18 December 2008 External T.I. 2008-0300731E5 - Costs of Clearing Land / Replanting

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Proper treatment of Orchards and Vineyards Transition Program (OVTP) payments. 2. Whether the costs of clearing and levelling land are deductible. 3. Proper treatment of re-planting costs of an orchard or vineyard.

Position: 1. Receipts should offset the costs of clearing the land which may be deductible if incurred in respect of a farming business, otherwise the receipts should be offset against the cost of the land. 2. Clearing and levelling land costs are generally deductible if incurred in a farming business; otherwise, those costs are generally capital in nature. 3. The cost of trees or plants to create an orchard or vineyard should be capitalized to the cost of the land.

Reasons: 1. Consistent with IT273R2. 2. Section 30 permits an income deduction for such costs if a farming business, otherwise paragraph 18(1)(b) would apply. 3. Fixed plants (i.e. trees and shrubs) generally become part of the land when planted and their costs should be capitalized accordingly. Consistent with prior positions.

Gordon Andrusiak
Agriculture and Agri-Food Canada
930 Carling Avenue						2008-030073
Ottawa ON  K1A 0C5						James Atkinson CGA
(519) 457-4832
December 18, 2008

Dear Mr. Andrusiak:

Re: Orchards and Vineyards Transition Program ("OVTP")

This is in response to your email dated October 20, 2008 concerning the above-named program. Our understanding of the OVTP is based on the information you have provided, a telephone discussion (Atkinson/Andrusiak) of December 5, 2008, and information contained on Agricorp's website.

Based on the information provided, it is our understanding that the OVTP was jointly established by Agriculture and Agri-Food Canada and the Ontario Ministry of Agriculture, Food and Rural Affairs for the Province of Ontario. Administered by Agricorp in Ontario, the OVTP will provide qualifying producers of eligible crops and/or landlords with payments as a reimbursement towards part of the costs of removing and disposing of orchard and/or vineyard stock. The OVTP is voluntary and is designed to help producers adapt to industry pressures and changing markets.

To qualify under the program applicants must:

• Be producers or landlords with a farmed area of at least 1.236 acres of qualifying crops,
• Operate a commercial enterprise located in Ontario,
• Grow eligible crops for harvest in the current growing season, or,
• Have harvested eligible crops in the growing season prior to the plant removal (except in cases where producers experienced documented crop failures beyond their control).

In addition, applicants must commit to keep the land in agriculture or available for agriculture for a period of five years. Qualifying OVTP participants will receive payment based on a flat rate of $1,618.74 per acre ($4,000 per hectare) towards their orchard and/or vineyard stock removal and disposal costs upon the completion of an accepted plant removal project to the satisfaction of Agricorp.

If an orchard and/or vineyard is leased or rented, the existence of the lease or tenancy must be disclosed on the application form. The tenant and the landlord will both need to sign the application form. As well, the tenant and the landlord must designate on the application form who should receive the payment.

In your email, you requested clarification of the correct tax treatment in respect of costs incurred, and amounts received, in connection with the activities undertaken by a participant in the OVTP. You have also requested clarification of the tax treatment of the costs of replanting the cleared land.

Our Comments:

The payments made to participants in the OVTP are in the nature of government assistance, a term that generally includes all payments received as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax or allowance.

As explained in paragraph 2 of Interpretation Bulletin IT-273R2, Government Assistance - General Comments, when assistance is received in the course of earning income from a business or property, the application of well-accepted business principles for the purpose of calculating profit or loss under section 9 commonly requires the cost of an asset or the amount of an expense to be reduced by any reimbursement or similar payment that relates to the acquisition of the asset or the expense incurred.

Pursuant to the OVTP guidelines, payments will be made as a reimbursement towards part of the costs of removing and disposing of orchard and/or vineyard stock. Accordingly, OVTP payments should either be applied against the cost of the asset (i.e., the land cleared) or the expense where such costs are otherwise deductible in computing income. The tax treatment of the costs of removing and disposing of orchard and/or vineyard stock may differ depending upon the determination of whether a particular recipient under the OVTP is "farming" for purposes of the Income Tax Act (Act).

Where a taxpayer is carrying on the business of farming, section 30 of the Act provides a special rule with permits the current deduction of amounts paid for clearing or levelling land for the purpose of carrying on such business (i.e., putting the land into productive use). However, in contrast, the cost of clearing or levelling land in the case of a non-farming business, to the extent it is not deductible as landscaping cost under paragraph 20(1)(aa) of the Act, ordinarily forms a cost of the land itself, or the depreciable cost of the property built or placed on the land. Further comments on this topic can be found in Interpretation Bulletin IT-485, Cost of Clearing or Levelling Land. Whether or not a person is carrying on a farming business is a question of fact, which can only be made on a case-by-case basis. The definition of "farming" in subsection 248(1) of the Act includes the "tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees." This list is not exhaustive. The courts have held that farming generally involves the whole aspect of commercial production of any crop or plant that has economic value. However, activities such as the resale of agricultural goods, the processing of agricultural goods, and the rental of farm land generally do not constitute farming, unless those activities are incidental to other farming activities which constitute a farming business.

It is the CRA's view that the cost of perennial plants, orchard trees and nut trees purchased on the initial establishment of an orchard or vineyard are considered to be capital expenditures that would be added to the cost of farmland. Regarding expenditures associated with replanting cleared land, it is a question of fact whether an amount has been incurred on account of capital, or is deductible because it is a current expense. Relevant factors in making such a determination include: enduring benefit, maintenance or betterment, integral or separate asset, relative value, acquisition of used property, and, anticipation of sale. A discussion of these factors can be found in paragraph 4 of IT-128R Capital Cost Allowance - Depreciable Property.

Where a taxpayer rents or leases land as a tenant, a leasehold interest in the property is acquired. A depreciable property, however, is considered to have been acquired if the taxpayer carries on an income earning endeavour such as a business and incurs a capital cost in respect of that property. Costs associated with planting or replanting (to the extent the replanting costs are considered capital in nature based on the factors noted above) that are discussed in the previous paragraph in respect of the owner of the land also remain capital in nature when incurred by a tenant and are added to the cost of the leasehold interest. A leasehold interest is a class 13 depreciable property for tax purposes, the cost of which is deductible as CCA, as discussed in more detail in Interpretation Bulletin IT-464R, Capital Cost Allowance - Leasehold Interests.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch