23 March 2009 External T.I. 2008-0303071E5 - Rollover of woodlot held by a spousal trust

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. Is a woodlot, used in a farming business, prevented by subsection 70(9.1) from qualifying for the intergenerational rollover on the death of the surviving spouse solely due to the fact that a prescribed forest management plan does not exist?

2. Is a woodlot, used in a farming business, prevented by subsection 70(9.1) from qualifying for the intergenerational rollover on the death of the surviving spouse solely because the woodlot was not managed in accordance with a prescribed forest management plan?

Position:

1. No. A prescribed forest management plan is not required in order for a woodlot, used in a farming business, to qualify for an intergenerational rollover under subsection 70(9.1).

2. No. A woodlot not managed in accordance with a prescribed forest management plan will not disqualify an otherwise qualifying woodlot farming property from being transferred under subsection 70(9.1).

Reasons:

The wording of subsection 70(9.1) does not specifically impose these conditions.

XXXXXXXXXX

March 23, 2009

Dear XXXXXXXXXX :

Re: Whether a woodlot that is a farming business qualifies for an intergenerational rollover under subsection 70(9.1)

This is in reply to your letter of December 2, 2008 in which you requested our comments with respect to the rollover of a woodlot held by a spousal trust. In particular, your submission requested an opinion as to whether a woodlot, used in a farming business, could qualify for the intergenerational rollover pursuant to subsection 70(9.1) of the Income Tax Act (the "Act") in the following two scenarios: (a) if a prescribed forest management plan for operating the woodlot does not exist; or (b) if a prescribed forest management plan exists but the farming business is not being managed in accordance with said plan.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

In general, subsection 70(9.1) allows farming or fishing property to be rolled over from a spousal trust to a child of the settlor of the trust where the following requirements are met:

(a) The farming or fishing property was transferred to the trust by the settlor;
(b) The trust was an inter vivos or testamentary spousal trust;
(c) The property was, immediately before the beneficiary's death, land or depreciable property of a prescribed class of the trust that was used in a fishing or farming business carried on in Canada;
(d) The child of the settlor was, immediately before the beneficiary's death, resident in Canada; and As a consequence of the beneficiary's death, the property is transferred to and becomes vested indefeasibly in the child of the settlor within 36 months after the beneficiary's death.

Whether the operation of a woodlot qualifies as a farming business is a question of fact. Interpretation Bulletin 373R2 - Woodlots ("IT-373R2") provides a detailed discussion of this issue. If the woodlot is, in fact, a farming business, a rollover pursuant to subsection 70(9.1) of the Act may apply despite the fact that the farming business is not operated in accordance with a prescribed forest management plan. As a prescribed forest management plan is not specifically required under subsection 70(9.1) for a property to qualify for the intergenerational rollover, the fact that a woodlot farming business is not managed in accordance with such a plan will also not disqualify an otherwise qualifying farming property from being transferred pursuant to subsection 70(9.1).

However, as is noted in paragraph 14 of IT-373R2, a woodlot may constitute a farming operation or a logging business or another commercial operation. As is noted in that paragraph (and upheld by the Tax Court of Canada in the case of Richard v The Queen 2008 DTC 4686), if the main focus of a business is planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan, this, along with other factors, may support a conclusion that it is a commercial farm woodlot. Such a determination would require full consideration of the unique facts in a given situation. The absence of such a plan may indicate that a woodlot is not being operated as a farming business.

In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such are not binding on the Canada Revenue Agency.

Yours truly,

Robin Maley
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch