24 March 1983 Income Tax Severed Letter 5-4414 - [The Income Tax Act (Canada) (the "Act") Timber Limits and Timber Resource Properties]

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.

J.C. Clark (613) 593-6201

March 24, 1983

Dear Sir:

Re: The Income Tax Act (Canada) (the "Act") Timber Limits and Timber Resource Properties

This is in reply to your letter of September 16, 1982, in which you asked a number of questions involving timber limits and timber resource properties, as those terms are used for purposes of the Act, and on related matters. We regret the delay in issuing a reply. Your questions are set out below, followed by our answers.

1. Schedule VI and Schedule II of the Regulations under the Act (the "Regulations")

"Can a taxpayer elect to claim CCA of $100 as prescribed in paragraph 4 of Schedule IV for one timber limit and claim CCA on a depletion basis as prescribed in paragraph 2 of Schedule IV for another timber limit?

What is meant by 'a timber limit'? If a taxpayer has a number of cutting rights, is each right 'a timber limit'? If a taxpayer owns several pieces of land with standing timber, is each piece of land 'a timber limit'?"

Since Regulation 1101(3) provides that each timber limit is a separate class, a taxpayer could claim the $100 deduction provided by section 4 of Schedule VI on one timber limit and claim CCA under section 2 of Schedule VI in respect of another timber limit.

There is no specific definition of the term 'timber limit' in the Act or the Regulations. The distinctions between timber limits and timber resource properties are discussed in IT-481 .

The term 'a timber limit' as used in Schedule VI of the Regulations refers to a single timber limit. Each qualifying cutting right or piece of freehold land with standing timber is a timber limit.

2. Replacement of Timber Limit & Cutting Rights "If an original right to cut timber is replaced by a new right, is the original right disposed of for income tax purposes? If the answer is yes, does it mean that each time a cutting right is replaced, the taxpayer has to estimate the value of the replaced cutting right for calculating CCA recapture and capital gain?

According to paragraph 13(21)(d.1), any right or licence acquired after May 6, 1974 as an extension, renewal or substitution of the original right is classified as 'timber resource property'. Assuming the original right was issued prior to May 6, 1974 and was classified as a timber limit other than timber resource property, does the extension, renewal or substitution trigger the recapture of CCA and a capital gain?"

The replacement of an original right to cut timber (which was a timber limit) by a new right upon the expiry of the term of the original right, constitutes a disposition of the timber limit for no proceeds. Since Regulation 1101(3) provides that each timber limit is a separate class, the owner of a timber limit which expires is entitled to a terminal loss to the extent provided by subsection 20(16).

The extension in the circumstances described in subparagraph 13(21)(d.1) (ii) of a right or licence acquired before May 7, 1974 will constitute an acquisition of a timber resource property ("TRP"). The cost of renewal, if any, is an addition to class 33. The renewal of the pre-May 7, 1974 timber limit does not result in a recapture of CCA in its Schedule VI class or a capital gain, as explained in the previous paragraph. Any subsequent disposition of the renewed right to cut will reduce the UCC of class 33, pursuant to subparagraph 13(21)(f)(v), and, as explained in paragraph 3 of IT-481 , may result in an income inclusion under subsection 13(1). Note that the proceeds of disposition of a TRP which are described in paragraph 13(21)(f)(v) are not limited to the capital cost of the property, as is the case for most other depreciable property. The amounts excluded from the definition of capital gains by paragraph 39(1)(a)(iv) may therefore be included in income under subsection 13(1) and subparagraph 13(21)(f)(v).

3. Regulation 700

"What is the definition of 'log'? The B.C. Logging Tax Act defines log to include saw log, wood chips, poles and other cut timber of whatever length, whether round or flat. If a taxpayer obtains rough timber, wood chips or poles from an independent saw mill operator for further processing, is he caught under Regulation 700(l)(d)?"

Since the term 'log' is not defined in the Act or Regulations, the common usage of the term applies for income tax purposes. According to The Concise Oxford Dictionary (Oxford University Press, 1980, page 640) a log is an

.. unhewn piece of felled tree, or similar rough mass of tree ...

This type of general definition is applicable for income tax purposes, rather than the specialized definition included in the B.C. Logging Tax Act.

The exclusion from a taxpayer's logging tax credit base under Regulation 700(1)(d)(i) is for

(i) his income from sources other than logging operations and other than the processing and sale by him of logs, timber and products produced therefrom...

It is doubtful whether wood chips would fit the common usage definition of log quoted above, but rough timber and poles would probably be includable in that definition. This distinction is not significant, however, because there is no doubt that rough timber, wood chips and poles are covered by the words '...logs, timber and products produced therefrom...' as they appear in Regulation 700(1)(d)(i). A taxpayer who purchased these products from an independent saw mill operator for further processing would therefore not be required by Regulation 700(1)(d)(i) to exclude the income derived from such processing from the income base for purposes of the logging tax credit.

4. Regulation 700 (1)(c)

"What does '... as determined by the province...' mean?"

The phrase '... as determined by the province...' as used in Regulation 700(1)(c) refers to the value of logs exported by a taxpayer as determined for purposes of inclusion in income under the applicable provincial taxing statute.

5. Regulation 700(1)(b)

"What is meant by 'his net profit for the year from such sales to the extent that such profit is required to be included in computing his income', assuming:

(a) a taxpayer sells timber limits and realizes a capital gain, or

(b) both capital gain and CCA recapture are realized by the sale of timber limits, or

(c) capital gain is realized on the sale of timber limits but capital gain reserve is claimed, or

(d) a taxpayer sells a cutting right which is included in Class 33 and CCA recapture is added to his income, or

(e) a taxpayer sells a cutting right which is included in Class 33 and no CCA is recaptured because he still owns some cutting rights in his class 33 pool, or

(f) a U.S. resident disposes of some timber rights and the capital gain is exempt by treaty."

(a) Where a taxpayer sells timber limits and realizes a capital gain within the meaning of paragraph 39(1)(a) of the Act, '...his net profit for the year to the extent that such profit is required to be included in computing his income...' for purposes of Regulation 700(1)(b) includes his taxable capital gain, as defined in paragraph 38(a) of the Act.

(b) Where a taxpayer who sells a timber limit and realizes both a taxable capital gain, within the meaning of paragraph 39(l)(a) and a recapture pursuant to subsection 13(1), '...his net profit for the year to the extent that such profit is required to be included in computing his income...' for purposes of Regulation 700(l)(b) includes his taxable capital gain as defined in paragraph 38(a) of the Act, and the amount of the recapture determined under subsection 13(1).

(c) Where a taxpayer realizes a capital gain on the sale of a timber limit, but claims a full reserve under paragraph 40(1)(a)(iii), his gain for the year within the meaning of subsection 40(1), his capital gain within the meaning of subsection 39(1) and his taxable capital gain within the meaning of paragraph 38(a) are all nil. His net profit for the year for purposes of Regulation 700(1)(b) is also nil.

(d) A taxpayer who sells a cutting right which is included in Class 33, and who has an income inclusion of recaptured capital cost allowance pursuant to subsection 13(1), will include the amount of that recapture in his net profit for the year for purposes of Regulation 700(l)(b).

(e) A taxpayer who sells a cutting right which is included in Class 33, but who has no immediate recapture because there is a remaining UCC in the Class 33 pool, will have no net profit for the year for purposes of Regulation 700(1)(b).

(f) If a U.S. resident realizes a treaty exempt capital gain on the disposition of timber limits, his net profit for the year for purposes of Regulation 700(1)(b) in his taxable capital gain as defined in paragraph 38(a) of the Act.

6. "If a taxpayer received timber royalties or stumpage, does he have income from a logging operation?"

Where a taxpayer sells a right to cut standing timber in a province and receives timber royalties or similar payments as a result, he will have income from a logging operation pursuant to Regulation 700(l)(b) to the extent that the profits from the sale are required to be included in computing his income for tax purposes.

7. Regulation 700(l)(d)(1)

"What is meant by 'income from sources other than logging operations'? If a taxpayer engaged only in a logging operation receives a business interruption insurance payment, how can the payment be considered from sources other than the logging operation?

What is the difference between the words 'business' and 'source'? If a taxpayer engaged only in selling logs, the sales tax commission he received is clearly part of his business income from logging operations. If such is the case, why is the sales tax commission income from sources other than logging operations?"

The Department's position is that business interruption insurance proceeds are received by virtue of the non-operation of a resource business. In the case of logging these receipts from the non-operation of the business are considered to be "...income from sources other than logging operations... as that expression is used in Regulation 700(1)(d).

Business has the meaning assigned by subsection 248(1). Source is not defined in the Act, but can include an office, employment, business or property. The concept of sources of income of taxpayers in resource industries was the subject of litigation in Macmillan Bloedel (Port Alberni) Ltd. v. M.N.R. (73 DTC 5264) and Gunnar Mining Ltd. v. M.N.R. (68 DTC 5035). Sales tax commission is normally the compensation paid by a government imposing a sales tax to a person who renders services by acting as its agent in collecting the sales tax. The income earned by a person engaged in selling logs who also acts as the agent of a government in collecting the taxes due to that government is therefore income derived from a source other than logging operations.

8. Class 10(o) and 15

"Class 10(o) and Class 15 have the same preamble 'property that would otherwise be included in another class'. If a taxpayer acquired a mechanical piece of equipment for cutting timber from a timber limit and it will be of no further use to him after all the timber has been removed from the limit, can he elect to include that equipment in either Class 10(o) or Class 15?"

Logging assets that qualify for inclusion in either class 10(o) or class 15 may be included in either class, at the taxpayer's option. It should be noted that if, in a previous year, a taxpayer elected to include in another class any property which would have qualified for inclusion in class 15, he cannot later transfer that property to class 15.

9. "A spur road is a road that branches off from other roads for access to a specific timber stand and generally will not be used longer than one cutting season. What Is the Department's policy regarding the spur road? Can it be written off as a current expenditure because there is no enduring benefit? Can it be recorded as deferred charges and written off, based on its useful life in cases where the cutting season does not end in a taxation year? Can it be capitalised as a Class 10 Asset or Class 15 asset?"

Where spur roads have a useful life of three years or less because all merchantible timber will have been removed in that time from the particular area serviced by the road, the cost of the spur road may be written off as a current expense. If the taxpayer chooses to treat the cost of a spur road as a capital expenditure because it will be used for a period of one to three years it would qualify for inclusion in class 10 or class 15, at the taxpayer's option, subject to the restrictions of those classes. A road with a useful life in excess of three years must be capitalized.

Please note that the expressions of opinion given above are not rulings and are therefore not binding upon the Department, as explained in paragraph 24 of Information Circular 70-6R, issued by Revenue Canada, Taxation on December 18, 1978.

Yours truly, for Director General Corporate Rulings Directorate Legislation Branch JC/sr