11 January 1988 Income Tax Severed Letter 7-2341 - [Qualified Farm Property and Capital Gains Deduction]

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.

TO - KITCHENER DISTRICT OFFICE Audit Review

Attention: R. Timm

FROM- Specialty Rulings Directorate J. Thompson (613) 957-2104

RE: Qualified Farm Property and Capital Gains Deduction

This is in reply to your letter of November 20, 1987 wherein you request our views concerning the definition of "qualified farm property" as defined in subsection 110.6(1) of the Income Tax Act (Canada) (the "Act").

Your letter states that a farmer sold off standing timber and claimed the capital gains deduction in respect of the taxable capital gain derived therefrom. The auditor allowed the claim for the capital gains deduction on the basis that the timber sold constituted the disposition of real property used by the farmer in the course of carrying on the business of farming in Canada. You seek clarification as to whether the trees removed from the farm land should be considered real property for purposes of the definition of qualified farm property set out in subsection 110.6(1) of the Act. In addition, you request our views as to whether the taxpayer is merely selling the right to remove the trees.

Our Comments

Generally, where there is a contract for the sale of standing timber without any disposition of an interest in the land itself, it is our view, that the trees are considered to be personal property rather than real property. Furthermore, paragraph 1(l)(g) of the Ontario Sale of Goods Act and paragraph 1(1)(k) of the Ontario Personal Property Security Act clearly contemplate that trees which are to be severed before sale or under a contract of sale are presumed to be personal property. Thus, where a farmer enters into an agreement with a party which permits him to cut and remove the trees from the land, it is our view, that these trees would be considered personal property and accordingly the sale thereof would not be viewed as a disposition of real property used in carrying on a farming business in Canada. Therefore, it is our opinion that the standing timber sold by the farmer does not fall within the ambit of the definition of qualified farm property pursuant to subsection 110.6(1) of the Act.

As regards your second question, it is our view that the sale of standing timber would not ordinarily be regarded as merely a sale of the right to remove the trees. However, there is insufficient information in your letter to draw any specific conclusions with respect to this matter and hence, we cannot offer any further comments on this particular aspect of the transaction.

We note that paragraph 2(b) of Interpretation Bulletin IT-373R

provides some relief from the immediate taxation of the proceeds received from the sale of standing timber by a farmer in certain circumstances. Thus, you may wish to consider whether the departmental practice referred to therein, would apply to this particular situation.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch