20 January 1994 Internal T.I. 9329727 F - Woodlots Which Are Not Incidental to Farming Operations

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.

January 20, 1994

Attention:  M. Chiasson K. Mc Guigan Technical Advisors

Woodlots which are not incidental to farming operations

This is in reply to your memorandum dated September 1, 1993 which was sent to us by facsimile on October 14. We also acknowledge receipt of your facsimile of November 17 as well as our various telephone conversations concerning this matter.

In your memorandum reference is made to a number of queries which you have received concerning the treatment for purposes of the Income Tax Act (the "Act") of amounts arising upon the sale of, or upon the sale of a right to clear timber from, a woodlot owned by an individual who is not a farmer or by a farmer where the income from the woodlot is not incidental to the income from other farming operations (herein such woodlots referred to as a "Woodlot").

You have requested our comments as to the extent to which the views expressed in document #E9225617 (the "Document"), concerning a presentation at the 1992 Revenue Canada Forestry Tax Conference, apply to payments so received by individuals owning a Woodlot. You have indicated that in your view, the fact that a Woodlot owner structures his sales with a fixed price, quantity and time should not necessarily preclude inclusion in income under paragraph 12(1)(g) of the Act.

In addition, you have requested our comments concerning a draft reply, submitted with your memorandum, regarding the above-mentioned queries (the "Draft").

Our Comments:

In our opinion, the proper treatment for the purposes of the Act of amounts received by a taxpayer in respect of a Woodlot is a question of fact which can only be resolved with reference to all of the facts of a particular situation. This view was reflected in the closing paragraph of the Document, wherein it was indicated that:

It is our view, that the appropriate treatment including the application of paragraph 12(1)(g) and the comments in IT-373R to amounts received by a landowner in connection with the activities described above, will depend on the specific facts and circumstances as well as the purpose and objective of the particular transaction.

In order for the provisions of paragraph 12(1)(g) of the Act to be applicable, however, the amount received by the taxpayer must have been "...dependant upon the use of or production from property...". In the decision of the Federal Court - Trial Division ("FCTD") in the Mel-Bar Ranches Ltd. case (the "Mel-Bar case"; 89 DTC 5189 at 5191) referred to in the Document, it was indicated that such determination was to be made by looking "at the entire context of (the) transaction" and by viewing "the total context of the agreement" between the parties. In our opinion, these comments from the Court support the nature of this determination as being a question of fact as discussed above. However, the Court went on to decide that the provisions of paragraph 12(1)(g) of the Act did not apply given the circumstances present in that case, indicating at the same page that:

While I am, with respect, unable to conclude as did the learned Tax Court judge that there was an "aggregate gross specified price", because of what appears to me to be a sale price linked to the quantity removed, I do not think that alone defeats the defendant's case. This is a one-time contract for the removal of timber in a specified area within a specified time.

In the decision of the Tax Court of Canada in the Frederick Cromwell and Rose Cromwell case (the "Cromwell case"), 90 DTC 1335 at 1339, after referring to the above decision of the FCTD as a binding authority, the Court indicated that all that remained was:

to determine whether the facts support the conclusion that the sale of timber by the Appellants in the years in issue was a single final transaction transferring all the property rather than the sale of an indefinite amount of timber over a continuous period.

Immediately prior to stating its conclusion that the provisions of paragraph 12(1)(g) of the Act did not have application to that situation, it was also indicated at the same page of this decision of the Tax Court that the Court was satisfied that the agreement in question "provided a fixed price for a fixed quantity of timber to be taken within a fixed period of time."

In reaching its decision the Tax Court had also looked to the decision of the FCTD in the George E. Lackie case (78 DTC 6128) and in particular to the reference therein (at page 6132) to the definition of the phrase "profit à prendre" provided by the Tax Appeal Board in the Israel Hoffman case (65 DTC 617 at 623) and which concerned the predecessor provision to paragraph 12(1)(g) of the Act:

From the legal background to the phrase profit à prendre, quoted above, it is clear that the expression should be reserved to cover such typical situations as the granting of a continuing license or right to fish and to take away the catch, to hunt and to take away the bag, to dig and to take away the gravel, to cut and to remove the timber, and so on. In all of those examples, it is readily discernable that the license or right, known as a profit à prendre, is used to cover some continuing activity which can be described in no better way than in the pertinent language of section 6(1)(j) of the Act which reads as follows: a profit dependent upon use of or production from property.

Since, as you have indicated, the Mel-Bar case and the Cromwell case both concerned fact situations where the primary purpose of the sale of the timber was to clear the land for use in a farming business, in our view, such decisions from the Courts are not necessarily determinative of the treatment for the purposes of the Act of amounts received from a Woodlot. In our opinion, the decisions in these cases are consistent with the comments found in paragraph 2(b) of Interpretation Bulletin IT-373R (herein the "Bulletin"). It is also our view, however, that, as noted in the Document, the comments of the Courts in those cases concerning the application of the provisions of paragraph 12(1)(g) of the Act suggest that the Courts are unlikely to find that provision applicable in the absence of a right of a continuing nature as discussed above.

It should be noted, however, that it would remain a question of fact whether an amount received in respect of a Woodlot was an income or capital receipt, i.e., an amount received which is not of the nature described in paragraph 12(1)(g) of the Act may still be included in the determination of a taxpayers income from a business or property under subsection 9(1) thereof.

With regard to the draft reply submitted, since as discussed above these determinations are basically "questions of fact" in nature, in our view, your response should begin with a statement to that effect.

In addition, when discussing the treatment of specific amounts received, your comments should be qualified by indicating that such amounts are "generally" or "normally" treated in a given manner in recognition that the final determination with regard to an amount received by a particular taxpayer can only be made with reference to all of the relevant facts of that taxpayer's situation which may only become known at the time of any subsequent audit of the transaction in question.

Where possible the taxpayer should be referred to the Department's published position concerning a particular receipt, e.g., the comments contained in the second through fifth paragraphs of the Draft under the heading "Vendor is a Farmer" are encompassed by the comments contained in paragraph 2 of the Bulletin. The reference to "farmer" contained in the Draft should also be qualified to specify what is meant by that term, e.g., note the comments in paragraph 1 of the Bulletin which exclude operators of timber limits as part of logging, etc., and the requirement that the operations be carried on with a reasonable expectation of profit.

We would also note, with reference to your first comment under the heading "Vendor is a Farmer", that the comments contained in paragraph 7 of the Bulletin provide an example of how a situation may arise in which it would not be appropriate for an isolated sale of agricultural land to be considered solely a capital transaction. The comments in that paragraph (which relate to the decision of the FCTD in the Douglas C. Matthews case; 74 DTC 6193) indicate that a taxpayer may be considered to be farming where an area of land is being reforested "...with the objective of producing mature trees at a date that may be 40 or 50 years in the future, or even longer". As noted in that paragraph, where such a farming operation is a business undertaken with a reasonable expectation of profit, such a taxpayer may have been deducting over the years, subject to the provisions of subsection 31(1) of the Act, various costs relating to this operation as they arose. In our view, if the taxpayer chose to realize the proceeds from such an operation through an "isolated" sale of the land, it is likely that a significant portion of such proceeds would have been received on income account rather than on capital account.

With regard to your comments under the heading "Vendor conducts a woodlot operation whether or not a farmer", in our view, reference should be made to the comments contained in paragraph 3 of the Bulletin which concern woodlots owned by farmers where the income therefrom cannot be viewed as incidental to the income from other farming operations. Our comments from the preceding paragraph would also be relevant with regard to your first comment under this heading, although we note that this comment has been qualified by the use of the word "usually".

In discussing transactions involving a right to remove timber in point 2 under your second heading, it may be helpful to first refer the taxpayer to the comments found in paragraph 8 of Interpretation Bulletin IT-481 in differentiating between timber resource properties and timber limits; subsequent reference may then be made to paragraphs 2 and 3 thereof in responding to issues concerning timber resource properties or to paragraphs 4 through 7 thereof in responding to issues concerning timber limits.

With regard to your last sentence in paragraph 2 a) under your second heading, we would note that, as discussed in paragraph 4 of Interpretation Bulletin IT-481, pursuant to paragraph 20(1)(a) of the Act and paragraph 1100(1)(e) of the Income Tax Regulations (the "Regulations"), a taxpayer is entitled to a deduction not exceeding the amount provided under Schedule VI of the Regulations in respect of the capital cost to him of a property, other than a timber resource property, that is a timber limit or a right to cut timber from a limit.

In addition, with regard to your comments in paragraphs 2 b) and c) under your second heading, as discussed above, the provisions of paragraph 12(1)(g) of the Act will not necessarily apply in such circumstances, however, whether such receipts are on income or capital account remains a question of fact.

If any further questions arise when you are amending the Draft in light of our comments, please do not hesitate to contact us.

A/Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch