31 January 1995 External T.I. 9430355 - WOODLOTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether amounts received in respect of woodlots constitute income or capital gains.

Position TAKEN:

Amounts either constitute income or are on account of capital.

Reasons FOR POSITION TAKEN:

IT-373R

			5-943035
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

January 31, 1995

Dear Sir:

Re: Woodlots

We are writing in response to your letter of November 23, 1994, wherein you requested our comments regarding the tax treatment of amounts received in respect of woodlots.

Our Comments

Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.

The determination of whether a taxpayer carries on the business of farming at any particular time is a question of fact to be resolved after a review of all the circumstances. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.

As stated in paragraph 9(b) of Interpretation Bulletin IT-433R, although an established woodlot operation is a logging business, where it is combined with a farming business, the combined operation will be viewed as a farming business if the taxpayer elects to report such business income under the cash method. However, a taxpayer engaged in the business of logging would not be considered to be a farmer, and will need to report his income using the accrual method of accounting used by businesses.

Interpretation Bulletin IT-373R (a copy of which is enclosed) outlines the appropriate tax treatment for amounts received by a farmer in respect of a woodlot situated on the farm property. As indicated in paragraphs 2 and 3 of the Bulletin, any incidental proceeds from sales of logs, lumber, firewood or trees should be included as farming income. Receipts for permitting another person to cut and remove standing trees is considered to be a receipt by the farmer on account of capital which reduces the adjusted cost base of the farm property. However, the reduction of the farm property's adjusted cost base is permissible only where the facts and circumstances relevant to the particular farmer and transaction indicate that the removal of trees is occasional and incidental to the principal business activity. When the woodlot is more than incidental to the farming activity, amounts received by the farmer for granting a right to cut and remove trees is income.

We cannot comment on the two situations described in your letter, since the proper treatment for the purposes of the Income Tax 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, as well as the purpose and objective of the particular transaction.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch