28 July 1995 External T.I. 9432555 - TIMBER LIMIT AND DISPOSITION OF TIMBER

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:

(A) Whether a timber limit must be capital property?

(B) What would be the factors to be considered in determining whether the proceeds from disposition of timber are on account of income or capital?

Position TAKEN:

(A) A timber limit could be capital property or inventory to a taxpayer.

(B) The proceeds from selling cut timber by a taxpayer is generally on account of income. However, whether the proceeds from granting a right to a third party to cut timber from a taxpayer's timber limit would be on account of income or capital, is always a question of fact to be determined and depends on the intention of the parties as evidenced by the terms of such right.

Reasons FOR POSITION TAKEN:

(A) The expression "timber limit" is not defined in the Act nor the Regulations. There is no requirement in the Act nor in the Regulations that a timber limit must be capital property.

(B) See the statement of principal issues re file #3-931623 dated December 23, 1993, which deals with the similar issue. See also the comments of Di Castri in the Law of Vender and Purchaser (2 ed).

		5-943255
XXXXXXXXXX	Peter Lee
(613) 957-8977

Attention: XXXXXXXXXX

July 28, 1995

Dear Sirs:

Re: Timber Limit
Disposition of Timber

This is in reply to your letter of December 9, 1994 wherein you requested our comments on circumstances under which a property might be classified as a "timber limit", and on factors in determining whether proceeds from disposition of timber would be on account of income or capital, in light of the Department's positions in Interpretation Bulletins IT-481 and IT-373R. We apologize for the delay in replying to you.

Our Comments

1.The expression "timber limit" is not defined in the Income Tax Act (the "Act") nor in the Income Tax Regulations (the "Regulations"). Paragraphs 5 and 8 of Interpretation Bulletin IT-481 state:

A timber limit or cutting right may be acquired with or without title to the land on which the timber stands... If a taxpayer acquires land on which there is standing timber (for example, freehold timberlands), such property is a timber limit.

The definition of "residual value" in Schedule VI of the Regulations, the estimated value of the property if the merchantable timber were removed, envisages that there would be salvage value of land on which timber had previously grown and been removed. Furthermore, there is no requirement to exclude any land from such timber limit in the Regulations for capital cost allowance purposes, unlike the provision in subsection 1102(2) of the Regulations under which land is excluded in respect of the classes of property described in Schedule II of the Regulations.

2.The expression "capital property" is defined in section 54 of the Act as "(a) any depreciable property of the taxpayer, and (b)...". The expression "depreciable property" is defined in subsection 13(21) of the Act as "... property acquired by the taxpayer in respect of which the taxpayer has been allowed, or would, if the taxpayer owned the property at the end of the year... be entitled to, a deduction under paragraph 20(1)(a) in computing income for that year or a preceding taxation year". Pursuant to paragraph 20(1)(a) of the Act and paragraph 1100(1)(e) of the Regulations, a taxpayer may claim a deduction 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, not exceeding the amount calculated in accordance with Schedule VI of the Regulations.

3.In light of the discussion in 2 and 3 above, we do not share your view that a property must be a capital property in order to be classified as a timber limit. It is our view that a timber limit would be a capital property to a taxpayer only if the taxpayer is or has been entitled to a deduction under paragraph 20(1)(a) of the Act in respect the timber limit. A timber limit can be inventory to a taxpayer, in which case, the taxpayer would not be entitled to a deduction under paragraph 20(1)(a) of the Act by virtue of paragraph 1102(1)(b) of the Regulations. Accordingly, such a timber limit would not be considered as capital property.

4.With respect to disposition of timber, it is our view that a taxpayer may claim a deduction in respect of depletion of a timber limit only if the deduction is wholly applicable to the taxpayer's source of income from a business or property or such part of the amount as may reasonably be regarded as applicable thereto and the other requirements of paragraph 20(1)(a) of the Act have been met.

5.The proceeds from selling cut timber by a taxpayer is generally on account of income. However, whether the proceeds from granting a right to a third party to cut timber from a taxpayer's timber limit would be on account of income or capital, is always a question of fact to be determined and depends on the intention of the parties as evidenced by the terms of such right.

We hope that our above-noted comments are helpful to you. These comments represent our general views on the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, these comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.

Yours truly,

A/Chief
Resource Industries Section
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch