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 a person can make the capital gains election with regard to standing timber.
Position TAKEN:
Not with regard to the timber, per se, but can elect on land which has standing timber.
Reasons FOR POSITION TAKEN:
Standing timber is not considered to be an asset distinct from the land.
950986
XXXXXXXXXX J.D. Brooks
April 21, 1995
Dear XXXXXXXXXX:
Re: Standing Timber -- Capital gains election
This letter concerns your request of March 30, 1995 in which you requested our views concerning the capital gains election in subsection 110.6(19) of the Income Tax Act (the "Act") as it applies to standing timber where the timber is standing on real property owned by an individual.
The situation you described appears to involve specific taxpayers in a specific fact situation. As explained in Information Circular 70-6R2 dated September 28, 1990, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advance income tax rulings basis and only with respect to the taxpayers identified in such rulings. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature.
Our View
In our view, standing timber normally is not an asset distinct from the land on which it stands. That being so, it is not possible to make the capital gains election with respect to standing timber, per se. However, where an individual owns real property on which there is standing timber and the timber does not constitute a timber resource property, it is possible to make an election on the land on which the timber stands. Interpretation Bulletin IT-481 ("Timber Resource Property and Timber Limits") discusses timber resource property. If the land is "non-qualifying real property" within the meaning of subsection 110.6(1), one must determine the "eligible real property gain" according to the definition of the same in subsection 110.6.
If the timber is standing on real property that constitutes an individual's principal residence, it would appear to be unnecessary to make the capital gains election with respect to the land. Where such an individual receives an amount for permitting other persons to remove standing trees from a woodlot, the proceeds are normally considered to be a part disposition of capital property and the Department normally accepts an amount equal to the proceeds as being the reasonable portion of the adjusted cost base of the whole property. This will result in no recognition of a gain at the time of the sale of the timber. Upon a subsequent sale of the principal residence, the normal rules for exempting the gain on a principal residence would prevail.
One should be aware that not all of a person's residential property may qualify as principal residence. According to the definition of principal residence in section 54 of the Act,
the principal residence of a taxpayer for a taxation year shall be deemed to include ... the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence, except that where the total area of the subjacent land and of that portion exceeds 1/2 hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.
Gains realized on the remaining land would be subject to tax on capital gains (presuming the disposition is on capital account). A person in such situation may wish to file the capital gains election with respect to the (whole) property, making the principal residence election as appropriate for the portion of the property that qualifies as principal residence.
One should be aware that the filing of a capital gains election has NO effect on how the actual disposition of the timber will be treated. Depending on the facts of a particular case, proceeds from the sale of timber may be on income account.
The actual sale of timber should be disclosed for income tax purposes even if the taxpayer feels that any gain on such disposition is not taxable.
These comments represent an expression of opinion and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust that our comments are of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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