12 October 1995 External T.I. 9510535 - SHARECROPPING, WOODLOTS AND GRAVEL DEPOSITS

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:

1.Whether property that is farmed under a sharecropping arrangement qualifies as qualified farm property.

2.Whether the value of the gravel deposit and the woodlot would be considered to be part of the overall value of the land.

3.How to treat the proceeds from the sale of gravel and from the sale of timber for tax purposes.

Position TAKEN:

1.Unlikely that property qualifies as qualified farm property.

2.Cannot comment on questions of valuation.

3.Proceeds from the sale of gravel are taxable under paragraph 12(1)(g) of the Act. Cannot determine whether the proceeds from the sale of timber would be capital gain or income.

Reasons FOR POSITION TAKEN:

1.Land that is farmed under a sharecropping arrangement will be considered to be farmed by the taxpayer only where the sharecropper is but an employee of the taxpayer. Based on the facts provided, the taxpayer does not appear to be the sharecropper's employer. Therefore, the taxpayer is not in the business of farming.

2.The Directorate does not provide valuation advice.

3.All proceeds which are computed by reference to production are included in income under paragraph 12(1)(g) of the Act, whether or not the source of the production is a renewable resource. Where an individual owns real property on which there is standing timber and the timber does not constitute a timber resource property, the sale of a timber limit or cutting right may, depending on all of the facts, result in either a capital gain or income.

		5-951053
XXXXXXXXXX		C. Chouinard

October 12, 1995

Dear Sir and Madam:

Re: Qualified Farm Property and Woodlots

We are writing in response to your letter of April 13, 1995, wherein you requested our comments regarding the tax treatment of amounts received in respect of gravel and woodlots and the eligibility of property as "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding.

You indicate that, in 1975, you purchased a parcel of land for a retirement home. You have since then leased thirty-five acres of this land to a farmer who crops it on shares. The income you derive from this arrangement (mostly from wheat and barley) usually ranges from $200 to $300 and has never exceeded your income from other sources. In October 1992, you signed a lease with a gravel company granting the company a five-year exclusive right to mine gravel on your property, in return for royalties paid on a per yard basis. In addition, the unused portion of the land is treed and may contain marketable timber.

You inquire whether the property would qualify as "qualified farm property", whether the value of the gravel deposit and the tree stands would be part of the overall value of the land for purposes of the capital gains election and how future sales of the gravel or the trees would be treated for income tax purposes.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will qualify as "qualified farm property" provided it was used by the person claiming the capital gains exemption, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares, a family farm partnership in which any of the above persons have an interest or a personal trust from which the individual acquired the property, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the individual, a spouse, child or parent of the individual, a personal trust from which the individual acquired the property or a family farm partnership.

The determination of whether real property is used by a taxpayer in carrying on a farming business is a question of fact. In an actual situation, where more than one party is involved, it is necessary to review the relevant agreements and the method by which the agreements are carried out. As indicated in paragraph 9(a) of Interpretation Bulletin IT-433R (a copy of which is enclosed), the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming. The reference to "sharecropping arrangement" means an arrangement where a taxpayer or landlord receives from a tenant a share of crop in lieu of rent. The Department considers that a lessor of farm property does not use such property in the business of farming. However, if the sharecrop arrangements is such that the sharecropper is actually an employee of the taxpayer and receives a share of the crop as remuneration for services provided, the taxpayer may be considered to be in the business of farming. We cannot determine conclusively from the facts you have provided whether the sharecropping arrangement you have with the farmer falls within the first or second situation, however, given the small amount of income you have reported in previous years from this arrangement, it appears more likely that you are a lessor of land and therefore, not in the business of farming.

In any event, even if we were to accept that you are an employer of the sharecropper and therefore in the business of farming as regards the sharecropping part of your activities, in order to meet the definition of "qualified farm property", the property must be used principally in the business of farming. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where its use is primarily in the business of farming, that is, more than 50% of the asset's use must be in the business of farming. Given that only 35 acres are under cultivation and that your property appears to cover approximately 100 acres, it is unlikely that you would meet the "principally" used test of the definition of "qualified farm property". Accordingly, whether you are a lessor of land or an employer of a sharecropper, it is unlikely that your property qualifies as "qualified farm property" within the meaning of subsection 110.6(1) of the Act.

As regards your query concerning the value of your land, the Income Tax Rulings and Interpretations Directorate of Revenue Canada provides advance income tax rulings to taxpayers where proposed transactions are involved and gives technical interpretations of the various provisions of the Income Tax Act and the Income Tax Regulations. The Directorate does not, however, provide advice in matters pertaining to valuations. However, the Valuations Service of your local Tax Services Office or a professional valuator may be able to assist you in this respect.

With respect to the tax treatment of sales of gravel, paragraph 1 of Interpretation Bulletin IT-423 indicates that the sale of gravel is considered to be income of a taxpayer either under paragraph 12(1)(g) or subsection 9(1) of the Act. All proceeds which are computed by reference to production are included in income under paragraph 12(1)(g) of the Act, whether or not the source of the production is a renewable resource. Given that the royalties you receive from the company mining your property are calculated on the basis of the number of yards of gravel extracted, in our view, paragraph 12(1)(g) of the Act would apply to the sales of gravel. As regards your query concerning tax relief for non-renewable resources, such as gravel pits, the Act recognizes that there is a distinction between renewable and non-renewable resources in determining what costs may be deducted from the proceeds from the sale of production. The cost of a non-renewable resource, such as a gravel pit or a mine, may be deducted for tax purposes as the resource is being depleted. On the other hand, the cost of farmland which is used to produce crops is not deductible in computing income from the sale of crops because the land itself is not depleted when the crops are harvested.

With respect to the sales of timber, 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 in a particular situation, such as, the taxpayer's intention at the time the land was purchased, whether the trees were removed by the taxpayer or someone else and whether the sale of timber is an isolated transaction or a recurring event. As indicated in paragraph 6 of Interpretation Bulletin IT-481 (a copy of which is enclosed), where an individual owns real property on which there is standing timber and the timber does not constitute a timber resource property, the sale of a timber limit or cutting right may, depending on all of the facts, result in either a capital gain or income. However, where a taxpayer is engaged in the business of logging, the income derived from the logging activities must be reported using the accrual method of accounting used by businesses. We cannot determine from the facts you have provided how sales of timber should be treated in your situation.

We trust that these comments will be of assistance.

Yours truly,

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

Encl.