12 October 1995 External T.I. 9513305 - TAX TREATMENT OF SALES 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:

1.How to treat the proceeds from the sale of timber for income tax purposes.

2.Whether the capital gains election can be filed in respect of timber.

Position TAKEN:

1.Depending upon the facts, may be treated as business income, farming income or a transaction on account of capital.

2.No.

Reasons FOR POSITION TAKEN:

1.The proper treatment for purposes of the Act of amounts received by a taxpayer in respect of sales of timber is a question of fact which can only be resolved with reference to all of the facts of a particular situation.

2.Standing timber is not considered to be an asset distinct from the land on which it stands.

		5-951330
XXXXXXXXXX			C. Chouinard

October 12, 1995

Dear Sir:

Re: Sales of Timber

We are writing in response to your letter of May 5, 1995, wherein you requested our comments on the tax treatment of sales of timber. We apologize for the delay in responding.

Your specific queries regarding the sale of timber are as follows:

1)Is the determination of the tax treatment of sales of timber dependant upon the tax status of the land upon which the timber stands or is timber considered to be capital property in all cases? In your opinion, if land on which timber stands is acquired for the purpose of selling the timber, the proceeds from such sales is business income. On the other hand, if the land is acquired for other purposes and, in response to an unsolicited offer, timber is sold, the proceeds from such a sale would be on account of capital.

2)If timber is capital property, could a late capital gains election be filed in respect thereof, provided that the late filing penalty is paid?

3)If the land on which the timber stands qualifies as "qualified farm property", will the proceeds from the sales of timber be eligible for the enhanced capital gains exemption?

4)If the land is used in a farming business but does not qualify as "qualified farm property" (because the gross revenue test is not met), can a late capital gains election be filed in respect of the trees without the required proration for "non-qualifying real property"?

5)If the land constitutes "non-qualifying real property", can a late capital gains election be filed, using as fair market value of the trees, their value at the time the land was acquired?

Our Comments

As regards your first question, in our view, the proper treatment for purposes of the Income Tax Act (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. Therefore, the tax status of land upon which timber stands is only one of many factors that must be considered in determining the appropriate tax treatment of timber sales. Other determining factors include:

• whether the trees were removed by the taxpayer-owner of the woodlot or by some other person;
• whether the payment received in respect of the timber is a fixed price for a fixed quantity of timber to be taken within a fixed period of time or an amount related to the use of or production from the woodlot on a continuing basis; and
• whether the taxpayer-owner is involved in farming activities.

Generally, where a taxpayer acquires land with the specific intent of selling timber, the taxpayer is considered to be in the business of logging and, therefore, amounts received by the taxpayer in respect of sales of timber are business income. If, on the other hand, the selling of timber was not the motivating factor for the purchase of the land, amounts received by the taxpayer in respect of sales of timber would likely be on account of capital. In such a case, the amounts received by the taxpayer would be considered to be proceeds from a part disposition of capital property (the land). Since the Department normally accepts an amount equal to the proceeds as being the reasonable portion of the adjusted cost base of the whole property, such sales do not give rise to a gain at the time of the sale of the timber.

With respect to your second question, in our view, standing timber normally is not an asset distinct from the land on which it stands. Accordingly, it is not possible to file a capital gains election with respect to standing timber. However, where an individual owns real property on which there is standing timber and the timber does not constitute a timber resource property, as described in Interpretation Bulletin IT-481, it is possible to file an election on the land on which the timber stands. In addition, if the land is "non-qualifying real property" within the meaning of subsection 110.6(1) of the Act, the elected capital gain must be reduced by the portion of the capital gain that does not qualify for the capital gains exemption. In order to determine the amount of the reduction, the capital gain (before reduction) must be multiplied by the following ratio: 24 (being the number of calendar months between March 1992 and February 1994) over the number of calendar months in the period that commences with the calendar month in which the property was acquired and ends with the calendar month in which the property is disposed of, which, where the capital gains election is filed, is February 1994. You should also note that the filing of the capital gains election in respect of land on which timber stands will be of no consequence in determining the appropriate tax treatment of subsequent sales of timber.

Regarding your third question, in order for timber sales to be eligible for the enhanced capital gains exemption, they would have to be viewed as a disposition of real property used in carrying on a farming business in Canada. Given our position that timber is not an asset distinct from the land on which it stands, the enhanced capital gains exemption could only be claimed in respect of a disposition of the land.

In response to your fourth and fifth questions, since timber is not considered to be an asset distinct from the land on which it stands, the capital gains election cannot be filed solely in respect of the timber.

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