12 October 1995 External T.I. 9518425 - 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 which stands on land used for recreational 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 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.

		5-951842
XXXXXXXXXX		C. Chouinard

October 12, 1995

Dear XXXXXXXXXX:

Re: Sales of Timber

We are writing in response to your letter of July 14, 1995, wherein you requested our comments on the tax treatment of proceeds from sales of timber.

More specifically, you indicate that there is standing timber on the parcel of land on which your cottage is situated and that a logging company has expressed their interest in removing the standing timber from your property. You inquire whether the amounts received from the logging company would be business income or capital in nature. You also inquire whether a late capital gains election could be filed in respect of the standing timber.

Our Comments

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. 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 (a copy of which is enclosed), 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.

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