20 March 1996 External T.I. 9521185 - MANAGED FOREST - QUALIFIED FARM PROPERTY

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 managed woodlot qualifies as qualified farm property.

Position TAKEN:

May qualify.

Reasons FOR POSITION TAKEN:

Question of fact relating to the requirements of the definition of qualified farm property.

L. Barrows
XXXXXXXXXX							952118

Attention: XXXXXXXXXX

March 20, 1996

Dear XXXXXXXXXX:

Re: Status of a Managed Forest as a "Qualified Farm Property"

This is in reply to your letter of August 2, 1995 in which you requested our opinion regarding the interpretation of the definition of "qualified farm property" as it relates to XXXXXXXXXX.

We apologize for the delay in replying, however, we have previously discussed this issue with you (Albert/XXXXXXXXXX).

We have reviewed the background facts provided in your letter as well as the information contained in the specific documents pertaining to the forest management agreement also included with your letter of August 2nd. We wish to advise that written confirmation of the tax implications inherent in this type of fact situation is only given by this Directorate when there is a proposed transaction which is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. However, in response to your request, we can provide the following general comments which are not binding on the Department.

Our Comments

Paragraph 7 of IT-373R, entitled Farm Woodlots and Tree Farms, states that "a taxpayer who is not otherwise engaged in a lumbering or logging business and who undertakes the reforestation of an area of land with the objective of producing mature trees at a date that may be 40 or 50 years in the future, or even longer, is considered to be farming". While it is a question of fact whether an existing woodlot is under reforestation, indications of such in this particular situation are the natural reforesting being achieved through managed cutting and the fact that the existing trees will not be mature for commercial logging purposes for approximately 20 to 30 years.

Whether a particular farm operation (an existing woodlot in this case) constitutes a farming business and is a "qualified farm property", are also questions of fact that can only be determined after a review of all the facts at a specific time. Normally, this would require an audit of the particular operation by a district taxation officer. The following factors as they relate to the relevant provisions are generally considered by the Department in making these determinations.

The Department's general position with respect to the meaning of a farming business is outlined in paragraphs 7 and 8 of IT-433 and in paragraphs 4 through 6 of IT-322R. In addition, paragraph 7 of IT-373R specifically discusses reforestation as a business and indicates that where the reforestation project was undertaken in a systematic way, in a business-like manner in accordance with good forestry procedures, and holds forth the prospect of a profit when the trees mature, the Department generally considers that the tree farming operation is a business that was undertaken with a reasonable expectation of profit.

Under the definition of "qualified farm property" as outlined in subsection 110.6(1) of the Income Tax Act (the "Act"), for property acquired before June 17, 1987, a property may qualify if the property has been used principally in the course of carrying on the business of farming in Canada by any of the persons described in subparagraphs 110.6(1)(a)(i) to (v) of the definition of "qualified farm property" in the year of its disposition or was used principally in the business of farming in at least 5 years during which it was owned by any of the persons described in subparagraphs 110.6(1)(a)(i) to (iii) and (v) thereof.

When 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. Whether or not particular assets are "used principally in the business of farming" is also a question of fact. In this respect paragraph 5 of IT-486R outlines the Department's position which is applied on a property by property basis.

As discussed, when a capital gains election is filed in respect of capital property, the property is, pursuant to subparagraph 110.6(19)(a)(ii) of the Act, deemed to have been reacquired by the elector immediately after February 22, 1994. Therefore, if a capital gains election was filed in respect of farm property, the property would now be considered to have been last acquired after June 17, 1987. In such a case, it is possible that farm property which satisfied the definition of qualified farm property for property acquired before June 17, 1987 may no longer satisfy the definition of qualified farm property for property acquired after June 17, 1987. For instance, it is unlikely that a woodlot would satisfy the gross revenue requirement for qualified farm property for property acquired after June 17, 1987.

We trust 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