6 February 1996 External T.I. 9600765 - LOSSES FROM A REFORESTATION PROJECT

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:

The deductibility of losses incurred with respect to a reforestation project.

Position TAKEN:

Question of fact - general comments provided.

Reasons FOR POSITION TAKEN:

As stated in paragraph 7 of IT-373R, Farm Woodlots and Tree Farms, "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." If the facts indicate that the reforestation project was undertaken in a systematic way, is being conducted in a business-like manner in accordance with good forestry procedures, and holds forth the prospect of a profit when the trees are mature, a loss resulting from the project may, subject to the restrictions in section 31, be deducted as a loss from a farming business.

									5-960076
XXXXXXXXXX							M. Azzi

February 6, 1996

Dear Madam:

Re: Restricted Farm Losses

This is in reply to your letter of December 27, 1995 requesting our views on the deductibility of losses incurred with respect to a reforestation project. In your view, the legislation regarding the deductibility of restricted farm losses is a disincentive on the part of Revenue Canada to grow and harvest forests.

We understand that you and your spouse purchased,
XXXXXXXXXX

Your intention is to grow and harvest trees; however, the trees will not be harvestable timber for 30 to 40 years. You indicate that you and your spouse will need to continue your jobs as professionals to support the losses resulting from the reforestation of this land.

Our Comments

The determination of whether a taxpayer carries on a farming business at any particular time or whether any resulting losses are deductible is a question of fact to be resolved after a review of all circumstances. However, we are prepared to offer the following general comments.

As stated in paragraph 7 of IT-373R, Farm Woodlots and Tree Farms, "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. Apart from the proceeds that may be obtained as a result of the thinning of the trees from time to time, no revenue can be expected until the trees have matured. In the meantime, recurring costs are incurred for property taxes, planting, fertilizing, thinning, etc. Whether such costs are deductible depends on whether the farming operation is a business that was undertaken with a reasonable expectation of profit." If the facts indicate that the reforestation project was undertaken in a systematic way, is being conducted in a business-like manner in accordance with good forestry procedures, and holds forth the prospect of a profit when the trees are mature, the loss created by these costs may, subject to the restrictions in section 31 of the Income Tax Act (the "Act"), be deducted as a loss from a farming business.

As a general rule, where section 31 of the Act applies, the amount of a taxpayer's loss for a taxation year from all farming businesses, which may be deducted from income from other sources, is limited to $8,750, made up of the first $2,500 of loss plus one half of any further loss between $2,500 and $15,000. Any farming loss that is not deductible by reason of section 31 of the Act becomes a "restricted farm loss". A restricted farm loss may be carried back three years and forward ten years, but its deduction in a given year is limited to the amount of the taxpayer's income from all farming businesses for that year. For your information, we have enclosed a copy of Interpretation Bulletins IT-232R2 and IT-322R, which discuss restricted farm losses, and IT-373R (with its special release) which discusses farm woodlots and tree farms.

Please note that the provisions relating to the carry back and carry forward of restricted farm losses were amended in 1983 to increase the carry back and carry forward periods. Prior to these amendments, such losses could only be carried back one year and forward 5 years against income from a farming business. The purpose of these amendments was to enhance the ability of farmers to utilize losses incurred in one year to reduce tax in other years and, in particular, they benefit taxpayers starting up a farming business.

Finally, please note that Revenue Canada does not write or amend legislation; the function of Revenue Canada is to administer the laws as set out in the Act. The Department of Finance is responsible for writing and considering amendments to existing legislation.

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