16 May 1996 Internal T.I. 9616950 - SALE OF TIMBER FROM PRIVATE LAND

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.

1996 Calgary TSO - Alberta CA Roundtable

Question #5

In the last few years, sale of timber off private land is on the rise and the tax treatment does not appear clear. In most cases, this land is owned by a farmer, who is using a significant portion of the land in his farming business which does not include tree farming. Does Revenue Canada have any guidelines with respect to income versus capital treatment and eligibility for the $500,000 capital gain exemption?

Response

Whether a contract relating to disposal of timber constitutes a sale of chattels or a grant of an interest in land or a licence analogous to a profit à prendre, depends upon the intention of the parties as evidenced by the terms of the contract itself and upon any relevant statutory provisions, e.g., provincial land title and personal property legislations. (See the comments of Di Castri in the Law of Vender and Purchaser (2 ed) at page 28.) This is always a question of fact to be determined in each case. If a contract constitutes a sale of chattels, proceeds from the sale is generally considered to be on account of income. By analogy to the case of Orlando, 62 DTC 1064 (SCC), selling timber may be considered as a scheme of profit making or an adventure in nature of a trade for the purpose of section 9 of the Act. By analogy to the case of Lackie, 78 DTC 6128 (FCTD), affirmed 79 DTC 5309 (FCA), proceeds from selling timber may be considered as income from property for the purpose of paragraph 12(1)(g) of the Act. If a contract constitutes a grant of an interest in land or a licence analogous to a profit à prendre, proceeds from the grant or the licence may be considered as on account of capital. By analogy to the cases of Mel-Bar Ranches Ltd., 89 DTC 5189 (FCTD), and Cromwell et al., 90 DTC 1335 (TCC), if a grant or licence provides sale of all usable timber from a designated area in an isolated transaction to clear land for farming purposes, it may be considered as on account of capital.

In order that a grant of right to cut timber would qualify for the $500,000 capital gain exemption or part thereof, among other requirements under section 110.6 of the Act, such right must be real property and capital property to the grantor and were used by the grantor in his/her course of carrying on the business of farming in Canada before the grant, for the purposes of subsection 110.6(2) of the Act and the definition of "qualified farm property" under subsection 110.6(1) of the Act.

Prepared by Peter Lee on May 15, 1996
Resource Industries Section
5-961695