23 July 1997 External T.I. 9639765 - TIMBER LIMITS

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 does the Department define a "timber limit" and a "right to cut timber from a limit"?

2. Does 10(n) apply on a limit by limit basis?

3. If roads are expensed in accordance with para 7 of IT-501, are other immovable woods assets precluded from class 10(n) treatment?

4. Whether purchase price must be allocated between timber lands and roads.

5. Whether only mature trees are included in para 2(b) of Schedule VI.

PositionS:

1. These concepts are not defined and must be determined on a case by case basis. Rights to cut,other than 13(21) rights would generally be included. Although a provincial license would be a factor to consider, it would not be determinative.

2. No.

3. Generally no.

4. Yes.

5. No

Reasons:

1. No definition in Act or caselaw.

2. Longstanding position.

3. Assets not placed in another class.

4. Same treatment for all acquisitions under the Act.

5. Act does not distinguish between harvestable timber and immature trees. Act requires a cruise.

963976
XXXXXXXXXX Denise Dalphy

Attention: XXXXXXXXXX

July 23, 1997

Dear Sirs:

Re: Timber limits

This is in reply to a letter where you enquired about a number of income tax issues related to forestry. We have provided some general comments, which we hope will assist you. If your enquiry relates to proposed transactions, we would be pleased to give further consideration to these issues in the context of an advance income tax ruling request, where all relevant, facts, documentation and other relevant information are available and those facts can reasonably be expected to prevail. Alternatively, should you wish to receive the Department's opinion on a particular completed transaction, we would advise you to contact the relevant Tax Services Office.

The Income Tax Act (the "Act") does not define either "timber limit" or "the right to cut timber from a limit". The caselaw in this area is limited, however we would mention that the Highway Sawmills Limited decision, a 1996 judgment of the Supreme Court of Canada (66 DTC 5116), provides a brief discussion of the meaning of the "timber limit" as that term is used in the Act. In our view, a "timber limit or right to cut timber from a limit" would likely include, inter alia, any right to cut timber that does not fall within the scope of the definition of "timber resource property" in subsection 13(21) of the Act.

Whether a particular area of land constitutes a "timber limit" or whether a particular right is a "right to cut timber from a limit" can only be determined on a case by case basis after a review of all the relevant circumstances. The fact that a provincial license which relates to a particular property or properties has been issued is a factor that would be considered by the Department; however this fact in itself would not necessarily be determinative of whether or not a certain area is a "timber limit" or a particular right is a "right to cut timber from a limit". Once a determination has been made as to what comprises a particular "timber limit" or "right to cut timber from a limit", the rule in 1101(3) of the Income Tax Regulations (the "Regulations"), which provides that each timber limit or right to cut timber from a limit, other than a timber resource property, is a separate property applies - it is not a provision that may be applied at a taxpayer's discretion.

Interpretation Bulletin IT-501, Capital cost allowance - Logging assets, discusses the classification for CCA purposes of certain assets used in the logging industry. The Department's longstanding position on the depreciation of immovable woods assets for income tax purposes is stated in paragraph 5 of IT-501:

"Classification as property described in paragraph (n) of class 10, however, is contingent upon all (emphasis added) property that qualifies therein being classified thereunder and not merely some of it."

That is, the paragraph 10(n) restriction is not applied on a timber limit-by-timber limit basis. Paragraph 7 of this IT Bulletin discusses the income tax treatment of the cost of roads and provides that a taxpayer may expense certain roads in areas where all merchantable timber will be removed within three years. In our view, the scheme of the Act requires a taxpayer that acquired timber lands on which logging roads had been established to allocate the purchase price between the timber limit or timber resource property, as the case may be, and the road, just as a taxpayer that acquired land with a building and a parking lot must allocate the purchase price among the land, the building and the parking lot. However, the fact that a road described in paragraph 7 of the Bulletin was expensed by a taxpayer would generally not affect its claim under paragraph 10(n) of Schedule II to the Regulations.

Finally, Schedule VI to the Regulations defines the amount that may be deducted in accordance with paragraph 1100(1)(e) of the Regulations in respect of a "timber limit" or a "right to cut timber from a limit", other than a timber resource property, where that property is a capital property. One of the variables in determining the amount is set out in paragraph 2(b) of the Schedule: "the quantity of timber in the limit or the quantity of timber the taxpayer has obtained a right to cut as shown by a cruise". We note that the legislation does not differentiate between immediately harvestable timber and immature trees, but requires a cruise, which should be performed in accordance with accepted forestry practices.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practise is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch