24 December 1996 Internal T.I. 9640647 - SALE OF TIMBER ON FARMLAND

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.

		December 24, 1996

	Penticton Tax Service Office	HEADQUARTERS
	277 Winnipeg Street	A.M. Brake
	Penticton, B.C.	(613) 957-8953

	Attention:  Mike Callon
		964064

Sale of Timber on Farmland

This is in reply to your letter of December 9, 1996, relating to the above-noted matter which was the subject of our October 7, 1996 letter (962373). You questioned the position outlined therein with respect to the capital gain resulting from the sale of timber on farmland, that was otherwise qualified farm property, being eligible for the enhanced capital gains exemption. You noted that there was a discrepancy between the views expressed in the letter of October 7, 1996 and that expressed in two previous opinions dated January 11, 1988 (7-2341) and October 12, 1995 (951330).

We confirm that the views expressed in the previous opinions dated January 11, 1988 and October 12, 1995 accurately reflect the Department's position. We have advised the taxpayer in receipt of our October 7, 1996 letter that the views expressed therein are incorrect. The follow-up letter dated December 23, 1996 (#962373.1) reads as follows:

"This is further to our letter of October 7, 1996, in reply to your letter of July 2, 1996 requesting our comments as to whether a capital gain resulting from proceeds from permitting other persons to cut timber, in circumstances set out in paragraph 2(b) of IT-373R, would be eligible for the enhanced capital gain exemption available for qualified farm property. In a hypothetical situation, you stated that the land from which the timber was cut is qualified farm property and that the sale proceeds from the one-time removal of the timber exceeds the adjusted cost base of the land.

Our Comments

As discussed in a recent telephone conversation (Brake/Taxpayer), we must inform you that the views expressed in our October 7, 1996 reply (#962373) were incorrect. The Department's views on this issue were accurately reflected in previous correspondence, most recently on October 12, 1995 in file 951330, as follows:

...in order for timber sales to be eligible for the enhanced capital gains exemption, they would have to be viewed as a disposition of real property used in carrying on a farming business in Canada. Given our position that timber is not an asset distinct from the land on which it stands, the enhanced capital gains exemption could only be claimed in respect of the disposition of the land.

...since timber is not considered to be an asset distinct from the land on which it stands, the capital gains election cannot be filed solely in respect of the timber.

Accordingly, in circumstances set out in paragraph 2(b) of IT-373R, where the sale proceeds from the one-time removal of timber exceeds the adjusted cost base of the land such that a capital gain arises, that capital gain is not eligible for the enhanced capital gains exemption."

Thank you for bringing this matter to our attention.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch