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. Can land and timber be considered "qualified farm property" under subsection 110.6(1) of the Act?
2. What is the tax treatment of timber and land if they are sold separately?
3. Do they answers to 1 & 2 change if the property was transferred to the taxpayers son in 1985?
4. When a taxpayer engaged in "forest planting" dies, is an unharvested crop (standing timber) considered a “right or thing”?
5. Can the land and timber be considered a capital asset in a "forest planting" situation?
Position:
1. Perhaps
2. If the timber is considered a capital property, a capital gain may result which is not eligible for the enhanced capital gains exemption.
3. All of the comments in 1 & 2 would apply to the son.
4. It depends.
5. The sale of timber is considered income from the business of farming.
Reasons:
1. First it is a question of fact whether the sale of timber would result in business income or a capital asset. Standing timber is normally not an asset distinct from the land. Thus when the timber and land are sold together, the timber will be eligible for the capital gains exemption if the land on which it stands is a "qualified farm property", which is a question of fact.
2. If the timber is considered a capital property, the ACB of the whole property should be reduced by the amount of ACB attributed to the partial disposition (timber). If the proceeds from the partial disposition exceed the ACB allocated thereto, a capital gain would result. The enhanced capital gains exemption cannot be claimed when the timber is sold separately from the land, because our position is that the timber is not an asset distinct from the land.
3. Because the property was transferred prior to 1987, the property will be considered QFP if the requirement of subparagraph 110.6(1)(a)(vii) are met. As long as the son or father has used the property principally in the course of carrying on the business of farming for at least five years during the time the property was owned by the son or father, all of the comments in 1 & 2 will apply to the son.
4. Paragraphs 1 & 2 of It-234 indicates that the value of unharvested crops need not be included in the deceased taxpayers income, but such value may be included in income under subsection 70(2) if his executors so desire.
5. The value of unharvested timber would be considered business income when the taxpayer has been engaged in "forest planting" and claiming restrictive farm losses for over twenty years.
5-980584
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
Attention: XXXXXXXXXX
August 24, 1998
Dear Sirs:
Re: Farmers and Timber
We are writing in reply to your letter of March 9, 1998, in which you requested our views on three separate questions relating to the sale of timber by farmers.
Your specific queries regarding the sale of timber are as follows:
1. A full time farmer has operated a farm since 1950. He owns 5 - 100 acre lots all in a group. One of the lots which in the 1950’s and 1960’s was used for pasture is now heavily covered in timber. The farmer is considering selling the property in 1998. It is worth approximately $100,000 with half of the value attributed to the land and the remaining half attributed to the value of the timber.
a) If the farmer sells the land and timber for $100,000 is he entitled to the “qualified farm property” capital gains exemption on the entire gain?
b) If he sells the standing timber of $50,000 in June and the land to a different party in November what it the proper tax treatment?
2. The second question involves the same situation as in question 1, but the farmer has transferred the 100 acre timbered property to a son in 1985. The son has not been involved in the farming operation. What is the proper treatment of a subsequent disposition by the son as outlined in a) and b) above?
3. A taxpayer is engaged in “forest planting” as described in IT-373R, and has been filing tax returns reporting restricted farm losses for 20 years. At his death, trees are still unharvested.
a) Is the value of the unharvested crop (i.e. standing timber) considered a “right or thing”?
b) Assuming that the land would qualify for the enhanced capital gains exemption by virtue of ownership, income earned, principal use, etc., is there an option to treat the value of the land including standing timber as a capital asset and would the entire capital gain qualify for the enhanced capital gains exemption?
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following comments which may be of assistance to you.
Question 1
a) Standing timber is normally not an asset distinct from the land on which it stands, thus when timber and land are sold together, the timber will be eligible for the lifetime capital gains exemption if the land on which it stands is considered "qualified farm property" under subsection 110.6(1) of the Income Tax Act (the “Act”).
One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada.
Whether a property is considered to have been used in the course of carrying on the business of farming is dependent on when the property was last acquired by the individual. In your situation, the taxpayer last acquired the farm land in 1950. Consequently, the farm land can be considered to have been used in the course of carrying on the business of farming if the requirements of either subparagraph (a)(vi) or (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act are met.
Pursuant to subparagraph (a)(vi) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, real property may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned, by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, throughout the 24 months preceding the sale. In addition, the real property must meet either of the conditions described in clauses (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Subparagraph (a)(vi)(B) of the definition of “qualified farm property” in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership and does not appear to apply in your situation.
Under clause (a)(vi)(A) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual’s income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be the parent of the individual.
In addition, pursuant to subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, real property acquired before June 18, 1987 or after June 18, 1987 under an agreement in writing entered into before that date, will be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as "qualified farm property" provided the following requirements are met. The property must be used by the individual, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, principally in the course of carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the person, a spouse, child or parent of the person, a personal trust from which the person acquired the property or a family farm partnership.
The determination of whether real property is used principally by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.
In your situation, the requirements of subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act appear to be met, if, in fact, in at least 5 years during which the lot was owned by the taxpayer (the farmer), the lot was used by the taxpayer (the farmer) principally in the course of carrying on the business of farming. If all of the requirements of the definition of “qualified farm property” in subsection 110.6(1) of the Act have, in fact, been met, in our view, the property, including the land and timber, will qualify as "qualified farm property".
b) The proper treatment for purposes of the Act of amounts received by a taxpayer in respect of timber is a question of fact which can only be resolved with reference to all of the facts of a particular situation. However, generally, the sale of timber will result in taxable income when:
a) the woodlot is operated with a reasonable expectation of profit,
b) there is an adventure in the nature of trade in connection with a woodlot, or
c) an amount based on the use of, or production from, a woodlot is received.
Otherwise, the sale of timber from a woodlot will generally be taxed as a capital gain.
Factors that should be considered in determining the appropriate tax treatment of timber sales include:
- the tax status of land upon which the timber stands;
- whether the trees were removed by the taxpayer-owner of the woodlot or by some other person;
- whether the payment received in respect of the timber is a fixed price for a fixed quantity of timber to be taken within a fixed period of time or an amount related to the use of or production from the woodlot on a continuing basis; and
- whether the taxpayer-owner is involved in farming activities.
In the case where the timber is sold prior to the sale of the land and considered to be on account of capital, the amount received ($50,000) by the taxpayer would be considered to be proceeds from a part disposition of capital property (the land). The adjusted cost base (the “ACB”) of the whole property should be reduced by the amount of ACB attributed to the partial disposition. The Department normally accepts an amount equal to the proceeds as being the reasonable portion of the ACB of the whole property. Should the proceeds from the partial disposition exceed the ACB allocated thereto, a capital gain would result.
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, in situations where the land and timber are sold separately. The recent Tax Court of Canada decision of Jens Larsen v. Her Majesty the Queen is contrary to this position, however, this decision is under review.
Question 2
As discussed in question 1, pursuant to subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, real property acquired before June 18, 1987 will be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as "qualified farm property" provided the property was used by the individual, a spouse, child or parent of such a person, principally in the course of carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the person, a spouse, child or parent of the person.
If the father has met all of the requirement of subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, the comments provided in question 1 will apply to a subsequent disposition by the son.
Question 3
a) As discussed in paragraph 7 of IT-373R “Farm Woodlots and Tree Farms”, a taxpayer who is not otherwise engaged in a logging business and who undertakes reforestation with the objective of producing mature trees at a date in the future, is considered to be farming. Yearly recurring costs are deductible if the farming operation is a business that was undertaken with a reasonable expectation of profit.
In regards to whether unharvested crops are considered a “right or thing” pursuant to subsection 70(2) of the Act, paragraphs 1 and 2 of IT-234 “Income of Deceased Persons - Farm Crops” states as follows:
1. A taxpayer who farms land that he owns or rents,...may have an interest in a crop that is sown but not harvested. Where a taxpayer dies having such an interest, the Department does not insist that any amount representing the value of the unharvested crop be included in computing his income, but such value may be so included if his executors so desire. However,...the ultimate proceeds of the whole crop are subject to tax in the group comprising the deceased, his estate and his beneficiaries.
2. In the event that the deceased's executors wish to include an amount representing the value of the unharvested crop in the income of the deceased, the following rules apply:
(a) in the case of a deceased taxpayer who farmed land that he owned or rented, the value of the deceased's interest in the crop at the time of his death is included in his income under subsection 70(2);
(b) in the case of a deceased taxpayer who rented land to a sharecropper, the value of the deceased's interest in the crop at the time of his death is included in his income under subsection 70(1)...
Any amount so included in income reduces the amount to be included in the income of his estate or his beneficiaries when they receive the ultimate proceeds of disposition of the crop.
b) If, in fact, the taxpayer is engaged in “forest planting” as described in IT-373R and considered to be in the business of farming from which he has been claiming restricted farm losses for the past twenty years, the value of unharvested timber would be considered income from the business of farming and not a capital asset.
We trust our comments will be of assistance to you.
Roberta Albert, C.A.
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.../cont'd
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