13 October 1999 External T.I. 9922625 - WOODLOTS, TIMBER SALES

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.

XXXXXXXXXX                                             		 992262
                                                                                 Denise Dalphy
                                                                                 (613) 957-9231
Attention:  XXXXXXXXXX 

October 13, 1999

Dear Sirs:

Re: Interpretation Bulletin IT-373R2 ("IT-373R2"), Woodlots

This is in reply to your letter dated July 30, 1999 wherein you asked a number of questions with respect to the above-noted FT' Bulletin.

Administrative positions

Administrative positions have been removed from fl'-373~ (see Reasons for Revision, in Explanation of changes, IT-373R2). Accordingly, ~-373~ is effective for taxation years commencing after July 16, 1999 (See Application in IT-373R2).

1. Whether the proceeds from the sale of timber from a farm that includes a woodlot are included in determining farming income is a question of fact.

2. In order to determine the income tax consequences that will apply in respect of a timber sale, the steps outlined in fl'-373~ should be followed. If it has been determined that a sale of timber is in respect of a "non-commercial woodlot" and is taxable on capital account, the adjusted cost base of the timber must be ascertained and the proceeds from the sale will be subject to income taxation at that time to the extent that they exceed the adjusted cost base of the timber (See paragraph 11 of YI'-373~ and the bulletins referred to therein for the general rules concerning adjusted cost base).

Payments for timber harvesting rights based on board feet harvested

1. Where the amount payable for the right to cut standing timber is based on the total board feet of trees removed, paragraph 12(l)(g) of the Income Tax Act (the "Act") may apply. The income tax consequences of such a sale will depend upon all of the particular facts involved. In the above circumstances, it is possible that the sale generated income from business or property, income from an adventure or concern in the nature of trade, or it may be taxed on capital account. See Step I in Yr-373~.

2. It is a question of fact whether paragraph 12(l)(g) of the Act would apply on the sale of fruit or maple trees. One would have to ascertain whether the amount received by the taxpayer was "dependent on the use of or production from property".

Capital gains deduction

1. Where paragraph 12(l)(g) of the Act applies on a sale of timber, the proceeds are taxed on income account, not capital account. The enhanced capital gains deduction for farmers is available for certain capital, not income, transactions. Accordingly, the deduction does not apply where an amount has been taxed as income under paragraph 12(1)(g) of the Act.

2. The sale of a right to harvest trees is generally not the sale of a real property. Unless a profit à prendre has been sold, a timber sale is usually a licence - to enter on the land and to sever standing trees (which is a personal property), combined with ownership of the trees, once severed (a personal property). The enhanced capital gains deduction does not apply.

3. Where the property that was sold was a real property that was profit à prendre, notwithstanding that it is a disposition of a real property, it is hard to conceive of a situation where the enhanced capital gains deduction for farmers would apply. This is because, in order for the capital gains deduction to apply, it must be demonstrated that the profit à prendre itself (the right to harvest, as opposed to the trees themselves) was used in the farming business. This would be unlikely.

4. If treed land is sold as one real property, the enhanced capital gains deduction for farmers may apply, provided, of course, all the requirements are satisfied.

5. The Department does not agree with the reasons for judgment in Larsen, and has filed an appeal.

(See paragraphs 16 to 18 of IT-373R2.)

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 7O-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice 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