What the "Archived Content" notice means for interpretation bulletins

NO.: IT-501

DATE: September 4, 1984

SUBJECT: INCOME TAX ACT
Capital Cost Allowance - Logging Assets

REFERENCE: Paragraph 20(1)(a) (also classes 10 and 15 of Schedule II and Schedule IV to the Regulations)

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1. This bulletin discusses the classification, for capital cost allowance purposes, of various assets used in the logging industry. The classification and determination of the maximum capital cost allowance rates for timber resource properties and timber limits are discussed in IT-481.

2. Logging operations of a logger are generally considered to encompass the following:

(a) cutting or "felling" trees in the woods,

(b) trimming off branches and tops,

(c) "bucking" into desired log lengths,

(d) transporting logs to tidewater, or some other central gathering point, e.g. dry land sort, and

(e) booming, rafting, or loading onto barges for towing to the mill.

Where a taxpayer is engaged not only in logging but also in a manufacturing enterprise such as the operation of a sawmill or pulp and paper mill, assets used in the processing of logs into the final product are not logging assets. For example, wood-handling equipment in the mill yards of a pulp and paper company is not a logging asset since it is used in the first stage of the manufacturing process. In addition, where operations described in (d) or (e) above are carried out by a contractor who neither owns the limit or cutting rights nor carries out the operations described in (a) to (c), the contractor does not carry on a logging operation.

Immovable Woods Assets

3. The expression "immovable woods assets" as used in this bulletin refers to immovable property acquired for the purpose of cutting and removing merchantable timber from a timber limit, which property will be of no further use to the taxpayer after all merchantable timber has been removed from the limit. Examples of logging assets of this kind that are most commonly in use are camp and depot buildings (including water, sewer and electrical systems), roads, bridges, canals, culverts, railway track and grading, dams, telephone lines, fire protection towers, docks and wharves for loading logs and for loading or unloading supplies, and flumes and chutes. Vessels located in land-locked waters, in circumstances where they cannot be removed or sold, are also considered to be assets of this kind.

4. Immovable woods assets which have a useful life of three years or less by reason of the fact that all merchantable timber will have been removed in that time from the particular area serviced by those assets may be written-off as current expenses in the year in which they are incurred. However, a taxpayer may chose to treat these costs as costs of acquisition of immovable woods assets, and must treat them as immovable woods assets if the useful life will exceed three years.

Classification - Schedule II

5. Although specific assets may be property described in various other classes, immovable woods assets may, at the option of the taxpayer, be classified in the year acquired as property to be included in paragraph (n) of class 10 or in class 15. Classification as property described in paragraph (n) of class 10, however, is contingent upon all property that qualifies therein being classified thereunder and not merely some of it. On the other hand, a taxpayer may classify some or all immovable woods assets as property of class 15 or of any other classes in which they are described, other than paragraph (n) of class 10. It should be noted that river improvements made to facilitate the removal of timber from a particular limit qualify for inclusion in class 15 by virtue of Regulation 1102(7), but are not otherwise depreciable property, i.e. may not be included in class 10 or in any other prescribed class.

6. By virtue of Regulation 1100(1)(f) and Schedule IV to the Regulations, a taxpayer with property in class 15 is entitled to claim capital cost allowance based on a rate per cord or board foot of production in the year, rather than at an amount not exceeding a fixed percentage rate applied to the undepreciated capital cost of the class. If all the property in class 15 was used for the one limit or section thereof, the rate per cord or board foot is determined by dividing the undepreciated capital cost of the property by the number of cords or board feet of timber in the limit or section thereof as at the commencement of the taxation year. Where different parts of the class were used in connection with different timber limits or sections thereof, separate rates are computed for each part of the class as though each part of the class were the taxpayer's only property of that class. The same rate will continue from year to year unless there is a cruise which indicates a change in the quantity of timber recoverable from the limit or there are additions to or deletions from the capital cost of the class.

Roads

7. The cost of constructing any road on land in which the taxpayer has no beneficial ownership interest is not a capital cost of depreciable property, although it may be an eligible capital expenditure (see IT-128). However, permits and other rights granted by landowners in respect of roads usually confer significant incidents of land ownership on the grantee in which case road construction costs can be property included in depreciable property classes. A road that is expected to have a useful life beyond the life of the timber limit it is servicing should be included in class 1 or 17 (depending on the date of its acquisition) if not included in class 10(p). Access roads or trails for the protection of standing timber against fire, insects and disease qualify for inclusion in class 10(p). Roads which meet the description of immovable woods assets in 3 above may be included in class 1, class 17, class 10(n), class 10(p) or class 15. Notwithstanding any of the preceding comments, a taxpayer may, as an alternative, treat expenditures which relate to a spur road or trail branching off from another road for access to a specific timber stand or area from which all merchantable timber will be removed within three years as expenses of the year in which they are incurred. Nevertheless, the cost of an "addendum road" (a road in respect of which the costs are recoverable from the crown, usually by a reduction in "stumpage" charges) is simply an account receivable and is neither deductible nor depreciable

Logging Equipment

8. Certain equipment, acquired for logging operations but not covered by class 10(n), ordinarily will also fall within the scope of one of the following paragraphs of class 10: 10(a) - automotive equipment. 10(c), (d) or (e) - harness or stable equipment, sleighs, wagons or trailers. 10(o) - mechanical equipment, not including property described in class 7 (see Boats, below).

Electrical generating equipment, radiocommunication equipment, and miscellaneous equipment which is not specifically described in another class, may be property to be included under paragraph (f), (j) or (i) respectively of class 8. Any of the above noted equipment that was acquired for use in respect of one timber limit only and will be of no further use after all the merchantable timber has been removed from that limit may be classified under class 15 for allowances based on the production from the limit. As discussed in 5 above, the classification of equipment acquired for use at one timber limit as property of any class other than class 10 will prevent the classification of any other property of the taxpayer under paragraph (n) of class 10. Also, logging equipment is excluded from class 29 by virtue of Regulation 1104(9)(b).

9. Examples of specialized logging equipment which may be included in class 10 are as follows:

(a) Automotive equipment - trucks, tractors, skidders, "tree harvesters", self-propelled cranes, and power-operated movable road-building equipment acquired by a logger to construct roads to or in the timber limits of the logger.

(b) Mechanical equipment (when acquired for logging operations) - yarders, sulkies, logging arches, slashers, barkers, loaders, unloaders, hoists, winches, garage equipment, machine shop equipment, blacksmith shop equipment and railway locomotives and rolling stock.

Boats

10. Canoes, rowboats, scows, tugboats and other vessels and their fittings may not be classified as mechanical equipment acquired for logging operations under paragraph (o) of class 10. Normally they are included as property of class 7 (see IT-267R). Where a boat is acquired for use in respect of one timber limit only and will be abandoned when all the merchantable timber has been removed from that limit, it may be classified as property to be included in paragraph (n) of class 10 or in class 15 (see 5 above).

Boomchains

11. Boomchains represent supplies to be accounted for as inventory of the taxpayer.

Power Saws

12. The Department is prepared to allow a taxpayer who is required by a contract of employment to supply a power saw to deduct from income the cost of the power saw in the year of purchase. The Department's practice is set out in Information Circular 74-6R, "Power Saw Expenses".

Leased Logging Equipment

13. Leasing equipment acquired by a taxpayer and subsequently leased to a person carrying on a logging operation is normally not considered to have been acquired by the lessor for logging operations. Instead, it is considered to have been acquired for the purpose of leasing. Accordingly, such property is included in the class in which it is otherwise described, and not in paragraph (o) of class 10. However, the lessor may be considered to have acquired the property for logging operations in the following circumstances,

(a) where the property acquired is specialized logging equipment and cannot conveniently be used for purposes other than logging, or

(b) where the property, although it is capable of being used for purposes other than logging, is acquired specifically to be leased out to a person to be used in that person's logging operations. In either case, the lessor may include the property in class 10 by virtue of paragraph (o) thereof.