7 January 2010 External T.I. 2009-0343311E5 - sale of timber resource property

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.

Principal Issues: tax consequences of the sale of a "Replaceable Interior BC Timber Harvesting Contract"

Position: proceeds to class 33...income inclusion of excess

Reasons: timber resource properties are included in Class 33, which has a CCA rate of 15%. The half-rate rule applies in the year of acquisition. When a taxpayer disposes of a timber resource property, subsection 13(21), the definition of "timber resource property", requires that the undepreciated capital cost of the class to which the property belongs be reduced by the full amount of the proceeds of disposition.

								2009-034331
XXXXXXXXXX 							Lena Holloway, CA 
								613-946-3553
January 7th, 2010

Dear XXXXXXXXXX ,

This is in reply to your letter dated September 30, 2009 wherein you requested an advance income tax ruling with respect to the tax consequences of a hypothetical sale of a particular property. We regret that, in accordance with Information Circular 70-6R5, in the absence of a specific proposed transaction, we are unable to provide an advance income tax ruling. Your deposit will be returned under separate cover. However, we will provide the following general comments.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

The particular property that you have described in your letter is a "Replaceable Interior BC Timber Harvesting Contract" and is defined as a "Replaceable Contract" under the Forest Act (British Columbia) and the Timber Harvesting Contract and Subcontract Regulation to the Forest Act. It is our understanding that these contracts are renewable and, pursuant to the terms thereof, grant the contractors a right to harvest timber. Generally, it is our view that such a contract would constitute a "timber resource property" under subsection 13(21).

A timber resource property is included in Class 33 of Schedule II of the Income Tax Regulations. The half-rate rule applies in the year of acquisition. When a taxpayer disposes of a timber resource property, the undepreciated capital cost of the class to which the property belongs is reduced by the full amount of the proceeds of disposition. This rule applies even where the proceeds exceed the original capital cost of the timber resource property. Accordingly, recapture may arise not only in respect of the capital cost allowance claimed but on any amount realized in excess of original cost. Ordinarily, any such excess realized on a disposition of depreciable property is treated as a capital gain, however subparagraph 39(1)(a)(iv) specifically provides that capital gains and losses cannot be realized or incurred on timber resource properties. If the aggregate reductions to the class exceed the amounts added to the class, the excess will be included in income under subsection 13(1).

We trust the above comments are of assistance. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation, Policy and Regulatory Affairs Branch