11 June 1997 Ruling 9700313 - SALE OF STANDING TIMBER

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.Transfer of farmland under subsection 73(3) is part of a series of transactions that result in a non arm's length disposition of the farmland.

2.Whether land with standing timber, if sold outright, is a disposition of real property used in the course of carrying on a farming business.

3.If the corporation harvests the timber, will paragraph 13(7)(e) apply to grind the cost for depletion purposes.

Position:

1.The Department finds it offensive where transfers of farmland, under subsection 73(3) of the Act, are made as part of a series of transactions resulting in an arm's length disposition of the property.

2.Where farmland that has standing timber is sold outright, although it is a question of fact to be determined on the basis of the contract(s) of sale and surrounding circumstances, we would generally consider that the sale constituted the disposition of real property.

3.Setting up a depletion base would be the only mechanism for the corporation to get any cost base and in so doing paragraph 13(7)(e) would apply to grind the cost.

Reasons:

1.The purpose would not simply be the transfer of the farm to the child but to create additional enhanced capital gains exemptions.

2.Determination of fact.

3.Paragraph 13(7)(e) requires such a cost grind.

970031
XXXXXXXXXX A.M. Brake

Attention: XXXXXXXXXX

June 11, 1997

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
Sale of Land and Standing Timber

This is in reply to your letter of December 13, 1996 requesting an advance income tax ruling on behalf of three family members (father and two sons) carrying on the business of farming in a partnership. The individuals, who own the property used in the partnership, propose to transfer land and standing timber to a corporation ("Newco") to be set up and owned equally by the three individuals. We understand that prior to the transfer to Newco a portion of the father's interest in the properties will be transferred under subsection 73(3) of the Act to the sons such that each will own a one-third interest in the properties at the time they are transferred to Newco. It is our understanding that the activities of Newco will be limited to the disposition of the timber or the timber and the land. You requested confirmation on whether the enhanced capital gains deduction would be available to the three individuals resulting from the transfer of the land and standing timber to Newco.

Since it would be a determination of fact to be made based on all the relevant facts of a particular situation as to whether the land qualifies as real property used in the course of carrying on a farming business in Canada throughout the qualifying period and whether a timber limit would exist before the transfer to the corporation, we are unable to make such a confirmation in the form of an advance income tax ruling. We are prepared, however, to provide the following comments.

Our Comments

It is a determination of fact as to whether a farming business is in fact carried on with a reasonable expectation of profit and whether a particular parcel of land was used primarily in that business of farming by a qualified user that was actively engaged on a regular and continuous basis. In accepting that a farming business may have been carried on in a given situation, we must point out that each property would have to be considered on its own merits as to whether it was used primarily in the business of farming throughout the qualifying period. The farmer who owns, say, three separate parcels of land may have in fact carried on a farming business and done so entirely on only one of these parcels of land and that in fact the remaining parcels may not have been used primarily or otherwise in the business of farming.

In our view, where land that has standing timber is sold outright, although it is a question of fact to be determined on the basis of the contract(s) of sale and surrounding circumstances, we would generally consider that the sale constituted the disposition of real property. Should the property have been acquired by Newco with the intention of selling the land and timber together or the timber, by itself, to a third party, the transaction, in our view, would most likely be on account of income to Newco.

If it is the intention of Newco to hold the property and harvest the timber and at any time in the future a timber limit is set-up by Newco, any portion of the purchase price of the real property that is allocated to that depreciable property for depletion purposes would be subject to the cost reductions set out in paragraph 13(7)(e) of the Act.

In a situation where the only purpose for the transfer of farmland is simply to pass the property from parent to child as a inter-generational transfer, there would not appear to be misuse of a provision of the Act, in this case subsection 73(3), or abuse of the Act read as a whole, within the meaning of those terms in subsection 245(4) of the Act. However, in a series of transactions involving a transfer under subsection 73(3) of the Act, and an arm's length sale of farm property, the child could be considered to be the agent of the parent. In such a scenario, the gain would be a gain of the parent rather than the child. Alternatively, GAAR could be applied to redetermine the tax consequences if the transfer to the child was entered into merely as an avoidance transaction. Depending on the facts, it is also possible to consider dispositions by the child of the farm property to be on account of income rather than capital.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on Revenue Canada.

We trust our comments will be of assistance to you. Your deposit will be refunded under separate cover.

Yours truly,

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