7 October 1991 Income Tax Severed Letter - Inventory of Christmas Trees Acquired by a Cash-basis Farmer

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.

Dear Sirs:

Re: Inventory of Trees-Paragraph 28(1)(c) of the Income Tax Act

This is in reply to your letter of September 5, 1991 requesting our comments regarding the application of paragraph 28(1)(c) of the Income Tax Act (the "Act") to the inventory of Christmas trees acquired by a cash basis farmer (assumed).

In your example a taxpayer purchases property with the intention of growing Christmas trees. A portion of the purchase price is specified to be in respect of trees presently on the land. You ask if the price specified in the agreement for the trees would be considered inventory for the purposes of the Mandatory Inventory Adjustment (MIA) under paragraph 28(1)(c) of the Act. You ask a series of other questions related to the inventory of trees the answers to which will be provided as part of our answer to your main question.

Our Comments

The Department's position with respect to the owners of farm woodlots, tree farms and Christmas tree growers is contained in Interpretation Bulletin IT-373R. There it states with specific reference to Christmas trees that no part of the purchase price of land planted with evergreens may be claimed as a cost of the trees unless the purchase agreement specifies a price for the trees and a separate price for the land. If a price is specified for the trees (at whatever state of growth), the cost of acquiring the trees will, in the case of a cash basis farmer, be deductible and, in the case of an accrual basis farmer, be added to inventory.

Subsection 28(1.1) defines, for purposes of subsection 28(1), inventory owned in connection with a farming business, as "property that would have been included as inventory of the business if the income from the business had not been computed in accordance with the cash method ...". IT-433 states in essence that Christmas tree growing is considered a farming business. Thus, in our view, the lessor of the cost or the fair market value of the purchased inventory in your hypothetical example would be considered inventory for the purposes of the MIA under paragraph 28(1)(c) of the Act. (See subsection 28(1.2) of the Act).

As indicated in our letter of September 19, 1989 to which you refer and as stated in paragraph 7 of IT-433, in certain factual circumstances it is considered that farming includes the operation of nurseries. In the letter referred to, it was opined that seedlings and one or two year old trees purchased by a nursery operator which are then grown for, say seven years and then sold would be considered "inventory" for purposes of paragraph 28(1)(c) of the Act.

Not all types of trees or plants can be included in inventory, however. The term "inventory" is defined in subsection 248(1) of the Act as "a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year". Trees and plants that are acquired to be grown for their produce (berries, fruit and nuts for instance) would not in our view meet the definition of "inventory" for purposes of subsection 248(1) and paragraph 28(1)(c) of the Act as, once planted, the cost of the property is not relevant in computing the taxpayer's income from a business for a taxation year. It is the Department's view that the cost of perennial plants, orchard trees and nut trees purchased would, on the initial establishment of an orchard, be considered to be capital expenditures that would be added to the cost of farmland. The cost of replacement plants or trees is considered to be a deductible expense.

We trust our comments will be of assistance.