26 January 2000 External T.I. 1999-0011905 - WOODLOTS

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.Does the administrative position of reducing the ACB of a woodlot by the amount of proceeds from sale of timber still apply.

2.Is a sale of timber on account of income, capital or does 12(1)(g) apply.

3.Can the enhanced capital gains deduction apply in view of the Jens Larsen case

Position: 1. No. Subsection 43(1) applies.

2. Question of fact and circumstances.

3. Yes. The Jens Larsen case held that a one-time sale of real property that was used in the business of farming can qualify, provided that all other requirements for the deduction are satisfied.

Reasons: 1. Subsection 43(1).

2. Depends on facts.

3. Federal Court of Appeal decision in the Jens Larsen case.

XXXXXXXXXX 							992848
								Denise Dalphy
(613) 957-9231
Attention: XXXXXXXXXX 

January 26, 2000

Dear Sirs:

Re: Interpretation Bulletin IT-373R2, Woodlots

This is in reply to your letter dated October 27, 1999 wherein you asked a number of questions with respect to the above-noted IT Bulletin and your facsimile transmission of November 8, 1999 with respect to the 1999 decision of the Federal Court of Appeal in R. v. Larsen.

Adjusted cost base

With respect to allocating an amount as the adjusted cost base of the trees severed and sold, the rule for part dispositions of capital property in section 43(1) of the Income Tax Act would apply. In our view, what would generally be considered a "reasonable" ACB attributable to the trees disposed of for the purposes of subsection 43(1) of the Act would be the proportion of the ACB of the entire property before the disposition of the trees (after subtracting the residual value of the land) that the volume of timber sold is of the volume of timber on the entire property (before the disposition of the trees). This is similar to the way in which Schedule VI of the Act, which described the system of capital cost allowance for timber limits, operates. Of course, if due to a particular fact situation another method would be more appropriate, one would be advised to so allocate.

The administrative positions described in paragraph 2 of the former Interpretation Bulletin IT-373R, and in particular, the position that immediate tax consequences may be avoided by farmers on certain minor dispositions of trees by reducing the adjusted cost base of the entire property, do not apply for taxation years commencing after July 16, 1999 (the effective date of the new bulletin).

Hypothetical situation

You asked for our views on a hypothetical situation where a taxpayer received a fixed sum of money from a lumber yard for allowing the lumber yard to access the taxpayer's treed land and to harvest 15 acres of property. The amount paid was calculated on the total board feet that the lumber yard expected to harvest.

We do not have enough facts before us to make a conclusive determination on the above hypothetical situation. Whether 12(1)(g) applies to a transaction or whether a disposition is taxed on capital account is a question of fact that must be based on all relevant circumstances. Generally, the proceeds from the sale of trees (where the vendor is not in the business of selling timber and the transaction was not an adventure or concern in the nature of trade) will be taxable on capital account where:

(a) the land was not acquired with the specific intent of selling timber or land;

(b) the land was cleared to improve or maximize the value of the land (for example, to expand a farm operation, to clear storm damage, etc.);

(c) it is a one time contract for sale of capital property by the person (and not the sale of a continuing right to enter and take away timber);

(d) the price of timber is fixed; and

(e) the timber is to be removed over a short period of time (such as several months or such shorter period of time that, given a particular set of circumstances, would be reasonable to consider as a short period).

Capital or Income Account

As we stated in our earlier letter, whether the proceeds from the sale of timber by a farmer are included in determining farming income is a question of fact, and amounts may be taxed on income or capital account. Of course, where paragraph 12(1)(g) of the Act applies the Act deems the transaction to be taxable on income account.

Federal Court of Appeal decision in Larsen

Whether the sale of a right to harvest trees is a sale of a real property is a question of fact. The Court of Appeal found on the facts in Larsen that the disposition was a disposition of real property and we have not appealed this case to the SCC.

We accept the Court's position in Larsen that, where there has been a one-time disposition of a real property that is profit a prendre and the relevant treed land had been used in the farming business, the enhanced capital gains deduction may be available, provided that all the other requirements of this deduction are satisfied.

The profit a prendre itself need not have been used in the business of farming, however the treed land must have been used in the business of farming. Interpretation Bulletin IT-373R2 will be amended to reflect this position.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. 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 Directorate
Policy and Legislation Branch