4 November 2003 External T.I. 2003-0036395 - Proceeds from Sale of Trees

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does the sale of trees result in a capital gain or income for tax purposes?

Position: Question of fact.

Reasons: Can only be determined when all of the facts are known.

2003-003639
XXXXXXXXXX Luisa A. Majerus
(613) 946-3558
November 7, 2003

Dear XXXXXXXXXX:

Re: Proceeds from the Sale of Trees

We are writing in reply to your letter of June 26, 2003, wherein you requested our views regarding the treatment of any proceeds received by an individual landowner in respect of the sale of trees located on privately owned land and harvested by your company.

Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.htm l.

The determination of how proceeds from the sale of trees on a woodlot would be taxed under the Income Tax Act (the "Act") is a question of fact. This determination would require a review of all of the relevant facts.

The CCRA's general views regarding woodlots are found in Interpretation Bulletin IT 373R2, Woodlots (Consolidated). As noted in paragraph 1 of IT-373R2, a "woodlot" is used in a broad sense to mean land covered with trees. We also note that growing trees generally form part of and are the same property as the land on which they stand. Paragraph 2 of IT-373R2 provides an illustration of the three main issues that must be resolved in order to determine the income tax rules that will apply to any particular woodlot. The current version of IT-373R2 does not reflect the Supreme Court of Canada decision in Brian J Stewart v. Her Majesty the Queen (2002 DTC 6969). In this case, the court set out a new test to determine if a taxpayer has undertaken an activity in pursuit of profit instead of as a personal endeavour.

Where the purchase price for the trees on the woodlot is dependent on the use of or production from a property, other than an agricultural property, the amount received will be considered income from business or property pursuant to paragraph 12(1)(g) of the Act. For further information about the application of paragraph 12(1)(g) of the Act, refer to the current version of Interpretation Bulletin IT-462, Payments Based on Production or Use.

Where a person receives an amount for allowing someone to cut and remove timber from his or her property, the sale of the timber may be subject to tax on capital account if all of the following conditions are satisfied:

(a) The taxpayer did not acquire the property with the specific intention of selling the timber or land;

(b) The agreement for purchase and sale is an isolated transaction;

(c) The purchase price for the timber is a fixed amount;

(d) The timber is removed over a short period of time; and

(e) The purchase price does not depend on the use or production of the land.

If the above conditions are satisfied and the amount received is subject to tax on capital account then the individual landowner will report a capital gain in the year the amount is received to the extent that this amount exceeds the cost of the property.

We trust these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

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