Principal Issues: A taxpayer acquires a right to cut Christmas trees for a period of ten years. Is the cost of that right deductible from the taxpayer's income?
Position: The right to cut Christmas trees, which is for a limited period, is considered Class 14 property. Therefore, an amount can be deducted pursuant to paragraph 20(1)(a) (as provided under paragraph 1100(1)(c) of the Regulations).
Reasons: The right to cut Christmas trees is a capital expenditure. The right is not a timber resource property nor a property described in paragraph 1100(1)(e) of the Regulations (see paragraph 15 of IT-373R2 (Consolidated)). The meaning of "concession or licence" provided for in paragraph 11 of IT-477 is broad enough to include that kind of property in Class 14 if the right is for a limited period.
November 7, 2011
XXXXXXXXXX Tax Auditor Income Tax Rulings Directorate XXXXXXXXXX Tax Services Office XXXXXXXXXX Sylvie Labarre
2011-042464
Subject: Right to cut Christmas trees
This is in response to your e-mail of October 14, 2011 in which you requested our opinion on the tax treatment of expenditures made by a taxpayer in the following situation.
In XXXXXXXXXX, a taxpayer purchased the right to cut Christmas trees on another taxpayer's land for a sum of $XXXXXXXXXX that is payable over 4 years over the course of the following years:
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX
The buyer must maintain and fertilize the trees for the duration of the right.
The right to cut is valid for 10 years. However, the buyer cannot cut more than XXXXXXXXXX trees annually.
You are of the view that the right to cut Christmas trees is not a timber resource property, as defined in subsection 13(21) of the Income Tax Act (the "Act") or property referred to in paragraph 1100(1)(e) of the Income Tax Regulations (the "Regulations").
You are also of the view that the right to cut is a capital property.
You have not attached an acquisition contract or other documents in support of the facts stated above.
Our Comments
We agree with your understanding that the right to cut Christmas trees is neither a timber resource property, as defined in subsection 13(21), nor a property referred to in paragraph 1100(1)(e) of the Regulations.
Paragraph 1100(1)(e) of the Regulations applies to a property, other than a timber resource property, that is a timber limit or right to cut timber from a limit.
Paragraph 15 of Interpretation Bulletin IT-373R2 Consolidated reads as follows:
A stand of Christmas trees is not viewed as a timber limit since the output is trees, not timber or similar products, and the capital cost allowance in Schedule VI of the Income Tax Regulations is not applicable.
That position reflects our interpretation of the term "timber" used in the English version of the Act and Regulations (that term is translated as "bois" in French). This interpretation is based inter alia on the decision of the Supreme Court of Canada in Highway Sawmills v. M.N.R, 66 DTC 5116 (in which the Court adopted the definition given to the word "timber" in the Oxford English Dictionary).
Since the definition of "timber" in English brings us back to lumber and similar products, we interpret the term "bois" used in French (which translates the word "timber") in the same sense even though the term "bois" could have had a broader meaning. Thus, Christmas trees that are not lumber or a similar product would not be covered by the term "bois" used in French to translate the term "timber".
The right to cut Christmas trees would therefore not be a timber cutting right in a timber limit and would not be covered by paragraph 1100(1)(e) of the Regulations. The capital cost allowance provided for in Schedule VI of the Regulations would not apply to that situation.
The term "bois" (which translates the term "timber") is not used only in paragraph 1100(1)(e) of the Regulations in respect of timber limits or timber rights in such a limit. The term "timber resource property" (depreciable property under Class 33 of Schedule II of the Regulations) is defined in subsection 13(21) and also refers to a right or licence to cut or remove "timber". In our view, the term "timber" must be given the same meaning in both provisions. Thus, the right to cut Christmas trees would not be a timber resource property, even if all the other conditions set out in the definition of "timber resource property" had been satisfied.
We also agree with you that the right to cut is a capital expenditure and will be deductible only as permitted by the Act pursuant to paragraph 18(1)(b). Indeed, the right to cut brings a lasting benefit to the corporation as it lasts for 10 years. Furthermore, the acquisition of that cutting right appears to us to constitute the creation or the expansion of the structure of the business.
We must therefore consider whether paragraph 20(1)(a) could allow the taxpayer to deduct a certain amount in respect of the cost of the cutting rights even though the latter is not a "timber resource property" or "right to cut timber from a limit”. In our view, the Christmas tree harvest is not property that is excluded from depreciable property under subsection 1102(1) of the Regulations. The question is therefore whether that property is described in one of the classes described in Schedule II of the Regulations.
Class 14 of Schedule II of the Regulations applies to property that is a patent, franchise, concession or licence for a limited period in respect of property other than the property referred to in paragraphs (a) to (e) of Class 14. In this regard, we find in paragraph (a) an exclusion for a concession or license in respect of "timber" (the term "bois" being used in the French version). We are of the view that the interpretation of the term "timber" used in this paragraph would not be different from that used in the context of the definition of "timber" and in the context of paragraph 1100(1)(e) of the Regulations. Consequently, the right to cut Christmas trees would not be part of the property referred to in paragraph (a) of Class 14. The right to cut Christmas trees is also not included in the exclusions stated in paragraphs (b) to (e) of Class 14.
It must be determined whether a right to cut Christmas trees could be "a concession or licence" for the purposes of Class 14. Paragraph 11 of Interpretation Bulletin IT-477 states:
The words "franchise, concession or licence", are not capable of easy definition. Generally, they must be given the meaning or sense in which they are normally employed by businessmen on his continent and they extend, not only to certain kinds of rights, privileges or monopolies conferred by or pursuant to legislation or by governmental authority, but also to analogous rights, privileges or authorities created by contract between private parties. Again, generally, these words are used to refer to some right, privilege or monopoly that enables the holder to carry on his business or earn income from property, or that facilitates the carrying on of his business or the earning of income from property. These words do not extend to a contract under which a person is entitled to remuneration for the performance of specified services, nor to a covenant not to compete for a limited period.
In our view, the right to cut Christmas trees could qualify as rights or privileges that allow the holder to carry on its business of selling Christmas trees or to facilitate that operation. Indeed, this right to cut allows the holder to obtain the raw material, the fir tree. In addition, according to the information you provided, we understand that this right to cut is not renewable. It seems to have a limited duration of 10 years.
Consequently, taking into account the broad interpretation set out in paragraph 11 of Interpretation Bulletin IT-477, we are of the view that the right to cut Christmas trees would be included in Class 14 of Schedule II of the Regulations.
Pursuant to paragraph 1100(1)(c) of the Regulations, the maximum allowable capital cost allowance to a taxpayer for any year in respect of property in Class 14 is the lesser of
(i) the aggregate of the amounts for the year obtained by apportioning the capital cost to him of each property over the life of the property remaining at the time the cost was incurred, and
(ii) the undepreciated capital cost to him as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of property of the class;
According to the information you provided, the capital cost of this right to cut Christmas tree is $XXXXXXXXXX and the duration of the right to cut is 10 years. Consequently, that capital cost could be amortized by the purchaser of the right over a period of ten years.
Subject to the analysis of the contract for the acquisition of the right to cut or any other relevant document, we are of the view that you should therefore refuse pursuant to paragraph 18(1)(b) the deduction claimed by the purchaser of the right to cut Christmas trees and should provide a deduction of $XXXXXXXXXX per annum pursuant to paragraph 20(1)(a).
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that our comments will be of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch