Principal Issues: A taxpayer acquires land on which there is standing timber. Whether such property constitutes a "commercial non-farm woodlot," as this expression is used in IT-373R2. Whether such property constitutes a "timber limit."
Position: It is possible that the land acquired constitutes a "commercial non-farm woodlot," as this expression is used in IT-373R2, and a "timber limit." However, the facts provided are insufficient to confirm the income tax consequences resulting from the acquisition of the land. General comments provided only. In the context of a commercial non-farm woodlot, paragraph 23 (b) of IT-373R2 states that capital cost allowance may be available in respect of the cost to the taxpayer of the woodlot. The expression "timber limit" is not defined in the Act. However, paragraph 7 of IT-481 states that if a taxpayer acquires land on which there is standing timber (for example, freehold timberlands), such property is a timber limit. Furthermore, paragraph 3 of IT-481 states that paragraph 20(1)(a) and paragraph 1100(1)(e) of the Income Tax Regulations (the "Regulations") provide for a deduction in respect of the capital cost of a timber limit. The amount claimed may not exceed the amount calculated in accordance with Schedule VI of the Regulations. Each property that is a timber limit is prescribed by subsection 1101(3) of the Regulations to be a separate class of property. Finally, rather than deduct an amount calculated pursuant to section 1 and section 2 or section 3 of Schedule VI of the Regulations, a taxpayer may elect to deduct the lesser of $100 and the amount of his timber sales in the year in accordance with section 4 of Schedule VI of the Regulations.
Reasons: Wording of the Act and previous positions.
2007-025205 XXXXXXXXXX S. Prud'Homme (613) 957-8975 April 30, 2008
Dear Sir,
Subject: Request for Technical Interpretation - Commercial Woodlot and "Forest Concession
This is in response to your fax of September 12, 2007, in which you requested our opinion on certain tax consequences arising from the acquisition of a woodlot by a taxpayer in the context of a particular situation.
1) Particular situation
You have presented us with the situation described below in the context of your request for a technical interpretation.
One of your clients is preparing to buy a woodlot. Your client intends to log the wood on this land and to then sell it. Farming would not be your client's principal source of income.
2) Your comments on the particular situation
You are of the view that, based on the terms of Interpretation Bulletin IT-373R2, "Woodlots (Consolidated)", the woodlot purchased by your client would be considered a "commercial non-farm woodlot", as that term is defined in IT-373R2.
You are also of the view that, based on the terms of Interpretation Bulletin IT-481, "Timber Resource Property and Timber Limits (Consolidated)" (January 13, 2004), the timberland purchased by your client would constitute a "timber limit" for purposes of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations").
Finally, you are of the view that, from a tax perspective, your client should be entitled to take a resource depletion allowance in respect of that woodlot, as the cutting and sale of the wood would significantly reduce the value of the woodlot.
You wish us to confirm that the woodlot acquired by your client would be considered a "commercial non-farm woodlot", as that term is defined in Interpretation Bulletin IT-373R2, and that the woodlot would constitute a "timber limit" for the purposes of the Act and Regulations.
You also wish to know what class of depreciable property your client's woodlot should fall into. Finally, you wish to know how to calculate the depletion allowance for this woodlot.
3) Our comments on this file
It is possible that the woodlot to be acquired by your client would be considered a "commercial non-farm woodlot", as that term is defined in Interpretation Bulletin IT-373R2, and that the woodlot would constitute a "timber limit" for purposes of the Act and Regulations. However, the facts and information submitted with your request for an interpretation are insufficient for us to confirm the tax consequences of your client's acquisition of the woodlot. We are, however, able to offer the following general comments that may be helpful to you.
Interpretation Bulletin IT-373R2 describes the steps to be followed in determining the main tax rules that apply in respect of a woodlot. With respect to a "commercial non-farm woodlot", paragraphs 1 to 10 and 23 of Interpretation Bulletin IT-373R2 appear to be the most relevant.
In that regard, paragraph 23(b) of Interpretation Bulletin IT-373R2 states that capital cost allowance may be available in respect of the cost to the taxpayer of the woodlot and refers to Interpretation Bulletin IT-481.
Paragraph 7 of IT-481 states that the Act does not define the term "timber limit". However, paragraph 7 of IT-481 states that "[i]f a taxpayer acquires land on which there is standing timber (for example, freehold timberlands), such property is a timber limit.”
Paragraph 3 of IT-481 states that paragraph 20(1)(a) and paragraph 1100(1)(e) of the Regulations provide for a deduction in respect of the capital cost of a timber limit or right to cut timber from a limit. The amount claimed may not exceed the amount calculated in accordance with Schedule VI of the Regulations. In addition, each timber limit is, by virtue of subsection 1101(3) of the Regulations, a separate class of property. Finally, rather than deduct an amount calculated pursuant to section 1 and section 2 or section 3 of Schedule VI of the Regulations, a taxpayer may elect to deduct the lesser of $100 and the amount of the taxpayer’s timber sales in the year in accordance with section 4 of Schedule VI of the Regulations.
We apologize for the delay in responding to your request. We hope that our comments will be of assistance.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Industrial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.