Principal Issues: [TaxInterpretations translation] 1) Are the conditions set out in subsection 73(3) of the Act satisfied?
2) What evidence does the CRA require to demonstrate that a taxpayer was participating to the extent required by a prescribed forest management plan?
3) Does the CRA interpret subsection 70(9) of the Act in the same manner as subsection 73(3) of the Act?
Position: 1) General comments
2) None
3) Subsection 70(9) contains conditions similar to those in subsection 73(3). Thus, paragraph 70(9)(a) will be interpreted in the same manner as subsection 73(3)(c).
Reasons: 1) Question of fact.
2) This matter is the responsibility of the tax services offices or tax centres that audit the tax return.
3) Wording of paragraphs 70(9)(a) and 73(3)(c)
XXXXXXXXXX 2008-027142 Sylvie Labarre, CA October 6, 2008
Dear Sir,
Subject: Transfer of woodlot
This is in response to your letter of March 3, 2008 in which you requested our opinion with respect to the application of subsections 70(9) and 73(3) of the Income Tax Act (the "Act") in the following hypothetical situation.
A taxpayer owns several woodlots located in Quebec. He has a forest producer's certificate for each of his woodlots under section 120 of the Québec Forest Act. Each woodlot has a forest management plan issued by the Minister of Natural Resources and Wildlife. The taxpayer did not follow the forest management plan with respect to certain lands because he did not carry out the work required under the plan. For other lands, the required work was carried out after the deadline set out in the forest management plan due to a lack of financing, the work being carried out either by the taxpayer and/or his children, or by a forestry group. The taxpayer and/or his children carried out work on certain lands in accordance with their forest management plan, while a forestry group carried out the required work in accordance with their plan on other lands. In addition, certain lands did not require any work in accordance with the forest management plan.
You wish to know whether the conditions set out in subsection 73(3) (or 70(9) as the case may be) are satisfied, which would allow the taxpayer to transfer them to his children without tax. You are also asking us what evidence would be valid to show that work was done by the taxpayer and/or his children.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Subsections 70(9) and 73(3) set out the conditions for using the rules to facilitate, inter alia, the transfer to a child of land used principally in a farming business carried on in Canada in which the taxpayer, the spouse or common-law partner of the taxpayer or a child or a parent of the taxpayer was actively engaged on a regular and continuous basis or, in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect of that woodlot.
One of these conditions is whether the transferred woodlot was used principally in the course of a farming business carried on in Canada.
To do so, it must be determined whether or not the taxpayer is operating the woodlot as a commercial activity, which is a question of fact. Assuming that the taxpayer is carrying on the woodlot as a commercial activity, it must be determined whether the taxpayer is carrying on the woodlot in the course of a farming business. As discussed in paragraph 14 of Interpretation Bulletin IT-373R2 (Consolidated), whether a woodlot constitutes a farming operation or a logging business or another commercial operation is a question of fact. If the main focus of a business conducted with a reasonable expectation of profit (a commercial woodlot) is not lumbering or logging, but is planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan and significant attention is paid to manage the growth, health, quality and composition of the stands, it is generally considered a farming business (a commercial farm woodlot). If the main focus of a business is logging (a commercial non-farm woodlot), and is not growing, nurturing and harvesting trees, the fact that reforestation activities are carried out would not transform that business into a farming operation.
The Tax Court of Canada also found that this paragraph of Interpretation Bulletin IT-373R2 appeared to provide the necessary nuances with respect to the direction of activities in order to answer the same question in La Succession de Camille Desrosiers v. The Queen, 2000 DTC 2033.
In your questions 1 to 4, you asked whether the conditions set out in subsection 73(3) are satisfied. Subsection 73(3) imposes conditions in paragraphs (a) to (c), which must be satisfied in order for that subsection to apply. (Subsection 70(9) provides for similar conditions applicable upon the death of an individual). While the conditions in paragraphs 73(3)(a) and (b) do not appear to pose any particular difficulties, the application of paragraph 73(3)(c) is less clear. Indeed, paragraph 73(3)(c) provides, inter alia, that the property must have been used principally in the course of a farming business in which the taxpayer (Mr. X) or his children were involved to the extent required by a prescribed forest management plan. You should therefore be able to establish, for each of the XXXXXXXXXX land mentioned in your letter, that it was used principally in the course of a farming business. The facts of your application are clearly insufficient to draw any conclusion on this issue, which is essentially a question of fact.
The same is true with respect to whether Mr. X or his children took a share in the operation of a woodlot to the extent required by a prescribed forest management plan.
You stated in point 4 of your letter that the land was used principally in a logging business carried on in Canada. If the woodlots are in fact used in a non-farming business, the woodlots will not be transferable tax-free to children pursuant to subsection 73(3) (or pursuant to subsection 70(9), as the case may be).
Where woodlot land is used principally in the course of a farming business, one of the persons described above must either take an active part on a regular and continuous basis or take part to the extent required by a prescribed forest management plan in respect of that land.
Under subsection 7400(1) of the Income Tax Regulations (the "Regulations"), a forest management plan in respect of a taxpayer's woodlot is, for dispositions of property after 2007, the written plan for the management and development of that land that is described in either paragraph 7400(1)(a) or paragraph 7400(1)(b).
Paragraph 7400(1)(a) refers to a written plan for the management and development of the woodlot that describes the composition of the woodlot, provides for the attention necessary for the growth, health and quality of the trees on the woodlot and is approved in accordance with the requirements of a provincial program established for the sustainable management and conservation of forests.
Paragraph 7400(1)(b) refers to a written plan for the management and development of the woodlot that has been certified in writing by a recognized forestry professional to be a plan that describes the composition of the woodlot, provides for the attention necessary for the growth, health and quality of the trees on the woodlot and includes the elements set out in subparagraphs 7400(1)(b)(i) to (iv) of the Regulation. According to subsection 7400(2), a recognized forestry professional referred to in subsection (1) must have a degree, diploma or certificate recognized by the Canadian Forestry Accreditation Board, the Canadian Institute of Forestry or the Canadian Council of Technicians and Technologists.
In Quebec, to be recognized as a forest producer by virtue of section 120 of the Forest Act, a person must own a forested area of at least 4 hectares in a single block with a Forest Management Plan (FMP) certified by a forest engineer as being in compliance with the regulations of the regional agency for the development of private forests. According to the Quebec Ministry of Natural Resources and Wildlife site, the regional agencies are mandated to guide and develop the development of private forests, in particular by drawing up a protection and development plan for their territory and by providing financial and technical support for protection or development. There are currently seventeen regional agencies established in Quebec.
The regional agencies for the development of private forests establish the content of the forest management plan. We can see by consulting the websites of several of these agencies that several of them have adopted a forest management plan content that is similar. The forest management plan contains several elements including the identification of the owner and the property, the description of the property, the potential or development work, the signature of the forestry engineer who made or supervised the realization of the forest management plan for the property. According to the description that is made in certain regulations of the regional agencies, the description of the property should include, inter alia, the identification and description of the forest stands (main species, density class, stage of development, area, etc.) and the diagnosis that indicates the state of the stand that is at the origin of an intervention. In addition, in the section "potential or development work", the owner would be informed of the paths to development, which could be expressed as forestry work to be carried out in certain stands or a survey of potential according to resources. The plan would identify the main development work to be carried out on the property to improve the composition, quality and growth of forest stands, reduce the vulnerability of the environment and forest stands, and improve infrastructure.
It is difficult to make a definitive statement without having examined the forest management plan for a particular piece of land. However, if we rely on the content of forest management plans that were described on the websites of several regional agencies, the main elements of which are described above, it would appear that forest management plans that are certified as complying with the regulations of a regional private forest development agency by a forest engineer would contain the elements described in paragraph 7400(1)(a). In addition, we are of the view that in Quebec, a forest management plan certified as complying with the regulations of a regional agency for the development of private forests by a forest engineer would be a plan that is approved as complying with the requirements of a provincial program for the sustainable management and conservation of forests for the purposes of paragraph 7400(1)(a). For the purposes of subsections 70(9) and 73(3) of the Act, if neither the taxpayer, the spouse or common-law partner of the taxpayer or a child or a parent of the taxpayer was actively engaged on a regular and continuous basis in the farming business, one or more of those persons will be required to participate to the extent required by a prescribed forest management plan in respect of a woodlot that is used principally in a farming business. This is also a question of fact. We may conclude that none of the above-described persons will take part to the extent required by a forest management plan in a situation where it is not one of the persons referred to who performs the work or if the work is done after the prescribed deadline. On the other hand, the condition may be satisfied with respect to a woodlot even if no work has been done, as long as the forest management plan does not require any work or task. It is only after a review of all the facts relevant to this issue (including the forest management plan) that the CRA will be able to make a final determination.
We cannot tell you what evidence would be required when verifying compliance with the conditions set out in subsections 70(9) or 73(3) as this is a matter for the Tax Services Offices or tax centres that audit the tax return.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.