Principal Issues: [TaxInterpretations translation]
Tax treatment of fruit trees
Position: Awaiting Archambault decision.
Reasons: Taxpayer appealed.
June 30, 2000
Richard Cloutier Headquarters
Quebec Tax Services Office Resources, Partnerships and
Trusts Division 2000-002991
Tax treatment of fruit trees
I am writing further to your email of June 2, 2000 and our telephone conversation of June 16, 2000 (Desparois/Cloutier) regarding the above subject.
The Tax Court of Canada recently analyzed, in René Archambault v. Her Majesty the Queen, 2000 DTC 1809 (the “Archambault” case), the tax treatment of costs related to the planting of fruit trees. In Archambault, one of the issues was the tax treatment of the costs of planting new apple trees and replacing apple trees destroyed by frost. In general, the Tax Court of Canada reiterated the position of the Canada Customs and Revenue Agency (“CCRA”) in concluding that the costs incurred for the purchase and planting of new apple trees constituted capital expenditures. However, contrary to the CCRA's position, the Tax Court of Canada concluded that costs incurred to replace apple trees were also capitalizable. The Tax Court of Canada stated, in part, as follows at pages 1820 et seq:
[73] To decide on the tax treatment of the cost of the trees that Mr. Archambault purchased for planting in 1992 in the Papineau orchard and of the cost of the trees that he purchased in 1994 and 1995 to replace the ones that had been killed by frost in 1993, it is important to begin by determining the nature of the asset involved.
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[77] In conclusion, I believe that each tree is an asset that is separate from the ground in which it is planted and that it is not appropriate to add the cost of each of these assets to the cost of the land. This result appears to me to be fully in accord with Canada's tax system. Indeed, it is interesting to note that, among the depreciable assets described in the Income Tax Regulations (Regulations), a distinction is made between land and the building constructed on it. The fact of constructing a building's foundations does not mean that the building is incorporated into the land on which it is located. Such an asset is referred to in Class 3 of Schedule II of the Regulations.
[78] A road, sidewalk, airplane runway, parking area, storage area or similar surface construction is also treated, in Class 1 of Schedule II, as property separate from the land on which it is found. Even a fence is treated as a separate asset in Class 5. There is thus nothing surprising in the conclusion that a tree is an asset that is distinct from the land on which it is planted. Furthermore, in sections 1702 and 1703 of the Regulations care was taken to make it clear that neither land nor a tree is a depreciable asset.
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[81] … In this case, Mr. Archambault's inventory is the apples produced by the apple trees, and not the apple trees themselves.
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[84] The trees purchased by Mr. Archambault thus possess all the attributes of a capital asset. They are property that was acquired for the purpose of earning income and that has a considerable life span. Their purchase is a one-time expense and that expense procures an enduring benefit for the taxpayer. The fact that an apple tree may be killed by frost a few months after it is planted in no way alters its nature as a capital asset; no one would think of treating a car purchased by a rental business as property included in inventory just because it was in an accident after having been used for a few months.
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[87] As may be noted from this analysis, it is important to decide whether a tree is an integral part of the land or a separate asset. Once it has been determined that each apple tree purchased by Mr. Archambault is a separate asset, it is relatively easy to conclude that the cost of replacing a tree killed by weather conditions or destroyed because it has ceased to be productive after twenty-five years is an expense for the replacement of capital under paragraph 18(1)(b). Replacing a tree is not the same as replacing the propeller of a ship.
[88] Accordingly, I believe that the costs incurred to plant trees replacing existing trees in an orchard are also—contrary to the Minister's administrative policy—capital expenses which are subject to the limitation set out in paragraph 18(1)(b) of the Act. …
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[89] In conclusion, the apple trees purchased by Mr. Archambault in 1992, and those purchased in 1994 and 1995, are capital assets and their cost cannot be deducted because of the prohibition in paragraph 18(1)(b). It is unfortunate that the Regulations expressly provide that trees are not depreciable assets. …
The taxpayer is dissatisfied with this unfavourable decision by the Tax Court of Canada and has appealed to the Federal Court of Appeal. Mr. Derek Baines, of the Appeals Branch, has indicated that in his view this case will not be heard before the end of 2000.
Considering that the Archambault case deals specifically with your question and that this judgment is being appealed, we feel that it would be premature to comment on the matter.
We hope you find our comments of assistance.
Marc Vanasse, Manager
Resources, Partnerships and Trusts
Partnerships and Trusts Branch
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. Derek Baines, Appeals Branch