Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
April 1, 1999
XXXXXXXXXX Tax Services Office Resource Industries Section
Client Services Division Denise Dalphy
XXXXXXXXXX 957-9231990789
Woodlots
This is in reply to your facsimile transmission dated March 24, 1999 with regard to an enquiry that you received about the income tax treatment of a sale of timber.
The situation that you describe is as follows:
1. In XXXXXXXXXX, the taxpayer, who presently lives inXXXXXXXXXX, paid $XXXXXXXXXX to buy a large piece of land in XXXXXXXXXX, on which XXXXXXXXXX unmatured red pines stood.
2. The taxpayer purchased the treed land in order to earn additional income on retirement by selling the timber on its maturity to Hydro for use as hydro posts.
3. The value of the treed land, before the ice storm in January 1998, was $XXXXXXXXXX.
4. Many trees were damaged by the ice storm. The value of the treed land is now $XXXXXXXXXX.
5. Trees destroyed by the ice storm were sold by the taxpayer for $XXXXXXXXXX. The purchaser, not the taxpayer, removed the timber.
6. In the spring of 1998, the taxpayer hired a company to plant trees. The company will also be retained to plant XXXXXXXXXX red pine trees in the spring of XXXXXXXXXX and another XXXXXXXXXX in the year XXXXXXXXXX.
7. The taxpayer has not received assistance from the provincial government, and we assume he received no other assistance with respect to the treed land or timber.
8. On his death, the taxpayer intends to pass the treed land on to his heirs.
9. There are no buildings on the land, “only trees".
Discussion
There is no specific set of income tax rules that applies solely to owners of woodlots, or treed land, and the general rules for the computation of income and taxable income apply. The tax result of transactions relating to woodlots depend upon the particular fact situation.
In this case, since the taxpayer purchased the treed land with the intention of generating income from the timber, the transaction would be subject to taxation on income account under section 9 of the Income Tax Act (the “Act”), and income must be reported using the accrual method. It should be noted that trees are not generally inventory when they are planted in the land.
Recurring expenses that are directly related to the woodlot adventure or business would generally be deductible in the year in which they are incurred. Whether a particular planting, thinning, fertilizing or property tax expenditure is a recurring expense will depend on the particular circumstances, and certain provisions of the Act, such as section 67, subsection 18(2), and paragraphs 18(1)(a) and (h), may limit the deductibility of a particular expense.
Finally, although the present value of the treed land is $XXXXXXXXXX, before the ice storm in January 1998 its value was $XXXXXXXXXX. When the value of an asset fluctuates, there is generally no income tax recognition at that time. In this case, there would be no present income tax consequences of the decline in value of the treed land. Similarly, although the value of the treed land was $XXXXXXXXXX when the taxpayer purchased it in XXXXXXXXXX and $XXXXXXXXXX in January 1998, there was no income taxation at that time of the rise in value of the property and the economic gain was not taxed.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to 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 your client request a copy of this memorandum, he can be provided with the LAD version or he may request a copy severed using Privacy Act criteria which does not remove the client’s identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
If we can be of any further assistance or if you wish to discuss this matter further, please contact the writer.
John Chan
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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