David R. Senecal
March 24, 1987
Dear Sirs:
This is in reply to your letter of December 22, 1986 wherein you request our views with respect to the application of section 700 of the Income Tax Regulations (the "Regulations").
In our view, it is a question of fact as to whether or not interest on short-term investments or on trade receivables would be considered to be "income from sources other than logging operations" within the meaning of those words as contained in Regulation 700(l)(d). This would depend on such factors as the exact relationship of the income to the logging and/or other businesses carried on by the taxpayer and, with respect to income from short-term investments, whether or not the capital invested is in excess of the amount required to carry on the corporation's existing levels (or planned levels on a short-term basis) of logging operations, having due regard to any cyclical fluctuations.
The Department's position is that business interruption insurance proceeds are received by virtue of the non-operation of a resource business. In the case of logging these receipts from the non-operation of the business are considered to be... "income from sources other than logging operations..." as that expression is used in Regulation 700(l)(d). Since the income from insurance is taken into account in determining sources other than logging the proceeds are deducted from the taxpayer's income for the purposes of subsection 127(1) of the Income tax Act (the "Act").
In our opinion, taxable capital gains (or allowable capital losses) do not constitute income (or a loss) from a source. As a result any gain from the sale of capital assets used in a logging operation would not constitute "income for the year from logging operations in the province" for the purposes of paragraph 127(2)(a) of the Income Tax Act.
With respect to your query as to how net income from sources other than logging operations is calculated, we draw your attention to the British Columbia Forest Products Ltd. case (71 DTC 5178) which held that the reference in Regulations 700(l)(d) to income "from all sources..." meant income from all sources as determined by the application of the provisions of the Act less all allowable deductions applicable to those sources of income.
With respect to your final query, we are of the opinion, that the term "original cost" for the purposes of Regulation 700(1)(d)(iii) means the original capital cost of the property to the taxpayer.
We trust that our comments will be of assistance.
Yours truly,
for Director Bilingual Services and Resource Industries Division Rulings Directorate Legislative and Intergovenmental Affairs Branch