OCT 31 1988
TO Special Audits Division E.H. Gauthier Director
FROM Specialty Rulings Directorate P. Mason Tel. (613) 957-4364
Attention: B.J. Peters
SUBJECT: C.C.A. and I.T.C. on Assets at "Dryland Sort" Facilities of Loggers
We are writing in response to your memorandum dated July 21, 1988, concerning a report prepared by Mr. B.J. Peters, the Forestry Specialist on June 5, 1988. In that memorandum you asked whether we agreed with the positions taken by Mr. Peters in his comments which concluded that:
(1) "Cutting and removing merchantable timber from a timber limit" includes all activities up to and including operating a central gathering point, including a dryland sort, but does not include activities beyond that point.
(2) An asset may be located off the timber limit and still qualify for Class 10(n) or Class 15, provided that it is used in activities prior to or at a "central gathering point".
(3) Perpetual yield forest management does not disqualify immovable assets from Classes 10(n) and 15.
(4) Immovable assets are not disqualified from Class 10(n) or 15 because they service more than one timber limit.
(5) (a) Logs are "finished goods" of logging, & (b) Storing and shipping logs does not commence until the logs are packed or "packaged" in the manner in which they will be shipped, and (6) (c) Assets used past the point where logs are packed or packaged do not earn investment tax credits because they are used to store or ship finished goods.
(7) We should be concerned that perpetual yield forest management results in long useful economic lives of immovable forest assets but the high rates of capital cost allowance seem to indicate these assets were expected to have much shorter useful economic lives.
Our views which follow, particularly those relating to points 5 and 6 (a) to (c), take into consideration the discussion in the draft position paper dated May 26, 1988 forwarded to us June 7, 1988 in support of the view that "logs are the finished goods of logging". The rationale supporting that view, and certain consequences argued to flow from it were contained in Sections (F) to (G) on pages 4 to 8 of that earlier position paper.
(1) "Cutting and removing merchantable timber from a timber limit" includes all activities up to and including operating a central gathering point, including a dry-land-sort:
We agree with the comments made and the position taken except in point (c). It is our view that if, for example, the central gathering point were in the centre of the timber limit and the processing mill on an outside edge of that limit, then the transportation of logs from that central point to the mill would be included in "cutting and removing". Consequently, it is our view that one cannot say categorically that the "transportation of logs from a central gathering point... is not included in "cutting and removing". However, we agree that capital assets at a dryland sort such as that described in your memorandum would qualify for Class 10(n) or 15 provided they met the "no further use" criterion of those classes.
(2) A Class 10(n) or 15 asset may be located off the timber limit it serves:
We agree with the comments made by Mr. Peters, excluding the inappropriate argument in paragraph (d), except that it is our view that such assets need not be used prior to or at a central gathering point. In the type of example described in (1) above, the road from the central gathering point to the mill would be beyond the central gathering point but would still be needed for removing merchantable timber from the timber limit. Such a road, in our view, could well qualify as a Class 10(n) or Class 15 asset.
(3) Perpetual yield forest management does not disqualify immovable assets from Classes 10(n) or 15:
We agree. In our view, point (a) is the only point which need be accepted to reach this conclusion.
(4) Immovable assets are not disqualified from Class 10(n) or 15 if they service more than one timber limit:
We agree as has been conveyed to you in the response to our file 7-2622 dated October 6, 1988.
(5) (a) Logs are "finished goods" of logging: & (6) It is our view that logs would not be considered "finished goods" within the context of the use of the term in paragraph 127(11)(b) of the Act (reference our memorandum to you on this subject, dated October 20, 1988).
(b) Storing and shipping logs does not commence until logs are packed or "packaged" in the manner in which they will be shipped, and
(c) Assets used past the point where logs are packed or packaged do not earn investment tax credits.
Both of these statements were premised on the assumption that the question of whether or not logs were finished goods was relevant. In our view, what is relevant is when the logging activity ends. While our reasons differ, the effect of our reasoning is substantially the same as the effect of your reasoning.
In Bunge of Canada Ltd. (84 DTC 6276) the Federal Court of Appeal concluded that "discharging facilities were used primarily for the storing of grain because the discharge of grain from a silo was a necessary and integral part of the storing of grain". We conclude that a similar rationale would be applied at the dryland sort so that logging would include those activities which were a necessary and integral part of preparing the logs for transport.
Therefore, we conclude that the self-tripping bunks and related skidways are used in logging. Once the logs are in the water; however, assets described would not in our view be used in logging.
(7) In our view, there is no need for Revenue Canada to concern itself with the tax policy behind capital cost allowance rates on assets used in perpetual yield forest management, except when requested by the Department of Finance. It is our view that perpetual yield forest management is not at present a criterion which influences an assets' qualifying for inclusion in a particular class.
Yours truly,
ORIGINAL SIGNED BY J.G. Fullerton
Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch