Is Farm Timber - Capital Or Income?

The tax court found in favour of a farm family who claimed the sale of timber from its property was on their capital account and not income dependent on the production from, or use of, the property as CRA had claimed.

The property had been held and continuously farmed by the family between the 1950s and early 1970s when they ceased farming it because of poor returns.

The unfarmed property consisted mostly of bush and essentially remained idle, producing little revenue. The owners were approached by a company that wished to remove usable trees from the property.

After a successful trial on a portion of the land, the parties agreed to removal of the rest of the timber over a five-year period.

The factors that supported the taxpayers' argument essentially were:

  1. The property was acquired and used only for farming.
  2. The family had held the property for over 40 years.
  3. They had not entertained previous offers to remove the timber nor did they seek competitive bids.
  4. No extensive contracts were negotiated, and once the timber was removed the arrangement ended.
  5. The family still saw the property as farmland.
  6. The trees were acquired as part of the land and not as inventory.
  7. The timber was seen as an impediment to raising alfalfa.
  8. No steps were taken to market the timber or make it more marketable.
  9. The agreement to remove timber was not an ongoing and continuous right to use the land, but a one-time sale of all of the timber on the property.
  10. All of the above contradicted CRA's contention that a commercial woodlot existed.

It's clear a great deal of thought and planning must go into such sales to avoid CRA's desire to apply higher tax rates.

Before you arrange to sell timber on your property, contact FBC for advice on how best to structure the agreement for tax purposes.