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Trees and Income Taxes – Selling Trees from your Personal Use Woodlot

The purpose of this article is to explain taxation of timber sales, also called stumpage, by persons who are not in the business of doing so. The common situation occurs when you are approached by someone wishing to cut timber from your property. This property may be part of your homestead, a cottage property, or other real estate holdings.

What is a Woodlot?

The Canada Revenue Agency (CRA) have many rules and interpretations related to sale of trees (stumpage) from your woodlot.

CRA considers a “woodlot” to be land covered with trees, including land that is part of a cottage property (Interpretation Bulletin IT-373R2). Taxation rules vary depending on whether or not your woodlot is

  1. A “commercial” or “non-commercial” woodlot (i.e. do you operate it as a business or are you selling the timber for the purpose of earning a profit, either continuously or one time only as an “adventure in the nature of trade”.
  2. If it is a commercial woodlot, is it considered a “farm”?

This article deals only with “non-commercial” woodlots considered to be “personal-use property”.

Is a sale of stumpage from a personal-use woodlot taxable?

Sale of this timber by a Canadian taxpayer will likely create a taxable “capital gain”, meaning that only one-half of the gain is taxable. Losses on personal use property are not tax deductible. To receive capital gain treatment, there are four conditions to be met, as set out in Interpretation Bulletin IT-373R2:

    1. The land was not acquired with the specific intent of selling timber or land;
    2. It is an isolated sale, and not a sale giving someone a continuous right to take timber;
    3. The sale price is fixed, for example by volume of timber removed or by fixed quote of a specific area harvested.
    4. The timber is removed over a short time period based on the particular circumstances.

Special tax rules relate to sale of timber by non-residents of Canada because they do not file Canadian income tax returns. A frequent example is the sale of stumpage by an American who owns acreage in Canada. Prior to payment for the timber, the purchaser must withhold taxes, usually 25% of the proceeds, unless certain approvals are received from CRA. Contact us for our firm’s article or further advice on this topic if it relates to you.

Can any deductions be claimed against this capital gain?

The cost of capital property may be deducted from the proceeds or sale of that property. Guidance is available by reference to Section 43(1) of the Income Tax Act, and to Internal Technical Interpretations Inquiry number 9925837 (E) dated November 30, 1999.

If you purchased a property consisting of raw land and standing timber, it works like this. First, allocate your cost between land and timber based on their pro rata values at the time of purchase. Now you have the cost of your timber. Next, allocate the cost of the timber between that which you have sold and that which is still standing. Subtract the cost of the timber sold from your sales proceeds to determine the capital gain to be reported.

Example:

    1. Determination of timber cost:Original cost of land: $40,000
      Less cost allocated to raw land without trees: $30,000Cost of timber – 2,000 cords: $10,000
      Cost allocated to 1,500 cords of timber sold: (1500/2000 x $10,000) $7,500

      Equals cost of remaining timber $2,500

    2. Determination of taxable capital gain:Timber sold – 1,500 cords at $15.00 per cord: $22,500
      Cost of timber sold (from above): $7,500Capital gain: $15,000

      Taxable portion of capital gain: $7,500

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum