Timber Sales and Taxes – Canadians Selling Trees from a Personal Woodlot

July 2020

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. 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 generally 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. See my article on Non-Residents’ Taxation – Sale of Canadian Timber (and Transfers of Canadian Real Estate involving Non-Residents for sale of real estate)

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.  In this Interpretation, CRA says:

“With respect to allocating an amount as the adjusted cost base of the trees severed and sold, the rule for part dispositions of capital property in section 43(1) of the Income Tax Act would apply. After consulting with Industry Specialist Services, we concluded that what would generally be considered a “reasonable” ACB attributable to the trees disposed of for the purposes of subsection 43(1) of the Act would be the proportion of the ACB of the entire property before the disposition of the trees (after subtracting the residual value of the land) that the volume of timber sold is of the volume of timber on the entire property (before the disposition of the trees).

This is similar to the way in which Schedule VI of the Act, which described the system of capital cost allowance for timber limits, operates. Of course, if the taxpayers can suggest another means of allocating ACB and you agree that it would be the most “reasonable” method, or if you are of the view that due to the particular fact situation another method would be more appropriate, you would be advised to so allocate. The main point is that the allocation should be reasonable.”

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. I provide an example below.  However, note that, as stated in CRA Interpretation Bulletin IT-481, Timber Resource Property and Timber Limits (Archived), paragraph 3, rather than doing these detailed calculations, “a taxpayer may elect to deduct the lesser of $100 and the amount of his timber sales in the year in accordance with section 4 of Schedule VI of the Regulations.”  In other words, you can claim $100 instead of the actual cost base calculation.

Example:

1. 1. Determination of timber cost: Original cost of land: $40,000
      Less cost allocated to raw land without trees: $30,000, so balance of $10,000 relates to timber
      Timber stand at time of purchase – 2,000 cords valued at $10,000 (which is $5.00 per cord)
      Cost allocated to 1,500 cords of timber sold: $5.00 per cord x 1,500 cords =$7,500 cost of sale
      Cost of remaining uncut timber =  $2,500
   2. Determination of taxable capital gain: Timber sold – 1,500 cords at $15.00 per cord = $22,500 proceeds
      Cost of timber sold (from above): $7,500
      Total capital gain: $15,000
      Taxable portion of capital gain, if at 50% (may change in future by tax law): $7,500

Remember that whatever you claim as an allocation to your cost for this tax reporting reduces the remaining cost for future sales.

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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