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A Commercial Woodlot is a Farm

By Dick Lalande

Few woodlot owners take advantage of operating a commercial woodlot as a farm, and each owner and their own situation is unique This article will focus on a theoretical woodlot, Harry’s Commercial Woodlot, which is a forested, 400-acre mixed forest, some planted trees, swamp and field mix, situated in eastern Ontario.

Harry is passionate about managing his woodlot in order to leave it as a better place for the future Harry also wishes to run his woodlot as a business so it will grow in value and become profitable Once it has positive income, it becomes a much more valuable property and can be sold as an investment or passed on without burden to others Therefore, he is treating his woodlot as a business venture and wishes to take full advantage of the provincial and federal incentives that are available to him.

Provincial Program: Managed Forest Tax Incentive Program

IMG 5973 pp EDick LalandeThe OWA, Ontario Forestry Association, and Ministry of Natural Resources have made substantial inroads to promote the Managed Forest Tax Incentive Program (MFTIP) Currently, some 6,000 woodlot owners participate in the MFTIP The main benefit of participating in MFTIP is that the woodlot owner receives a 75-percent reduction in provincial property taxes for as long as the owner stays in the program The owner can opt out or stay in the program as long as he owns the property The next owner can decide to apply for MFTIP or not.

Harry found that joining MFTIP was straightforward First, Harry joined a woodlot association, such as the OWA He obtained information on MFTIP and received assistance in finding a forester to help him prepare a stewardship managed forest plan that met his personal needs Once that was done, Harry had the forestry professional sign the plan and then he submitted it for approval.

Harry received his 10-year approved plan from the Ministry of Natural Resources; MNR also notified the Ontario Assessment Office (MPAC) to reclassify his property as a managed forest On the next property tax bill, Harry noticed the new managed forest classification and significant tax savings.

Example of cost savings:

Prior to applying for MFTIP, Harry’s 400 acres was classed as rural residential rate (.00039) on assessment 
His annual property tax bill was

$4,000

Harry received his MFTIP approval and his 400 acres is classified at the managed forest rate (0001) on assessment.
His property tax bill is now

$1,000
Harry’s annual property tax savings is $3,000

It is important to note that MFTIP was introduced to achieve objectives of the government, by encouraging private woodlot owners of Ontario to become involved with managing their woodlots in a sustainable manner It is not a free gift, and each woodlot owner is responsible to provide good stewardship practices in their woodlots.

Federal Programs: Tax incentives

Harry took the time and effort to obtain a provincial MFTIP stewardship forest management plan He had already developed a business plan as part of his forest management plan with a 10-year budget forecast of revenues and expenditures He knew that he would be losing money for several years, but that the property would grow in value and that he would receive income in the future from activities on the woodlot.

Harry studied federal income tax bulletins and became very familiar with the tax system He found that the Canada Revenue Agency’s (CRA) view was that if the main focus of the woodlot business plan is not lumbering or logging, but is planting, nurturing and harvesting trees pursuant to a forest management plan, and significant attention is put into the growth, health, quality and composition of the forest, it is then generally considered a farming business and called a commercial farm woodlot.

Harry also found that farming businesses included such activities as tree farming, Christmas tree growing, sugar bush, firewood, forest products, fruit growing and beekeeping, among others that qualified as accepted business activities allowed on a commercial farm woodlot.

He also discovered that he was not a full-time farmer since his principal source of income was not from farming activity. He was a part-time farmer and was allowed only a restricted loss of $8,750 per year for several years In the case of new tree plantings on his property, it would take some 30 to 40 years for the trees to reach full market revenues Harry also realized that his maximum allowable loss could be claimed against his other yearly income to reduce his taxable income amount, similar to how an RRSP contribution reduces taxable income.

Harry was excited about the fact that he could save federal income tax dollars However, in digging deeper he realized that this was the acid test — the result being that his woodlot business plan did in fact have a reasonable expectation of profit in the future.

Harry was able to find the following criteria to determine that his woodlot business plan would satisfy CRA’s requirements:

  1. His planting trees allowed him a lengthy startup period of several years.
  2. His plan would indicate movement from losses to revenues over a reasonable time.
  3. The plan would show how the woodlot is to grow and develop over time.
  4. Time spent on the woodlot would be acceptable to eventually produce a profit.
  5. He would join a woodlot association and spend time to educate himself on sustainable managed woodlot practices.
  6. He would keep appropriate accounting and business records.

Harry also found that only expenses that were used in any normal business activity for the purpose of producing income for the business or woodlot were expenses such as property taxes, interest on loans, insurance (woodlot and equipment), equipment (ATV, tractors, trailers, etc.), tools (chainsaws, pruners, wood splitter, etc.), electricity, fuel, and travel and lodging costs.

Example of tax savings

Harry’s yearly income from woodlot

$500

Harry’s yearly expense from woodlot

$15,500

Total Loss

($15,000)

   

Allowance for Tax Calculations:

100% on first $2,500.00 loss

($2,500)

50% on balance $12,500.00 loss

($6,250)

Total allowable farming loss on line 141 of the T-1 General

 

($8,750)

   

Based on Harry’s net marginal tax rate

40%

Harry’s federal tax savings was

$4,725

50% restricted farm loss not used can be carried back 3 years or forward up to 20 years on woodlot revenues or may be added to adjusted cost base of the woodlot to reduce future capital gains upon disposition.

$6,250

Harry was able to deduct $8,750 against his yearly personal income and saved $4,725 in income tax because he qualifies as a commercial woodlot as a farm He also could use his unused restricted loss in the future.

Harry realized that there are also other potential benefits of being a commercial woodlot as a farm:

  1. The ability to roll over the commercial woodlot to children; however, this may prove to be difficult.
  2. The ability to access $500,000 of capital gain exemption on disposition of the commercial woodlot.
  3. HST paid on commercial woodlot expenses can be offset against HST charged on other HST personal income received by Harry.

Each woodlot owner has very specific objectives, goals and different accounting circumstances The above article using Harry’s situation was a simplified theoretical example If any woodlot owner is interested in their property becoming a commercial woodlot as a farm, discuss it with an accounting professional first.

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