- Dominique Renaud | Fiscalist | Desjardins Group
Selling a woodlot: tax implications
There are many tax nuances associated with disposing of a woodlot, whether the owner sells or transfers it during their lifetime or leaves it to their children.
Although it's always recommended to talk to a tax specialist in matters like these, here are 3 essential concepts you absolutely must be aware of if you own a woodlot.
1. Qualified farm property
Given that woodlot harvesting is a farming activity for tax purposes, if you sell your land, you must determine if it's qualified farm property. Depending on the acquisition date, the conditions that must be fulfilled in order for a woodlot to be considered qualified farm property will vary.
If the woodlot was acquired before June 18, 1987
- Have owned the woodlot for more than 24 months
- Use more than 50% of the woodlot as part of a farming business (silviculture)
- Have used the woodlot to operate a silviculture business during the year of disposition or during a period of at least 5 years
If the woodlot was acquired after June 17, 1987
Have owned the woodlot for more than 24 months
- Use more than 50% of it in a farming business (silviculture) during a 24-month period
- During a 24-month period, have engaged on a regular and continuous basis in the farming business
- During a 24-month period, have earned gross income from this farming business which exceeded the sum of your income from any other source*
2. Capital gains
If you determine that the woodlot is qualified farm property, the consequences of the sale could be different depending on who is buying it.
Selling to an arm's-length individual
By selling at market value, you can reduce the capital gain resulting from the sale by up to $1,000,000. The woodlot sale is likely to be tax-free in this case.
Selling to children
If you decide to sell below market value to keep the woodlot in the family, you could
"roll it over" to your children tax-free. If eventually your children decide to resell the woodlot to an arm's-length individual, they would be the ones taxed on the capital gain.
3. Management or development plan
If the woodlot is not qualified farm property, you will have to add 50% of the capital gain resulting from the sale to your revenue, whether the sale was made to a third party or a child.
However, the tax authorities allow taxpayers to transfer a woodlot by rolling it over to their children if the owner shows that they actively operated the woodlot as part of a silviculture business, on a regular and continuous basis.
Selling or transferring
If you want to transfer a woodlot that is not qualified farm property to a child, tax-free, it's not enough to have a management plan. You must show that you operated your woodlot based on the recommendations included in your management plan. Getting a management plan immediately prior to the transfer to a child would not meet this condition.
Gifting upon death
Upon death, if you didn't have a woodlot operational management plan and you're leaving it to your children, it cannot be "rolled over" to them. It will be deemed to have been sold at fair market value immediately before your death, and the estate will have to pay the taxes resulting from the transfer.
The tax advantages of owning a woodlot are subject to complex tax rules. All woodlot owners should consult a tax specialist to make sure they're optimizing all the tax nuances associated with owning a woodlot.
* Certain rules mentioned above may be relaxed, depending on whether the woodlot is owned or operated by the seller's spouse, child or parent or by a family-farm partnership. For more information, talk to your tax specialist.