1 March 2000 External T.I. 1999-0015475 - CAPITAL GAIN ON JOINTLY-HELD PROPERTY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Reporting of capital gain on farmland owned jointly by a husband and wife where the capital contribution to acquire the farmland was provided disproportionately between the two of them.

Position: Each spouse would report a share of the capital gain on the basis of his or her respective contribution of capital to acquire the property.

Reasons: When spouses own a property jointly but have provided the financing for its acquisition disproportionately, it is our view that the attribution rules in subsection 74.2(1) of the Income Tax Act will apply to determine the reporting of a capital gain earned on the disposition of the property.

XXXXXXXXXX 	J. Gibbons
		1999-001547
Attention:  XXXXXXXXXX 

March 1, 2000

Dear XXXXXXXXXX:

We are replying to your letter of December 15, 1999, in which you requested a technical interpretation regarding the capital gains exemption on farmland (the "farm property") owned jointly by a husband and wife.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

You described the following three scenarios, in which farmland was acquired in the names of the husband and wife:

1. The down payment was made with the husband's funds only, and he was the only active farmer.

2. The husband and wife contributed equally towards the down payment, and the husband was the only active farmer.

3. The down payment was made with the wife's funds only, and the husband was the only active farmer.

You also state that in all cases the loan repayments were made from farm income, and the husband reported 100% of the farm income.

You requested our views on how the capital gain should be reported for purposes of calculating the capital gains exemption pursuant to subsection 110.6(2). In this regard, you ask whether our answer would change if the wife were active in the farm business or if she reported some of the farm income.

Our views

When spouses own a property jointly but have provided the financing for its acquisition disproportionately, it is our view that the attribution rules in subsection 74.2(1) of the Income Tax Act will apply to determine the reporting of a capital gain earned on the disposition of the property. As a result of these rules, each spouse would report a share of the capital gain on the basis of his or her respective contribution of capital to acquire the property. Although subsection 74.2(1) is applicable for transfers of property made after May 22, 1985, the results will generally be identical for transfers of property on or before this date, pursuant to the rules in former subsection 74(2).

Any loan payments, or portions thereof, that are made with farming income will be considered to be capital contributions by the husband to acquire the property if he is the only one carrying on the farming business and reported all of the income therefrom. If the wife contributed part of the down payment on the property which was used in the farming business and reported none of the farming income, only her down payment is relevant in determining her capital contribution to acquire the property. (The income attribution rules in subsections 74.1(1) and 74.1(2) do not apply to income from a business so that none of the farming income will be attributed to her.)

If the wife is also active in the farming business, it is likely that a partnership exists. Therefore, a portion of the profits from the farming operation (and a similar portion of the loan payments) should be allocated to each spouse on a reasonable basis. If the business income from the partnership is not allocated between the spouses on a reasonable basis, the Agency may adjust each partner's share to an amount which is considered reasonable pursuant to subsection 103(1.1) of the Act. In this regard, we refer you to IT-231R2, "Partnerships - Partners not Dealing at Arm's Length."

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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