13 September 2000 External T.I. 2000-0019235 - QUALIFIED FARM 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:

Is land that you pay another farmer to seed, cultivate, fertilise and harvest Qualifying Farm Property?

Position TAKEN:

Question of fact. Insufficient information to determine if land falls under pre or post-June 1987 rules and if requirements are met. General comments only provided to taxpayer.

Reasons:

Question of fact. Insufficient information.

XXXXXXXXXX 2000-001923
T. Young
September 13, 2000

Dear sir:

Re: Definition of "Farming" and "Qualified Farm Property"

This is in reply to your letter of March 29, 2000, requesting a ruling on whether land you own is "qualified farm property" for purposes of claiming a capital gains exemption under subsection 110.6(2) of the I\ncome Tax Act (the "Act"). We also acknowledge your letter of August 3, 2000.

In your letter, you indicated that you own slightly over 100 acres of cultivated farm land upon which you grow wheat. You presently have a farmer, who has his own equipment, that you pay yearly on a per acre basis for seeding, cultivating, harvesting, fertiliser, etc. Although the farmer buys his own insurance and settles any claims himself with his insurance company, you pay the insurance premiums. You do not have a Canadian Wheat Board permit book, however, you sell the wheat in the fall to various individuals.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where 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, dated December 30, 1996 (copy enclosed). Also, it would be necessary to review all relevant documentation before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.

Subsection 110.6(2) of the Act permits a lifetime capital gains deduction of $500,000 for an individual resident in Canada throughout the year who disposed of "qualified farm property" in the year. One of the conditions that must be met for real property of an individual to be considered "qualified farm property" is that the property has been used in the course of carrying on the business of farming in Canada.

The determination of whether land is used by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used principally in the business of farming, as is part of the requirements described in subparagraphs (a)(vi) and (a)(vii) of the definition of "qualified farm property" (see comments below), the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R, Farm Losses (copy enclosed). In addition, the Agency's general position with respect to the meaning of a farming business is outlined in paragraphs 8 and 9 of Interpretation Bulletin IT-433R, Farming or Fishing - Use of Cash Method (copy enclosed).

A taxpayer, spouse or child may be considered to be carrying on a farming business when, to the extent that the circumstances of the particular farming operation allow, that person determines, for example, which fields will be planted, the type of crops to be seeded and the times for spraying and harvesting. The fact that the services of another person may be engaged for a negotiated sum of money to undertake all or part of the work associated with the farming activity would not, in and of itself, disqualify the land from being "qualified farm property".

For purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act, property will not be considered to have been used in the course of carrying on the business of farming unless it meets either the condition of subparagraph (a)(vi) or (a)(vii) of the definition. Pursuant to subparagraph (a)(vi) of that definition, real property may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned by the individual, spouse, child or parent of such person, a family farm partnership in which any of the above persons have an interest, or a personal trust from which the person acquired the property, throughout the 24 months preceding the sale. For the purposes of section 110.6 of the Act, "parent" would also include a grandparent or a parent of a spouse.

In addition, the real property must meet the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Clause (a)(vi)(B) of the definition in subsection 110.6(1) of the Act will only apply when farm land was used by a corporation or a partnership and does not appear to apply in your situation.

Under clause (a)(vi)(A) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, a child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual's income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who currently owns the property and may be the parent or spouse of the individual where that parent or spouse previously owned the property.

Under subparagraph (a)(vii) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, property acquired before June 18, 1987 (or after June 17, 1987 under an agreement in writing entered into before that date) may also be "qualified farm property" provided it was used by the person claiming the capital gains exemption, a spouse, child or parent of the person, or a family farm partnership in which any of the above persons have an interest, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by a person referred to above.

We trust our comments will be of assistance to you.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate

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