14 June 2001 External T.I. 2001-0076595 - CAPITAL GAINS DEDUCTION-QFP

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: Whether property can be rolled using 73(3) and whether the capital gains deduction can be claimed for qualified farm property.

Position: General comments provided

Reasons: Question of fact and insufficient information provided to provide conclusive comments.

XXXXXXXXXX 	2001-007659
		Cornelis Rystenbil, CGA
June 14, 2001

Dear XXXXXXXXXX:

Re: Capital Gains Deduction - Qualified Farm Property

This is in reply to your letter of February 14, 2001, requesting our views on the income tax implications regarding an inter vivos transfer of farm property from a father to his sons by way of gift.

You have provided us with the following information:

1.) The taxpayer in question owns 5 quarter sections of farm land in Saskatchewan. Two parcels were purchased by the taxpayer around XXXXXXXXXX and were farmed by him until his retirement in XXXXXXXXXX.

2.) The remaining three quarter sections were transferred to the taxpayer by way of inter vivos transfer from his father in XXXXXXXXXX. His father had owned these quarter sections since approximately XXXXXXXXXX. Commencing approximately in XXXXXXXXXX, the taxpayer farmed these three quarter sections both as an employee and a tenant of his father.

3.) Commencing in XXXXXXXXXX and continuing until present, the taxpayer has leased all five quarter sections to unrelated third parties on crop share leases.

4.) The taxpayer's sons have not farmed this land in the past, and are not currently farming this land. In addition, the sons will not farm the land after they acquire it.

5.) The taxpayer and his sons are all residents of Canada.

Our comments

Written confirmation of the consequences 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 70-6R4 (enclosed). It should also be noted that we would need the appropriate authorization from the taxpayer in order to discuss his tax affairs with you. However, we are prepared to provide the following comments that are of a general nature.

Transfer of Property

Except as expressly provided in the Income Tax Act (the "Act"), when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, or to any person by way of gift inter vivos, the taxpayer is deemed, under paragraph 69(1)(b) of the Act, to have received proceeds of disposition equal to the fair market value.

Subsection 73(3) of the Act is one exception to the general rules of subsection 69(1) of the Act. Subsection 73(3) of the Act essentially provides for the deferral of the tax consequences on the transfer of farm property to a child during the taxpayer's lifetime. We have enclosed a copy of Interpretation Bulletin IT-268R4 which provides relevant interpretations of subsection 73(3) of the Act. In general terms, in order for a farm property to be eligible for the subsection 73(3) rollover, the following conditions must be met:

• the farm must be in Canada;
• the property must be transferred to a child who was resident in Canada immediately before the transfer; and
• before the transfer, the property must have been used principally in the business of farming in which the parent, the parent's spouse (or common-law partner) or any of their children, were actively engaged on a regular and continuous basis.

It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria that should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the general position of the Canada Customs and Revenue Agency (CCRA) with respect to the meaning of a farming business is outlined in paragraphs 8 and 9 of Interpretation Bulletin IT-433R and paragraph 7 of Interpretation Bulletin IT-145R (Consolidated). We have enclosed copies of these Interpretation Bulletins for your information. As indicated in paragraph 9 of IT-433R, the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming. "Sharecropping arrangement" means an arrangement where a taxpayer or landlord receives from a tenant a share of a crop in lieu of rent.

The determination of whether real property is used principally in carrying on a farming business is also a question of fact. Where reference is made to an asset being used principally in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. In our view, when determining whether assets will meet the more than 50% requirement, the test has to be applied on a property-by-property basis. Subsection 73(3) states, in part, that "... the property was, before the transfer, used principally in the business of farming...". There is no requirement that the property be used immediately before the transfer in the business of farming. However, if the property is used for some purpose other than farming for some period of time, a question may arise as to whether the property was used principally for that other purpose rather than in the business of farming.

For farm property to qualify for rollover treatment, it must be used in the business of farming in which a qualified person was actively engaged on a regular and continuous basis. It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Questions of fact of this nature are usually resolved by officials of the local taxation services office who are generally in a better position to appreciate all of the circumstances of a particular case.

Paragraph 27 of Interpretation Bulletin IT-268R4, reflects the CCRA's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates the requirement is considered to have been met when the person is actively engaged in the management and/or day-to-day activities of the farming business. Ordinarily, the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operations of the business. Whether an activity is engaged on a regular and continuous basis is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.

Qualified Farm Property

Subsection 110.6(2) of the Income Tax Act (the "Act") provides the capital gains deduction in respect of "qualified farm property" which is defined in subsection 110.6(1) of the Act. One of the conditions that must be met for real property of an individual to be considered a qualified farm property within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada. Whether a property is considered to have been used in the course of carrying on the business of farming is dependent on when the property was last acquired by the individual.

Pursuant to subparagraph (a)(vi) of the definition of qualified farm property in subsection 110.6(1) of the Act, 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, inter alia, the individual, or a spouse, child or parent of the individual, throughout the 24 months preceding the disposition. 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)(A) of the definition of qualified farm property in subsection 110.6(1) of the Act provides, in part, that in at least 2 years while the property was owned by a previously noted person the gross revenue of such a person from the farming business carried on in Canada in which the property was principally used, and in which such a person was actively engaged on a regular and continuous basis, must have exceeded the person'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 owns the property, such that, for instance, it may be the spouse or parent of the individual. For example, if a parent has met the gross revenue test in at least two years while he or she owned the property, and the parent later transfers the property to a child, the requirements of clause (a)(vi)(A) of the definition of qualified farm property in subsection 110.6(1) of the Act may be met even though the child has not farmed the property. Clause (a)(vi)(B) of the definition of qualified farm property in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership as described therein.

In addition, pursuant to subparagraph (a)(vii) of the definition of qualified farm property in subsection 110.6(1) of the Act, real property last acquired before June 18, 1987 (or after June 18, 1987 under an agreement in writing entered into before that date) will also be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as qualified farm property provided the property was used by, inter alia, the individual, or a spouse, child or parent of the individual, principally in the course of 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 such a person.

We trust that these comments will be of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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