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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1. In different scenarios, would certain shares be "shares of the capital stock of a family farm corporation"? Do we look at the use of assets over a time period or the use of the assets at a particular time?
Position:
1. Comments provided.
Reasons:
1. Reading of the particular legislation in sections 70, 73 and 110.6 of the Act.
2001-008811
XXXXXXXXXX Allan Nelson, C.M.A.
(613) 443-7253
November 20, 2001
Dear XXXXXXXXXX:
Re: Technical Opinion Request
We are writing in reply to your letter to us dated June 7, 2001, as amended in our telephone conversation (Nelson/XXXXXXXXXX) on October 31, 2001, wherein you asked us to comment on whether, at a particular point in time, certain shares would be shares of the capital stock of a family farm corporation for the purposes of sections 70, 73 and 110.6 of the Income Tax Act (the "Act").
You have asked us to consider the following two hypothetical situations:
Situation 1
A Canadian corporation ("Canco") owns land in Canada and certain farm equipment. All or substantially all of the fair market value of the property owned by Canco has always been attributable to the one parcel of land owned by it. Canco has been in existence for 35 years and Mr. X has always owned all the shares issued by Canco. In the first 32 years of Canco's existence, it used the land exclusively to carry on the business of farming in Canada in which Mr. X was actively engaged on a regular and continuous basis. In the most recent 3 years, Canco only rented out the land to an unrelated third party [i.e., in those years Canco did not use the land to carry on the business of farming].
Situation 2
The same fact pattern as in Situation 1, except that in the first 32 years of Canco's existence, the same land was rented out to an unrelated third party [i.e., in those years Canco did not use the land to carry on the business of farming]. In the most recent 3 years, Canco's only use of the land was to carry on the business of farming in which Mr. X was actively engaged on a regular and continuous basis.
As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.
Shares of the Capital Stock of a Family Farm Corporation - Subsection 70(10)
In order for certain rollover provisions to apply, for example, under subsections 70(9.2) and 73(4) of the Act, the relevant shares must be shares of the capital stock of a family farm corporation, as defined in subsection 70(10) of the Act. The definition of a share of the capital stock of a family farm corporation under subsection 70(10) of the Act, provides, inter alia, that a share of a corporation will be a share of the capital stock of a family farm corporation of a person at a particular time if that share is owned by the person at that time and if, at that particular time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that has been used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of the definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, common-law partner, child or parent of the person was actively engaged on a regular and continuous basis.
The facts in Situations 1 and 2, above, indicate that presently all the conditions have been met in order for each of Mr. X's shares of Canco to be a share of the capital stock of a family farm corporation, if Canco's land has been used principally (i.e., more than 50%) in the course of carrying on the business of farming. In addressing this question, generally, it is not solely the current use of the land that is relevant, but it is the use of the land over the entire period of its ownership.
In Situation 1, Canco used all of the land 32 out of 35 years in the course of carrying on the business of farming. This usage well exceeds the requirements in order for the land to be considered to have been used principally in the course of carrying on the business of farming (i.e., Canco used all of the land more than 50% of the 35 years that it owned it in the course of carrying on the business of farming). Therefore, the shares of Canco would be shares of the capital stock of a family farm corporation.
The facts in Situation 2 are, in our view, somewhat unusual. It may be uncommon for a taxpayer to change the use of its farm after being rented out for such a lengthy period to being used in the business of farming. However, we will provide general comments for the sake of discussion. We note that Canco only used the land for 3 out of 35 years in the course of carrying on the business of farming. This usage is well short of the requirements in order for the land to be considered to have been used principally in the course of carrying on the business of farming (i.e., Canco did not use all of the land more than 50% of the 35 years that it owned it in the course of carrying on the business of farming). Therefore, the shares of Canco would not be shares of the capital stock of a family farm corporation.
Shares of the Capital Stock of a Family Farm Corporation - Subsection 110.6(1)
In order to qualify as a share of the capital stock of a family farm corporation under the definition in subsection 110.6(1) of the Act, at any time (herein referred to as the "determination time"), the requirements of both paragraphs (a) and (b) of the definition must be met. For example, generally, a share of the capital stock of a corporation owned by an individual at the determination time would qualify as a share of the capital stock of a family farm corporation at that time if
(a) throughout any uninterrupted 24-month period ending before the determination time, more than 50% of the fair market value of the property owned by the corporation was attributable to property used by the corporation principally in the course of carrying on the business of farming in Canada in which the individual was actively engaged on a regular and continuous basis, and
(b) all or substantially all of the fair market value of the property owned by the corporation at the determination time was attributable to property that was used principally in the course of carrying on the business of farming in Canada by the corporation.
In Situation 1 the conditions outlined in paragraphs (a) and (b) above have been met. Throughout any 24-month period ending in the first 32 years of Canco's existence, the land represented more than 50% of the fair market value of the property owned by Canco and this land was used by Canco principally in the course of carrying on the business of farming in Canada in which Mr. X was actively engaged on a regular and continuous basis. Further, the land represented all or substantially all of the fair market value of the property owned by Canco at the determination time and the land was used principally in the course of carrying on the business of farming in Canada by the corporation (i.e., Canco used all of the land more than 50% of the 35 years that it owned it in the course of carrying on the business of farming). Therefore, the shares of Canco would be shares of the capital stock of a family farm corporation.
In Situation 2 the conditions outlined in paragraph (b) above have not been met. The land represented all or substantially all of the fair market value of the property owned by Canco at the determination time, but Canco did not use the land principally in the course of carrying on the business of farming in Canada. Canco only used the land for 3 out of 35 years in the course of carrying on the business of farming. This usage is well short of the paragraph (b) requirement in order for the land to be considered to have been used principally in the course of carrying on the business of farming (i.e., Canco did not use all of the land more than 50% of the 35 years that it owned it in the course of carrying on the business of farming). Therefore, the shares of Canco would not be shares of the capital stock of a family farm corporation.
In accordance with paragraph 22 of Information Circular 70-6R4, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Customs and Revenue Agency.
We hope the above will be of assistance to you.
Milled Azzi, C.A.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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