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:
Under the definition of "share of capital stock of a family farm corporation" in subsection 110.6(1) of the Act:
(a) Whether the fair market value of the land owned by the corporation is attributable to property used principally in the course of carrying on the business of farming if 2% is rented and 98% is farmed, regardless of the fact that the fair market value of the land increases as the potential rental income increases?
(b) Is this income considered farming income under the Act?
Position:
(a) The fact that a small percentage of the land is rented does not adversely impact whether or not the fair market value of the is considered attributable to property used principally in the course of carrying on the business of farming, as required under the definition in subsection 110.6(1) of the Act. This is so even if the rental income from the rented portion happens to exceed the net income derived from farming and the value of the land has increased accordingly.
(b) No.
Reasons:
(a) Interpretation of the definition of "share of capital stock of a family farm corporation" in subsection 110.6(1) of the Act.
(b) The rental income does not relate to the farming activities, nor would it be incidental to the farming revenue - two of the essential requirements for non-farming income to be considered part of the overall farming income.
XXXXXXXXXX 2002-012164
R. Hewlett, B.Comm.
March 20, 2002
Dear XXXXXXXXXX:
Re: Share of the Capital Stock of a Family Farm Corporation
We are writing in response to your letter dated January 22, 2002, wherein you requested our opinion on the interpretation of the definition of "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Income Tax Act (the Act).
In your letter, you describe a hypothetical situation in which a company (the Company) that is owned by individual shareholders resident in Canada (the Farmers) is engaged in the business of farming. The Farmers are actively involved in farming 98% of the overall acreage of the land owned by the Company on a regular and continuous basis. The Company holds this land under one legal title. The remaining 2% of the land acreage is rented to an arm's length party (the ALP). The ALP constructs a windmill, with no cost to the Company. As consideration, the Company receives a percentage of the revenues derived from the windmill operation of the ALP. In the absence of this rental income, the net income of the Company is nominal. The fair market value of the total acreage of the land will increase because of the rental income to be received from the ALP. If the rental income increases, there will be a corresponding increase in the value of the land.
We understand your general concern to be whether the fair market value of the land is attributable to property used principally in the course of carrying on the business of farming. In your view, because the land rented to the ALP is only 2% of the total land, it should meet this requirement, regardless of the fact that the fair market value of the land increases as the potential rental income increases
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 income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
In your situation, the fact that a small percentage of the land is rented does not adversely impact whether or not the fair market value of the land is considered attributable to property used principally in the course of carrying on the business of farming, as required under the definition of "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Act. This is so even if the rental income from the rented portion happens to exceed the net income derived from farming and the value of the land has increased accordingly. However, in our view it is likely that this rental income would not be considered farming income under the Act. The rental income does not relate to the farming activities, nor would it be incidental to the farming revenue - requirements which we feel are essential for non-farming income to be considered part of the overall farming income.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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