25 June 2004 External T.I. 2004-0065501E5 - QFP - Attribution (property last acquired)

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.

Principal Issues: Whether a property deemed to be disposed of by a taxpayer pursuant to subsection 74.2(2) is considered to be "qualified farm property"?

Position: Question of fact, general comments provided.

Reasons: Where subsections 74.2(1) and (2) attribute a taxable capital gain on the disposition of a property to an individual, in determining whether the property may be considered qualified farm property of the individual under subsection 110.6(1) of the Act, we would look to when the individual last acquired the property.

XXXXXXXXXX 	2004-006550
		Karen Power, CA
(613) 957-8953
June 25, 2004

Dear XXXXXXXXXX

Re: "Qualified Farm Property"

We are writing in reply to your letter of March 4, 2004, wherein you request our comments regarding the application of the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act").

You have provided the following hypothetical fact situation:

1. A husband (the "Husband") and his wife (the "Wife") purchased certain real property (the "Property") prior to June 18, 1987 as joint tenants. For land registry purposes, the Property was registered in the Husband and Wife's names as joint tenants. For purposes of this reply, you have asked us to assume that the attribution rules would not have applied to the Husband or Wife's interest in the Property prior to the transactions described in 2 and 3 below.

2. Subsequent to June 17, 1987, the Husband transferred the legal and beneficial ownership of his 50% interest in the Property ("Transferred Interest") to the Wife. The Wife became sole owner of the Property. The transfer and sole ownership of the Property by the Wife was registered for land registry purposes.

3. The Husband did not receive any consideration in respect of the transfer of the Transferred Interest. The Husband did not elect out of the provisions of subsection 73(1) of the Act in respect of the transfer of the Transferred Interest to the Wife.

4. The Husband and Wife have at all relevant times been residents of Canada and married (and not separated because of a breakdown of their marriage).

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.

As you know, the attribution rules in subsections 74.1(1) and 74.2(1) of the Act may apply where, inter alia, an individual has transferred or lent property, either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of the individual's spouse or common-law partner. These attribution rules apply in respect of any period throughout which the individual is resident in Canada and the person to whom or for the benefit of whom the transfer or loan was made is the individual's spouse or common-law partner. Where an individual has transferred or loaned property to the individual's spouse or common-law partner, such that subsection 74.2(1) of the Act applies, any taxable capital gains or allowable capital losses arising from the subsequent disposition of the property or property substituted for it (other than listed personal property) are deemed to be taxable capital gains or allowable capital losses of the individual and not of the spouse or common-law partner pursuant to paragraphs 74.2(1)(a), (b) and (e). Consequently, based on the limited information provided, if the Wife were to now dispose of the Transferred Interest, any taxable capital gain or allowable capital loss realized from the disposition of this interest will be attributed to the Husband by virtue of subsection 74.2(1) of the Act.

Where subsection 74.2(1) of the Act attributes a taxable capital gain or allowable capital loss to an individual from another person, subsection 74.2(2) of the Act deems, for purposes of the capital gains deduction under section 110.6 of the Act, the gain or loss to have arisen from the disposition by the individual of the property on which the gain or loss was realized, and on the day the property was disposed of by the other person. Consequently, if the Property is disposed of by the Wife, the Husband would be considered to have disposed of the Transferred Interest by virtue of subsection 74.2(2) of the Act for purposes of the capital gains deduction.

One of the conditions that must be met for the Transferred Interest deemed to be disposed of by the Husband to be considered a "qualified farm property" of the Husband as defined in subsection 110.6(1) of the Act (hereinafter referred to simply as the "definition"), is that the Transferred Interest must have been used in the course of carrying on the business of farming in Canada by, among others, the individual (i.e., the Husband), or a spouse, child or parent of the individual. Whether a property is considered to have been used in the course of carrying on the business of farming depends on whether the property was last acquired before June 18, 1987 or after June 17, 1987. Subparagraph (a)(vii) of the definition only applies to property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date) by, inter alia, "the individual". In our view, in the above situation, the Husband would be considered to have last acquired the Transferred Interest before June 18, 1987. Consequently, in establishing whether the Transferred Interest is qualified farm property of the Husband, the requirements of either subparagraph (a)(vi) or (a)(vii) of the definition can be used. We are not in a position to comment on whether either any of these tests have been met.

In determining whether the remaining 50% interest in the Property owned by the Wife would be considered a "qualified farm property" of the Wife as defined in subsection 110.6(1) of the Act, it is our view that the Wife would have last acquired that remaining 50% interest in the Property before June 18, 1987.

We trust our comments will be of assistance to you.

Yours truly,

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