10 November 2006 External T.I. 2006-0183341E5 - 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.

Principal Issues: Whether farm property would be qualified farm property under the definition in 110.6 subparagraph (a)(vii).

Position: Yes.

Reasons: The property was acquired in 1986 so the pre 1987 rules apply and the taxpayers' father had used the land 5 or more years in the business of farming.

2006-018334
XXXXXXXXXX Charles Rafuse
613-957-8967
November 10, 2006

Dear XXXXXXXXXX:

Re: Capital Gains Exemption

This is in reply to your letter of April 21, 2006 and our telephone conversation (Rafuse/XXXXXXXXXX), concerning the capital gains exemption under section 110.6 of the Income Tax Act (the "Act") in respect of farm property owned by two individuals.

You described a situation where Mr. X transferred ownership of a farm property, in 1986, to his two sons in undivided ownership. The farm property comprises 100 acres, 90 acres of which is used in farming with the remainder containing a woodlot and the land around the farm residence. Mr. X farmed the 90 acres of farmland from the date of the transfer until 2000 after which it was rented out to a farmer. However, the gross revenue for Mr. X from his farming business did not exceed his income from all other sources in at least two years for the period from 1986 to 2000. After Mr. X's death in 2002, the sons continued to rent out the land to a farmer.

You question whether Mr. X's sons are able to claim a capital gains deduction for qualified farm property ("QFP"), pursuant to subsection 110.6(2) of the Act.

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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments, which are not binding.

Generally speaking, subsection 110.6(2) of the Act permits a capital gains deduction of up to $500,000 for an individual who is resident in Canada throughout the year and disposed of QFP in the year. Real property will meet the definition of QFP in subsection 110.6(1) if certain conditions are satisfied. Under subparagraph (a)(vii) of the definition of QFP in subsection 110.6(1), where a property was last acquired by an individual before June 18, 1987, the property is QFP if it was used by certain persons that include, among others, the individual, or a parent of the individual principally in the course of carrying on the business of farming in Canada in at least 5 years during which the property was owned by, among others, the individual, or a parent of the individual. Based on the information you provided, it would appear that the farm property owned by

Mr. X's sons qualifies as QFP because of the farming use by Mr. X between 1987 and 2000. We would mention that whether Mr. X was carrying on a farming business at any particular time and used the farmland principally in such farming business is a question of fact that can be resolved only by an audit.

While the above comments are based on the existing legislation, we would mention that, on October 16, 2006, the Minister of Finance tabled in the House of Commons a Notice of Ways and Means Motion to Implement Certain Provisions of the Budget Tabled in Parliament on May 2, 2006, that contains provisions, with application to dispositions of property that occur after May 1, 2006, dealing with the conditions that are to be met in order for real property to qualify as QFP. The conditions in their present form do not seem to affect the comments made above as they pertain to the scenario you described.

You have also asked if the opinion in our previous letter #1999-0008385 would be applicable in your scenario. The answer appears to be negative because your scenario is different from that envisaged in document 1999-0008385. In document 1999-0008385, the situation involved two individuals where each party owned a 50% undivided interest in land such that each party could, at most, be considered to use in their separate farming businesses 50% of the property. As a result it was our view that the "principally" farming use test would not be met, such that the property would not fall within the definition of QFP in subsection 110.6(1) of the Act. On the other hand, your situation seems to involve only one farming business being carried on by one person, Mr. X.

We trust this information is helpful.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch