11 February 2008 External T.I. 2007-0259521E5 - QFP - Nature of Business

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: Is a real property QFP, eligible for the capital gains deduction pursuant to subsection 110.6(2), where the business consists of the provision of services in connection with farming?

Position: No.

Reasons: The requirement that an eligible user be engaged in a farming business is one requirement that must be met in order that a property may fit within the definition of QFP found in 110.6(1). The provision of services in connection with a farming business does not result in a conclusion that the service provider is farming. Non-farming income from activities such as rent or custom work (i.e., the provision of services) will generally only be considered "farming" in nature when that income is earned ancillary, or incidental, to the operations of a bona fide farming business.

								2007-025952
XXXXXXXXXX 							James Atkinson CGA
(519) 457-4832
February 11, 2008

Dear XXXXXXXXXX :

Re: Capital Gains Deduction - Real Property

This is in response to your fax dated November 14, 2007 concerning a contemplated disposition of real property.

You have indicated that a client (Mr. A) of yours acquired land in 1966 and worked the property as a cow-calf operation for 2-3 years. Since that time, Mr. A has used the property in the course of carrying on a business that consists of grazing cattle for third parties. The business employs individuals who tend the various herds. Services provided in connection with the business include feeding, health care and general maintenance of the cattle. Mr. A maintains the property in connection with the business, performing such activities as the fertilization and cultivation of the land to maintain the grass, and fence mending when necessary. Mr. A is paid a fee on a per diem basis for the services provided and does not bear risk in respect of cattle that may be lost.

Your question is whether the real property would be considered "qualified farm property" (QFP) as defined in subsection 110.6(1) of the Income Tax Act (Act), the disposition of which by Mr A., would qualify for the capital gains deduction provided for in subsection 110.6(2).

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. If your enquiry concerns completed transactions, the enquiry should be directed to the local tax services office. However, we are prepared to offer the following general comments. Generally speaking, subsection 110.6(2) of the Act permits a capital gains deduction of up to $750,000 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 met. One condition requires that the property be used by the individual principally in the course of carrying on the business of farming.

Whether a taxpayer's business operation in a particular case is considered "farming" for tax purposes is a question that can only be resolved after a complete review of the facts and circumstances of the case. The expression "farming" is defined in subsection 248(1) of the Act and includes activities such as the "tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees." However, the provision of services by an individual in connection with farming activities undertaken by another person (i.e., the owner of the cattle in these circumstances) does not generally constitute a farming activity, of the individual, unless the provision of services is incidental and ancillary to other activities the individual undertakes that qualify as farming.

In the situation described, it is our view that Mr. A's current business is in the nature of the provision of a service and does not constitute "farming" for purposes of the Act. The activity is neither incidental nor ancillary to any other farming activity being carried on by Mr. A.

The cow-calf operation may constitute "farming" depending upon the circumstances of the situation. However, in order for real property to meet the definition of QFP, there are other conditions that have to be met relating to the length of time used, its principal use in a farming business, and whether a qualified user was, concurrently, actively engaged in a farming business on a regular and continuous basis. The meaning of QFP and a discussion of the conditions required can be found in Guide T4003, Farming Income, Guide RC4060, Farming Income and the AgriStability and AgriInvest Programs, and IT-268R4 - Inter Vivos Transfer of Farm Property to Child. These documents can be accessed on the internet at http://www.cra-arc.gc.ca.

The facts provided are insufficient for us to draw a conclusion whether the real property is QFP, eligible for a capital gains deduction under subsection 110.6(2) of the Act. Should your require further assistance in making a determination, you should submit all relevant facts and documentation to your local Tax Services Office ("TSO") for their views.

We trust that these comments will be of assistance.

Yours truly,

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