15 October 2012 External T.I. 2012-0457891E5 - Transfer of shares of a Family Farm Corporation

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: 1) Whether a share of a certain Canadian corporation qualifies as a "share of the capital stock of a family farm corporation", pursuant to subsection 70(10) of the Act.
2) Where the will of a shareholder provides for the transfer of shares of the farm corporation to a trust for the grandchildren, will such transfer qualify for a roll-over under subsection 70(9.2)?

Position: 1) Question of fact; general comments provided.
2) It is possible, however, a question of fact.

Reasons: 1) Question of fact.
2) Again a question of fact. If it can be established that the property has been transferred indefeasibly to the grandchildren, it will probably qualify pursuant to paragraph 70(9.2)(c), provided further all other conditions in subsection 70(9.2) have been satisfied.

XXXXXXXXXX
2012-045789
V. Srikanth

October 15, 2012

Dear XXXXXXXXXX:

Re: Transfer of Family Farm Corporation Shares

This is in response to your correspondence dated July 31, 2012 wherein you wanted our interpretation of the definition of a ‘share of the capital stock of a family farm corporation’, and further you wanted our views on whether, in a situation described in your correspondence, the provisions of paragraph 70(9.2)(c) of the Income Tax Act (the “Act”) would be applicable. Specifically, you have described the following scenario:

• A Canadian corporation (“Aco.”) carries on a XXXXXXXXXX farm business in XXXXXXXXXX.
• Aco. is owned equally by Mr. and Mrs. A.
• XXXXXXXXXX of the XXXXXXXXXX children of Mr. and Mrs. A are actively engaged in the farm operation of Aco. They are also engaged in operating the farm business of their respective farming corporations.

You would like us to comment on the following:

1. Whether Aco. qualifies as a family farm corporation;

2. Where the wills of Mr. and Mrs. A provide that the shares of Aco. are to be left in trust to the grandchildren of Mr. and Mrs. A, whether the provisions of paragraph 70(9.2)(c) of the Act will be met.

Our Comments

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled ‘Advance Income Tax Rulings’, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on our website at http://www.cra-arc.gc.ca. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries and we are prepared to provide you with the following comments.

The determination of whether the shares of a particular corporation, owned by a particular taxpayer, are shares of the capital stock of a family farm corporation within the meaning of that term as defined in subsection 70(10), for the purposes of section 70 of the Act, is a question of fact which can only be determined from an examination of all the facts. Consequently, we can only offer the following general comments.

Pursuant to subsection 70(10), the expression “share of the capital stock of a family farm corporation” means the share of a corporation owned by a person at a particular time where, at that time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of that definition, principally in the course of carrying on a farming business 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. We refer you to paragraphs 12 to 16 of Interpretation Bulletin IT-349R3 entitled ‘Intergenerational Transfers of Farm Property on Death’, with respect to the CRA’s interpretation of the expressions “farming business”, “used in the business of farming” and “actively engaged on a regular and continuous basis”.

It is a question of fact as to whether all or substantially all of the fair market value of a family farm corporation's property is attributable to property described above.

Similarly, whether the children are ‘actively engaged on a regular and continuous basis’, is a question of fact. This is explained in paragraph 16 of IT- 349R3, which states that:

“Subsection 70(9) and the definitions in subsection 70(10) of "shares of the capital stock of a family farm corporation" and "interest in a family farm partnership" require that a person be "actively engaged on a regular and continuous basis" in the business of farming. Whether a person is "actively engaged on a regular and continuous basis" is a question of fact; however, it is considered that the requirement is met when the person is "actively engaged" in the management and/or day to day activities of the farming business. Ordinarily the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operation of the business. Whether an activity is engaged on a "regular and continuous basis" is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement.”

Subsection 70(9.2) will apply, inter alia, to override the automatic application of the rules in subsection 70(5) on the death of a taxpayer where at any time property of the taxpayer that was, immediately before the taxpayer's death, a share of the capital stock of a family farm corporation of the taxpayer is, as a consequence of the death, transferred or distributed to a child of the taxpayer who was resident in Canada immediately before the death and it can be shown, within the period ending 36 months after the death or, where written application therefor has been made to the Minister by the taxpayer's legal representative within that period, within such longer period as the Minister considers reasonable in the circumstances, that the property has vested indefeasibly in the child. For purposes of the transfers pursuant to subsection 70(9.2), the term "child" has the extended meaning as provided for in the definition of "child" in subsection 70(10) of the Act, i.e., child includes, inter alia, “the taxpayer's child's child”, i.e., the grandchild of the taxpayer.

Your concern was where the wills of Mr. and Mrs. A provide that the shares of Aco. are to be left in trust to the grandchildren of Mr. and Mrs. A, whether the property will become vested in the child within the specified period. The meaning of "vested indefeasibly" is not defined in the Act. However, the following excerpts from paragraph 1 of the archived Interpretation Bulletin IT-449R entitled ‘Meaning of Vested Indefeasibly’, generally reflect the views of the CRA:

“…a property vests indefeasibly in a spouse or child of the deceased when such a person obtains a right to absolute ownership of that property in such a manner that such right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all the benefits arising from that right. Where property is held in trust for the benefit of one or more persons it is the [CRA’s] view that such property normally vests indefeasibly in the trust and not in a beneficiary thereof.

However, where the [CRA] is satisfied that a property is held in trust solely to carry out the terms of a will under which the ultimate and absolute ownership of that property is bequeathed to a particular individual and the trust arrangement is such that the individual's ownership rights cannot be defeated by any future event and no other person has any right whatsoever to an immediate or future benefit from that property or that trust, the property will be considered to vest indefeasibly in that individual.”

A determination of whether shares have become vested indefeasibly within the specified time frame indicated in paragraph 70(9.2)(c) of the Act, can be made only after a review of all relevant information, including the will. If the wills provide discretion in determining which grandchild shall receive the shares, or their respective entitlements to receive the shares, it cannot be concluded that the shares have vested indefeasibly until such determinations are made.

In conclusion, in our view, the shares of Aco. would be eligible for the rollover under subsection 70(9.2) of the Act provided that they qualify as “shares of the capital stock of a family farm corporation” within the meaning of subsection 70(10), and provided it can be established that when the shares of Aco. are transferred or distributed to the grandchildren of Mr. and Mrs. A, under, or as a consequence of, the terms of the will or other testamentary instrument of the deceased taxpayer, the child has a right to absolute ownership or has an enforceable right or claim to the ownership of these shares within the period ending 36 months after the death of the taxpayer or within any longer period that the Minister considers reasonable in the circumstances.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
For Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch