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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

In 149(1)(t) regarding "farm property" and "residences of farmers":

(a) must there be a farm business carried on, and

(b) does eligible property include automobiles and personal property such as jewellery.

Position TAKEN:

(a) Yes

(b) No.

Reasons FOR POSITION TAKEN:

Positions taken previously.

								January 12, 1995

	Kitchener District Office			HEAD OFFICE
	Executive Building				Rulings Directorate
B. G. Dodd
	Attention:  R. Beech				(613) 957-8953
         		Chief of Audit
								941317

Income Tax Act - Paragraph 149(1)(t)

We are writing in reply to your memorandum dated May 5, 1994 concerning audits being conducted by your office with respect to several insurance companies' claims for exemption under paragraph 149(1)(t) of the Income Tax Act. We apologize for the delay in our response.

Unless otherwise stated, all references to statute are to the Income Tax Act (the "Act").

BACKGROUND

You note that in a memorandum issued by this Directorate, dated July 25, 1990, we stated

"In our view consistent with the above definitions and the decision in Moldowan, property can only qualify as farm property if it is utilized by a farmer in his farming business."

(Our memorandum then went on to indicate that in our view, what is contemplated in paragraph 149(1)(t) is the insurance of farm property and residences in the case of (full-time) farmers and restricted farmers, not hobby farmers or retired farmers.)

You indicate that your office has proposed reassessments of four taxpayers based on the above position and that representations on behalf of the taxpayers involved ( XXXXXXXXXX ) have been made by the law firm of XXXXXXXXXX in their letter dated April 21, 1994.

You summarize XXXXXXXXXX position as follows:

"... farm property includes all property used in or suitable for farming and would include particularly property used or usable by persons for farming activities, or rented out by persons for farming activities, whether or not a business of farming is carried on on the property (for profit or otherwise). There is also a difference of opinion as to whether or not the personal property of a person who is a farmer should also qualify as "farm property" or part of the "residence of the farmer".

Reference is also made in your material to an opinion on certain aspects of this same topic which we issued to XXXXXXXXXX on December 14, 1982.

In view of the above, you have requested clarification of the meaning of the expressions "farm property" and "residences of farmers" in paragraph 149(1)(t) and asked in particular whether these would include automobiles for personal transportation or personal property such as diamond rings or pieces of art.

OUR POSITION

XXXXXXXXXX submission raises a number of interesting arguments and observations and we are not inclined to dispute that their arguments have some merit. Nevertheless, we believe the position reflected in our previous correspondence is well founded and as such, we confirm that our views remain as expressed in our correspondence dated December 14, 1982 and July 25, 1990 for the reasons set out therein. We also have a number of additional comments and these are discussed below.

ADDITIONAL COMMENTS

In the Supreme Court decision in Stubart Investments Ltd. v. The Queen, 84 D.T.C. 6305, Estey, J. noted with respect to the modern rule of statutory construction as follows:

"While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed., (1983), at 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament."

In terms of the context, scheme, and object of the Act and the intention of Parliament, wherever the Act refers to farms, farming or farmers, it is invariably in the context of there being a farming business being carried on. (See, for example, sections 28 and 29 and subsections 111(8), 119(1) and 155(1).) The Act as a whole simply has no regard or concern for farms, farming and farmers where there is no notion of a farming business being carried on - the fact that a person is, for example, a retired farmer, in and of itself, is of no consequence whatsoever under the Act. An interpretation of the expressions "farm property" and "residences of farmers" which ignores this context, scheme, etc. does not, in our view, accord with the modern rule of statutory interpretation.

It is our view of the modern rule that the particular context of the relevant words must also be considered. In this case, the particular context is to be derived by considering the entire portion of the relevant text, which is as follows:

"... was in respect of the insurance of farm property, property used in fishing, or residences of farmers or fisherman".

Farmers and fisherman are often grouped together in the Act, presumably because, fundamentally, both are involved in the harvesting of nature's products. (See, for example, the definition of "farm loss" in subsection 111(8) which includes a loss from a farming or fishing business, and subsection 119(1) which provides block averaging of tax for farmers and fishermen.) In any event, with respect to farming, paragraph 149(1)(t) refers to "farm property" and with respect to fishing, it refers to "property used in fishing". The Act in our view is not distinguishing here between the relationship of property to the farming endeavour and the relationship of property to the fishing endeavour. Rather, this difference in language is undoubtedly due to the fact that, unlike the expression "farm property" which is relatively self-explanatory and readily understood, a grammatically equivalent expression such as "fish property" (or even "fishing property") would likely be met with blank stares.

It is our opinion that in the specific context of paragraph 149(1)(t), "farm property" is to be construed in the same manner as fishing-related property such that it means "property used in farming". (Note that the Act refers to "property used in" ..., not property which is simply capable of, or suitable for such use, which is the position taken in XXXXXXXXXX submission.)

That there are no differences between farmers and fisherman for purposes of paragraph 149(1)(t) is also quite apparent from the fact that, in either case, property which is a residence is eligible. Accordingly, the specific and overall context of paragraph 149(1)(t) is that the provision contemplates the insurance of both the business-related property and the residences of farmers and fishermen, in their capacities as such, without distinction. An interpretation of "farm property" whereby in the case of fishing, the property must be used in fishing but in the case of farming, the property need only be available for farming, is not, in our opinion, harmonious with the context, scheme and object of the Act.

Automobiles and Personal Property

The specific question regarding the treatment of automobiles and personal property was dealt with in our previous letters and as stated at the outset, our views remain unchanged. We would note the following with respect to XXXXXXXXXX submission of these aspects.

Automobiles

With respect to automobiles, XXXXXXXXXX refers to inconsistent audit treatment in one case whereby 100% of any pick-up truck would be recognized as farm property but only 20% in the case of any other vehicle. XXXXXXXXXX suggests there is no statutory basis in the case of paragraph 149(1)(t) for allocating insurance premiums according to the use of a particular property and that a property is either farm property or it is not. We agree. We do not agree, however, with their suggestion that in making the determination it may be sufficient simply that the vehicle be operated by a farmer.

Our view as set out previously is that this is a question of fact ("use" being one of a number of factors cited) and, with respect to an automobile other than a truck, it is by nature a road and passenger vehicle and generally would not be farm property and with respect to a farmer's tractor which is used for minimal non-farming purposes such as snow removal contracts, it would be farm property.

Personal Property

With respect to our position that "residences of farmers" includes only immoveable property and does not include personal property (such as jewellery), XXXXXXXXXX refers to a lack authorities cited on our part and suggests the jurisprudence favours a broader interpretation of the word "residence". Regarding the jurisprudence cited by XXXXXXXXXX, we note the following.

-We agree that the cases cited favour a more expansive view of "residence" (although we are not sure of the relevance of Nunes v. Gore Mutual Insurance Company, which seems to be concerned with whether certain items were or were not covered by an insurance policy).

However, these cases generally appear to extend the meaning relative to the amount of land to be considered, i.e., immoveable property.

-The jurisprudence cited (with the exception of Nunes) involves expropriation cases, not income tax. While this does not necessarily diminish its usefulness, we believe preference should be given to the context given by the Income Tax Act.

Although there are numerous references to "residence" in the Act, relatively few are in the present context. Those that are point to "residence" as meaning only immoveable property, particularly the physical structure, and not personal property such as furniture, jewellery, etc. The following are noted.

1.Subsection 248(1) defines "home relocation loan", paragraph (b) of which reads, in part, as

"the loan is used to acquire a dwelling, or ... the right to inhabit a dwelling ..., where the dwelling is for the habitation of the individual and is the individual's new residence" (emphasis added).

2.Subsection 248(1) defines "self-contained domestic establishment" as

"a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats" (emphasis added).

3.Section 231 defines "dwelling-house" as

"the whole or any part of a building or structure that is kept or occupied as a permanent or temporary residence and includes

(a)... and

(b) a unit that is designed to be mobile and to be used as a permanent or temporary residence and that is being used as such a residence" (emphasis added).

4.Section 54 defines "principal residence" as

"... property that is a housing unit, a leasehold interest in a housing unit or ... the right to inhabit a housing unit ...

and ...

(e)... shall be deemed to include ... the land subjacent to the housing unit ... and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence ..." (emphasis added).

Miscellaneous

We refer to certain comments contained a document entitled "tax letter" (volume 2 - February 1994) issued by the Canadian Association of Mutual Insurance Companies, a copy of which was included with your material. The document, which expresses that Association's opposition to the Department's views on this issue, suggests that the Department's position would create administrative difficulties for affected insurers, noting that insurers are aware of the nature of the farming activity carried on but not the extent. The document also suggests that, in the case of personal property covered under a home policy, our position would cause them to undertake the additional work of separate underwriting in respect of contents.

We would note that the issue concerns an outright exemption from tax in the context of what is an otherwise fully taxable business operation (see subsection 138(1). Although it might entail a certain amount of administrative work on an insurer's part, it would seem to us that paragraph 149(1)(t) is a fairly significant concession under the income tax system and as such, it is not unreasonable to expect an insurer to be prepared to demonstrate entitlement to the exemption.

(While, as noted earlier, we do not agree that the legislation contemplates an allocation of premium between farm and non-farm use in the case of an automobile, a single property, it would seem to us that in the case of a policy which covers a number of properties, some of which are eligible and some of which are not, it should be possible to allocate the premium.)

Conclusion

We have, as requested, reconsidered the matter but for the reasons noted initially as well as above, our views remain those expressed in our earlier correspondence.

At the same time we would note that, with respect to whether 25% or more of an insurer's gross premium income for the period is in respect of the insurance of the business property and residences of farmers and fishermen, it is expressly provided under the legislation that it is the Minister's opinion which is relevant. Perhaps this is necessary because there may be some imprecision inherent in ascribing insurance coverage to specific items or in determining which property is eligible, particularly where a property may have more than one use. The legislation thus appears to admit to the possibility of there being grey areas and presumably it is incumbent on the Minister to be reasonable in forming his opinion, taking into account the specific circumstances in each particular case.

We hope this will be of assistance to you.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch