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:
Whether real property would qualify as "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act") if it were bequeathed to a taxpayer's estate.
Position TAKEN:
Property would constitute "qualified farm property" of the estate if the designated beneficiaries of the estate were the taxpayer's children.
Reasons FOR POSITION TAKEN:
One of the persons mentioned in subparagraph (a)(vi) of the definition of "qualified farm property", namely the children's grandfather, would appear to meet the gross revenue test. A grandfather can be considered a "parent" of an individual because of the extended definition of "child" in paragraph 70(10)(a) of the Act, which applies for purposes of section 110.6 of the Act.
5-950677
XXXXXXXXXX C. Chouinard
April 25, 1995
Dear Sir:
Re: Qualified Farm Property
We are writing in response to your letter of February 9, 1995, addressed to the Vancouver Tax Services office, which was forwarded to us for reply.
You inquire whether real property which you own would qualify as "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act") if it were bequeathed to your estate. You indicate that the land was acquired by your father in the early 1900s and that you and your father farmed the land until 1950. In 1956, you acquired the land from your father and started renting out the farm to a third party in 1961.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will qualify as "qualified farm property" provided it was used by the person claiming the capital gains exemption, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares or a family farm partnership in which any of the above persons have an interest, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by a person referred to above. Since it appears that both you and your father farmed the property for at least five years while it was owned by your father, in our opinion, while owned by you, the property would qualify as "qualified farm property".
For income tax purposes, paragraph 70(5)(a) of the Act deems a deceased person to have disposed of their capital properties immediately before death and to have received proceeds of disposition therefor equal to the fair market value of the properties at that time. Paragraph 70(5)(b) of the Act deems any person, including the estate of a deceased person, who, as a consequence of a taxpayer's death, acquires property that is deemed by paragraph 70(5)(a) of the Act to have been disposed of, to have acquired the property at the time of the death at a cost equal to its fair market value immediately before death.
The capital gains or losses arising from the deemed disposition upon death must be reported in the taxpayer's T1 income tax return for the year of death. As we indicated above, since the farm property would qualify as "qualified farm property", your unused $500,000 capital gains exemption could be used to offset any taxable capital gains arising from the deemed disposition of the farm property.
As regards estates, since an estate is considered to be a personal trust for tax purposes, where property is left to an estate, it is considered to be owned by a personal trust. Where farm property is owned by a personal trust, the property must have been used in the business of farming by a designated beneficiary, the spouse, child or parent of a designated beneficiary, a family farm partnership in which any of the above persons have an interest, or a family farm corporation in which any of the above persons own shares, in order for it to meet the definition of "qualified farm property". A designated beneficiary is one in respect of whom a designation has been made by the trust under subparagraph 104(21) of the Act.
In the situation contemplated, since the estate would acquire the property upon your death, the property would be considered to have been last acquired by the estate after June 17, 1987. Where property is acquired after June 17, 1987, the definition of "qualified farm property" in subsection 110.6(1) of the Act requires that the property in question have been owned by an individual, a designated beneficiary of a personal trust, an individual's or a designated beneficiary's spouse, child or parent, a personal trust from which the individual acquired the property or a family farm partnership, throughout the 24 months preceding the sale. Furthermore, in at least 2 years while the property was so owned, the gross revenue from the farming business carried on by any of these individuals must have exceeded their income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be any of the persons described above.
If the property constituted "qualified farm property" of the estate and if a designation was made in respect of the property, each beneficiary referred to in paragraph 104(21.2)(b)(i) of the Act would qualify for the $500,000 capital gains exemption upon disposition of the property by the estate. Since you have not provided any information as to the intended beneficiaries of your estate, we cannot determine conclusively whether the property would constitute "qualified farm property" of your estate. However, if the designated beneficiaries of your estate were your children, the property would likely constitute "qualified farm property" of the estate, since one of the persons mentioned in subparagraph (a)(vi) of the definition of "qualified farm property", namely the children's grandfather, would appear to meet the gross revenue test referred to above. For purposes of the definition of "qualified farm property", "child" has the meaning assigned by subsection 70(10) of the Act. Accordingly, a grandfather can be considered a "parent" of an individual because of the extended definition of "child" in paragraph 70(10)(a) of the Act, which applies for purposes of section 110.6 of the Act. Therefore, since your children could be beneficiaries referred to in paragraph 104(21.2)(b) of the Act and since their grandfather is considered to be a "parent", if, in at least 2 years while the property was owned by the grandfather, the gross revenue of the grandfather from the farming business exceeded his income from all other sources, the property may constitute "qualified farm property" of the estate.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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