10 March 1998 External T.I. 9723495 - 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.

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:

Does farm property qualify as "qualified farm property?"

Position:

Not presently.

Reasons:

The property does not meet the 24 month holding period test under 110.6(1)(a)(vi) of the Act

5-972349

XXXXXXXXXX Karen Power, C.A.

Attention: XXXXXXXXXX

March 10, 1998

Dear Sirs:

Re: Definition of "Qualified Farm Property"

This is in response to your letter of September 2, 1997, wherein you requested our views on whether land owned by a taxpayer is considered to be "qualified farm property" for the purpose of claiming the capital gains exemption under subsection 110.6(1) of the Income Tax Act (the "Act") in the following scenario.

1Mr. X first acquires ownership of a parcel of farmland in the 1960's (the "property").

2.Mr. X actively farms the property in the course of carrying on the business of farming in Canada and the property meets the requirements of the definition of qualified farm property in subsection 110.6(1)(a)(vii) for land last acquired before June 18, 1987.

3.Mr. X also meets the 2 year gross revenue test set out in subparagraph 110.6(1)(a)(vi)(A).

4.In 1994, Mr. X transfers the farmland to a wholly-owned corporation and crystallizes his capital gain, and utilizes his capital gains deduction for qualified farm property.

5.Mr. X continues to carry on the business of farming in his farm corporation.

6.In 1997, Mr. X wishes to wind up his farm corporation and continue to farm the property personally. After 1997, Mr. X no longer meets the 2 year gross revenue test set out in subparagraph 110.6(a)(vi)(A) of the Act. However, Mr. X has met the 2 year gross revenue test during the period of ownership prior to incorporation.

7.Once the farmland is owned by Mr. X personally, Mr. X. will transfer the farm property to his children pursuant to either subsection 73(3) or subsection 70(9) of the Act.

You have asked for our comments on whether the farm property will qualify as "qualified farm property" when Mr. X's children dispose of the property.

Our Comments

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following comments which may be of some assistance to you.

One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada.

Real property acquired after June 17, 1987 may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property throughout the 24 months preceding the sale. In addition, it must meet either of the conditions described in clauses (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act.

When, in 1997, Mr. X winds up his farm corporation he is deemed, pursuant to subparagraph 69(5)(b) of the Act, to have acquired the property at a cost equal to its fair market value immediately before the winding-up. Therefore, in our view, the property will be considered to have been last acquired after June 17, 1987 and subject to the requirements set out in subparagraph 110.6(1)(a)(vi) of the Act.

Subparagraph 110.6(1)(a)(vi) of the Act requires that the property must be owned by one or more of the persons mentioned in that subparagraph throughout the period of at least 24 months immediately preceding the disposition of the property. As a farm corporation is not a person mentioned in subparagraph (a)(vi) of the definition, the length of time that the property was held in the farm corporation is not included in the 24 month holding period requirement.

However, once the property has been owned by the individual (i.e., a child of Mr. X after the transfer to his children), a spouse, child or parent (Mr. X) of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property throughout a period of at least 24 months following the winding up of the farm corporation, the property will qualify as "qualified farm property" if, in fact, the individual (or Mr. X) was carrying on a farming business in Canada in which he was actively engaged on a regular and continuous basis and in which this property was principally used and if, in fact, the gross revenue from the farming business exceeded the individual's (or Mr. X's) income from all other sources in a least two years.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch