5 June 1998 External T.I. 9805435 - USED PRINCIPALLY IN THE BUSINESS OF FARMING

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 or not a taxpayer meets the requirements of "used principally in the business of farming in which the taxpayer...was actively engaged on a regular and continuous basis".

Position: Depends.

Reasons:

General comments on our interpretation of the above concepts, so determination can be made as it is a question of fact.

		5-980543
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
Attention:  XXXXXXXXXX 

June 5, 1998

Dear Sirs:

Re: Subsection 70(9) and Subsection 73(3)

We are writing in response to your letter of February 27, 1998, wherein you requested our views on whether farm land would meet a particular requirement of subsection 70(9) and subsection 73(3) of the Income Tax Act (the “Act”) in the following scenario.

1. Farm land (the “farm land”), with no buildings thereon, has been owned by the taxpayer since 1987 when he purchased it for $60,000. The fair market value of this land is now $160,000.

2. At the time of the purchase of the farm land in 1987, the taxpayer entered into a joint venture agreement with another individual (“Party B”) which established a joint venture between the taxpayer and Party B (the “Joint Venture”).

3. Among other things, the joint venture agreement provided that:

a) the business of the Joint Venture was to be restricted to farming;

b) the taxpayer was to contribute management and the use of his farm land to the Joint Venture;

c) Party B was to contribute management, labour and the use of his farm machinery to the Joint Venture;

d) the taxpayer was required, on an annual basis, to contribute an amount equal to 33% of the costs of operation of the Joint Venture;

e) Party B was required, on an annual basis, to contribute an amount equal to 67% of the costs of operation of the Joint Venture;

f) the assets which each individual was to contribute to the use of the Joint Venture were to continue to be owned by the individuals and each individual was to be responsible for any maintenance costs, taxes and assessments pertaining to his assets;

g) the profits and losses resulting from the operations of the Joint Venture were to have been divided between the taxpayer and Party B according to the following percentages:

taxpayer 33%

Party B 67%

h) the term of the Joint Venture was to last for a period of 5 years.

4. A bank account was established in the name of the Joint Venture and all funds required for the Joint Venture’s operations and all amounts paid to the Joint Venture were withdrawn from or deposited to this account.

5. A Canadian Wheat Board Permit Book was issued to the Joint Venture and was utilized with respect to all sales of grain through the Canadian Wheat Board.

6. The taxpayer and Party B carried on the farming business of the Joint Venture on the farm land for the term of 5 years and adhered to all of the provisions of the joint venture agreement.

7. After the 5 year term of the joint venture agreement expired in 1994, the taxpayer and Party B entered into a new joint venture agreement for another period of 5 years beginning in 1995. The provisions in this agreement and the activities carried out were identical to those pertaining to the original agreement.

8. Throughout the term of the Joint Venture during which the farm land has been farmed by the taxpayer and Party B in the Joint Venture, the taxpayer, together with Party B, has actively managed and controlled, on a regular and continuous basis, the farming operations carried out on the farm land by the Joint Venture. As part of this function, the taxpayer has regularly traveled to the farm land and has participated in all decisions that have been made with respect to the farming operations carried out on the farm land.

You have specifically requested our views on whether the above fact scenario meets the requirements of “used principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis” as required in subsections 70(9) and 73(3) of the Act.

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 general comments which may be of some assistance to you.

Where two or more persons agree that each provides his own property to perform a specific task and receives a specific division from such tasks, the arrangement may be considered a joint venture. The participants in the joint venture are considered to be conducting business separately so that each participant receives a share of all income received on behalf of the joint venture and incurs a share of each cost incurred by the joint venture to the extent of the venturer’s participation in the joint venture. Since the joint venture is not a legal entity, it cannot own the property used by the joint venture.

In our view, the existence of a true joint venture, will not affect the decision as to whether or not an individual taxpayer may utilize the rollover provisions provided for in subsections 70(9) and 73(3) of the Act. Assuming, an individual participant of the joint venture meets all of the requirements of subsections 70(9) or 73(3) of the Act, then that individual may utilize the specific rollover provision with respect to his own assets, regardless of whether the other participant of the joint venture meets these same requirements.

One of the requirements needed to utilize the rollover provisions in subsection 70(9) and 73(3) of the Act, is that the land or property was to have been “used principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis”.

The following provides our comments on each specific aspect of this requirement:

“Used Principally”

It is a question of fact whether a property is used principally in an active business. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry. The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court in Ensite Limited v. Her Majesty the Queen, (1986) 2 C.T.C. 459, 86 DTC 6521. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business used to fulfill a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.

The determination of whether real property is used principally by a taxpayer in carrying on a farming business is also a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset’s use is in the business of farming. For example, where a property is used for farming and for some other purpose, if more that 50% of the property’s use is for farming then it will qualify as being used principally in the business of farming. If part of the property is lying idle, then that part cannot qualify as being used principally in the business of farming.

We cannot conclusively establish whether the farm land owned by the taxpayer was “used principally in the business of farming”, as such a determination requires a review of all of the facts surrounding a situation including which portions of the farm land were utilised throughout the period of ownership. Nevertheless, in our view, the farm land described above could have been “used principally in the business of farming”.

“Farming Business” and “Used in the Business of Farming”

It is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department’s general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.

In our view, based on the information provided, the joint venture operation appears to constitute a farming business.

“Actively Engaged on a Regular and Continuous Basis”

For farm property to qualify for rollover treatment, it must be used in the business of farming in which a qualified person “was actively engaged on a regular and continuous basis”. It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Questions of fact of this nature are usually resolved by officials of the local taxation services office who are generally in a better position to appreciate all of the circumstances of a particular case.

Paragraph 27 of Interpretation Bulletin IT-268R4, entitled “Inter Vivos Transfer of Far Property to a Child”, reflects the Department’s interpretation of “actively engaged on a regular and continuous basis”. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is “actively engaged on a regular and continuous basis” in the business of farming. Further, that paragraph indicates the requirement is considered to have been 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 operations 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.

When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business. In the case of Wilde v. MNR (91 DTC 1125), the courts determined whether the taxpayer’s involvement met the meaning of the words “actively engaged” in subsection 70(10) of the Act. In this case, the taxpayer sold shares of a corporation incorporated in 1964 to carry on his family’s farming business. From 1954 to 1964, prior to incorporation, the taxpayer was operating the family farm on a full-time basis, along with his brothers, sisters and mother. In 1960, the Appellant returned to school and his involvement in day-to-day farming operations decreased. Between the years of 1966 to 1980 he moved to Leftbridge to live and practice law. Throughout this time he attended at the farm for two or three days once a year when the cattle were branded. He also drove a truck three or four weekends a years during harvest. The taxpayer’s three brothers were hired to carry on the day-to-day operations and work as full-time managers. The taxpayer provided legal services, prepared annual returns and maintained the corporate minutes. The taxpayer performed all of the necessary legal work (at no charge) in connection with purchases and sales. Based on the evidence, the courts concluded that it could not be said that the taxpayer was “actively engaged”. Judge Bonner T.C.J. referred to the case of Buntine V. Hume which provided the following comments: :

“in my opinion, the word engaged here means more than a mere employment for short periods intermittently and at irregular intervals, but connotes some continuity of employment for a substantial part of the person’s time. The word engaged is itself capable of that meaning. In some contexts you may speak about a person being engaged in an occupation for however short a period he may be occupied therein. In another context, however, the word engaged conveys a different meaning, i.e., it excludes mere casual or intermittent employment and rather connotes such a degree of employment as occupies the whole or at least a substantial part of the person’s time.”

Based on the information provided, we cannot conclusively determine whether the taxpayer was “actively engaged on a regular and continuous basis”. Such a determination would require a review of all the facts surrounding a situation including whether or not the taxpayer had other sources of income.

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

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