15 April 1998 External T.I. 9806225 - Farm land - Replacement property, 73(3) roll

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:

1) Whether farm land acquired to replace property sold qualifies as replacement property if no farming activities are carried on it prior to being gifted to son, because land is covered by snow (land purchased during winter). 2) Whether this land qualifies for rollover under 73(3). 3) Whether situation is different if son farms the land before it is given to him (later in the year).

Position:

1) The land purchased by the taxpayer as a replacement for his former property is used by him for a use that is the same as or similar to the use to which he put the former property. The land qualifies as a replacement property and an election under 44(1) is available provided the other conditions of section 44 are met. 2) The land was, before the transfer, used in the business of farming in which the taxpayer was actively engaged on a regular and continuous basis. If that use is the primary use of the land, the rollover is available provided the other conditions of 73(3) are met. 3) The situation is not different. The answers in 1) & 2) apply.

Reasons:

1) The land is used in the same way as the taxpayer would have used his former property during that period of time. 2) Once it is determined that the land was, before the transfer, used in the business of farming in which the taxpayer was actively engaged on a regular and continuous basis, we have to determine whether this was its primary use. If it is and the other conditions of subsection 73(3) are met, the rollover is available. 3) The taxpayer’s son carries on farming activities on the land. The replacement property treatment (section 44) is not denied if the land is used by a related party for the same use or similar use. With respect to 73(3), the land was, before the transfer, used in the business of farming in which the taxpayer's child was actively engaged on a regular and continuous basis. To apply 73(3), we must determine if that use was the primary use of the land.

XXXXXXXXXX 980622

N. Mondou, M.Fisc.

Attention: XXXXXXXXXX

April 15, 1998

Dear Sir:

Re: Section 44 and Subsection 73(3) of the Income Tax Act

This is in reply to your letter dated March 5, 1998, in which you requested our views with respect to the application of section 44 and subsection 73(3) of the Income Tax Act (the “Act”).

In the first hypothetical situation you submitted, the taxpayer is a full-time farmer and carried on a grain farming business on a piece of land on a regular and continuous basis from 1973 to January 1, 1998, when he sold the land to a third party. A few months later, the taxpayer used the proceeds from the sale of the land to purchase another piece of land. Two weeks after this purchase, the taxpayer gave the land to his son. As the purchase was effected during winter, no farming activities were carried out during this two week period as the land was covered with snow. Once the snow has disappeared and the land is dry enough, the son commences carrying on a grain farming business on a regular and continuous basis on the land he now owns.

In the second scenario, the taxpayer keeps the newly purchased land for a longer period of time and the son commences a grain farming business on a regular and continuous basis on this land while it is owned by the taxpayer. A few months after the purchase, the taxpayer gives the land to his son.

Replacement property

Your question, as we understand it, concerns the qualification of the land purchased by the father as a “replacement property” and the conditions in paragraphs 44(5)(a) and (b) of the Act.

Those provisions require, inter alia, that:

1) the property acquired to replace the former property be so acquired by the taxpayer for the same or a similar use as the use to which the taxpayer or a person related to the taxpayer put the former property, and

2) the replacement property be acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose.

Bill C-28 proposes to amend paragraph 44(5)(a) and add paragraph 44(5)(a.1). Accordingly, our comments will be restricted to the application of these provisions and not the current law.

The new paragraphs will require that it is reasonable to conclude that the replacement property was acquired by the taxpayer to replace the former property, and that the replacement property was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property. The explanatory notes to Bill C-28 specify that former paragraph 44(5)(a), which is new paragraph 44(5)(a.1) of the Act, is amended to clarify that a property acquired by a taxpayer is not necessarily denied replacement property treatment simply because it is used by a related person rather than by the taxpayer.

The circumstances you describe seem to indicate that the conditions of new paragraph 44(5)(a) will be met, i.e. that it is reasonable to conclude that the new piece of land was acquired by the father to replace the land sold by him. Whether the conditions of new paragraph 44(5)(a.1) are met will depend on whether the land is considered to be used for the same or a similar use to which the former property was put by the father. In both scenarios, it is our view that the land is so used.

Generally, vacant land is excluded from the definition of replacement property, as non-use does not constitute use. However, in the particular circumstances of your first scenario, the taxpayer puts the land to the same use as he would have put his former property during the months of winter. He carries on the normal activities of his farming business for that time of the year: he uses his land in the same way as other farmers in the same industry would during that period of time. Consequently, in our view, the land purchased by the taxpayer as a replacement for his former property is used by him for a use that is the same as or similar to the use to which he put the former property.

In the second scenario, you mention that his son commences carrying on the same business on a regular and continuous basis on the land while it is owned by the taxpayer. As mentioned in the explanatory notes to Bill C-28, the fact that the son uses the land instead of his father would not prevent the land from being a replacement property. Moreover, the requirements of paragraph 44(5)(b) of the Act are met as the son carries on the same business as his father.

We wish to bring to your attention that the proposed amendments mentioned above are to apply to dispositions of former properties that occur after the 1993 taxation year except that, if a taxpayer so elects in respect of a former property of the taxpayer that was disposed of after the 1993 taxation year but before Bill C-28 is assented to, paragraph 44(5)(a.1) of the Act will require that the property is acquired by the taxpayer, but need not be used by the taxpayer or a person related to the taxpayer, for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property.

Transfer of farm property to child

Subsection 73(3) of the Act requires, inter alia, that the property transferred to a child be a property (land or depreciable property) that was, before the transfer, 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.

For the reasons mentioned above, it is our view that the land is, before the transfer to the son, used in the business of farming in which the taxpayer or his child is actively engaged on a regular and continuous basis. Whether such land is used principally in the farming business is a question of fact. Generally, for the purposes of subsection 73(3), a property is used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation, as discussed in paragraph 22 of Interpretation Bulletin IT-268R4 (“Inter vivos transfer of farm property to child”).

We trust that these comments are of assistance but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transactions.

Yours truly,

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