26 August 1998 External T.I. 9815455 - INTER VIVOS TRANSFER OF 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:

1. Can a property leased to a corporation be transferred pursuant to subsection 73(3) of the Act?

2. Can land where part of the land is used for residential purposes be transferred pursuant to subsection 73(3) of the Act?

Position:

1. Yes. Subsection 73(3) of the Act permits the transfer of property to a child of the taxpayer who was resident in Canada immediately before the transfer, and the property 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

Yes.

Reasons:

1. Literal application of the wording in subsection 73(3).

2. Although a housing unit would not normally be considered to be used in a farming business, if it is not a distinct property but forms part of the real property used in the farming business and it was never a principal residence, it may qualify for the rollover provisions of subsection 73(3) of the Act, if the entire real property on which it is part was used principally in carrying on the business of farming.

XXXXXXXXXX 	5-981545
		Karen Power, CA

Attention:  XXXXXXXXXX 

August 26, 1998

Dear Sirs:

Re: Subsection 73(3) - Inter Vivos Transfer of Farm Property to a Child

This is in reply to your letter of May 27, 1998 in which you requested our views on two separate questions concerning the application of subsection 73(3) of the Income Tax Act (the “Act”) in the following scenario.

Our understanding of the facts is as follows:

1. A corporation (the “Company”) is owned in equal parts by Mother and Father. The Company owns and operates a nursery (farming) business. The business grows and sells trees, shrubs and other plants.

2. The parents and four of their five daughters are employed by the Company and are actively engaged on a regular and continuous basis in the farming business. They are all residents of Canada.

3. The parents each own a number of farm properties separately or as tenants in common. The properties are all in Canada and are leased on a year to year basis to the Company pursuant to unwritten leases. The Company grows nursery stock on the properties which it sells in the course of its business.

Several of the properties include private residences. In some cases, the residences are used by the daughters and, in other cases, the residences are rented to third parties. In all cases, the residential portion of the properties (expressed in acres) is far less than 50% of the total property. The balance of the properties (excluding small portions which are unarable land) are used in farming and have been so used throughout the time the properties were owned by the parents. In all cases, the residential portion is included within the larger property and is not a separate legal parcel. None of the properties is a “principal residence” of either parent. The farms range in area from 10 acres to 121 acres. All except one of the properties is more than 60 acres.

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.

Question #1

Would the rollover provisions in subsection 73(3) of the Act permit the Mother to transfer the farm properties to her daughters?

Subsection 73(3) of the Act reads in part as follows:

(3) Inter vivos transfer of farm property to child. For the purposes of this Part, where at any time any land in Canada or...of a taxpayer or any eligible capital property in respect of a business carried on in Canada by a taxpayer is transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer, and the property 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,...”

The above subsection is applicable to transfers occurring after 1992. In our view, current subsection 73(3) does not require that the property be used by the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children. Rather, current subsection 73(3) requires that the property 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.

In our view, the rollover provisions in current subsection 73(3) of the Act would permit the Mother in the above situation to transfer the farm properties to her daughters, if, in fact, the children are residents of Canada, the property was, before the transfer, used principally in the business of farming by the “Company” and that any of the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis.

Question #2

Does subsection 73(3) of the Act apply to land in which part of the property is used for residential rather than farming purposes?

Subsection 73(3) of the Act requires, inter alia, that, prior to the transfer, the property be “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”. Property will meet the “principally used” test where its use is primarily in the business of farming, that is, more than 50% of the property’s use must be in the business of farming.

Although a housing unit would not normally be considered to be used in a farming business, if it is not a distinct property but forms part of the real property used in the farming business and it was never a principal residence, it may qualify for the rollover provisions of subsection 73(3) of the Act, if the entire real property on which it is part was used principally in carrying on the business of farming.

We would therefore, agree with your assertion, that in the above situation the “principally used” test has been met and the properties may be transferred pursuant to subsection 73(3) of the Act, if, in fact, the properties were used in the business of farming.

We trust our comments will be of assistance to you.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch