3 November 2010 External T.I. 2010-0381321E5 - Capital Gains and 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.

Principal Issues: Income tax consequences on the transfer of land on death of a parent to a child that was at one time used in a farming business by that individual's parent but is now being rented to an arm's length farmer and a possible sale by that child of such land.

Position: While a question of fact but it is possible that property may qualify for the rollover to the child under the rules in 70(9) and/or qualify as QFP for the purposes of the capital gains exemption in subsection 110.6(2) to the deceased individual and that individual's child. The requirements of these provisions are generally discussed.

Reasons: The law.

XXXXXXXXXX
								2010-038132
								Michael Cooke, C.A.

November 3, 2010

Dear XXXXXXXXXX :

Re: Capital Gains and Farm Property

We are writing in reply to your email of September 22, 2010, wherein you request our comments on the income tax implication under the Income Tax Act (the "Act") pertaining to one or more dispositions of land.

Briefly, it is our understanding that an individual ("X") owned certain land in Canada, which was farmed by X on a full-time basis for a number of years before that land was transferred (whether jointly or severally) to X's child ("Y") and grandchild ("Z") in equal shares (i.e., 50% each) in XXXXXXXXXX . Y is the child of X and Z is the child of Y for the purposes of the Act. It is our understanding that neither Y nor Z carried on any farming business on the land. Commencing in XXXXXXXXXX , Y and Z rented the land to an unrelated farmer who continues to farm the land. Y passed away in XXXXXXXXXX , and pursuant to the terms of Y's will, Z will inherit Y's 50% share or interest in the land.

You indicate that Z may either continue to rent the land to the unrelated farmer or sell the land and have asked what the income tax implications might be concerning the land to Y, Y's estate and Z as a result of Y's death and the possible sale of the land by Z.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following comments, which may be of assistance.

Rollover of Farm Property on Death

In general, subsection 70(9) of the Act allows land in Canada or depreciable property in Canada of a prescribed class that was owned by an individual ("taxpayer") at the time of the taxpayer's death to be transferred, potentially on a tax-deferred basis, to the taxpayer's child, pursuant to subsection 70(9.01) of the Act, where the following requirements are met:

(a) the property was, before the taxpayer's death, used principally in a farming business carried on in Canada in which the taxpayer, the spouse or common-law partner of the taxpayer, or a child or parent of the taxpayer, was actively engaged on a regular and continuous basis;

(b) the taxpayer's child was resident in Canada immediately before the day on which the taxpayer died; and

(c) as a consequence of the taxpayer's death, the property is transferred to and becomes vested indefeasibly in the child within 36 months after the taxpayer's death (or if written application has been made to the Minister within that period by the taxpayer's legal representative, such other period that the Minister considers reasonable).

While Interpretation Bulletin, IT-349R3, Intergenerational Transfers of Farm Property on Death, discusses the general application of this rollover provision, in general terms, where the above conditions have been met, the legal representative of the deceased taxpayer may elect to transfer the particular property at any amount between its cost amount and its fair market value immediately before the time of the death of the taxpayer. The elected amount is deemed to be the cost of the property to the child. For purposes of these rules a child of the taxpayer has the extended meaning as provided for in the definition of "child" in subsection 70(10) of the Act.

It should be noted that while there is no requirement that the particular property be used in the business of farming immediately before the transfer by the deceased taxpayer, the property must, before the death, have been used principally in the business of farming in which one or more of the taxpayer, the taxpayer's spouse or common-law partner, the taxpayer's child, or the taxpayer's parent was actively engaged on a regular and continuous basis. Where reference is made to a property being used "principally" in the business of farming, the property will generally meet this requirement if more than 50% of the property's use while it was owned by such persons described above, is in the business of farming. Such a determination must be made on a property-by-property basis. However, as noted in paragraph 14 of IT-349R3 and paragraph 25 of IT-268R4, Inter Vivos Transfer of Farm Property to Child, it is the CRA's view that the mere renting out of farmland by a lessor would not constitute the business of farming by the lessor.

While a question of fact, since it appears that Y has not used the land in any farming business, as noted above, the "principally" use test would generally only be met where the farming use of that land, taking into account the years while the land was owned by X, Y and Y's estate (i.e., the entire ownership period by eligible persons described in paragraph 70(9)(a) of the Act), would represent more than 50% of the use of the land during all the years where the land was so owned.

Capital Gains Deduction - Qualified Farm Property ("QFP")

Subject to the possible application of subsection 69(11) of the Act, generally speaking, subsection 110.6(2) of the Act permits an individual (other than a trust) who is resident in Canada throughout the taxation year to claim a capital gains exemption of up to $750,000 where that individual has disposed of QFP in that year. Real property will meet the definition of QFP in subsection 110.6(1) if certain conditions are satisfied.

The definition of QFP in subsection 110.6(1) of the Act provides, inter alia, that QFP of an individual (other than a trust that is not a personal trust) includes "real or immovable property that was used in the course of carrying on the business of farming in Canada" by certain qualifying users, who may include the individual, the individual's spouse or common-law-partner, the individual's child or parent. Subsection 110.6(1.3) of the Act provides that for the purposes of applying the definition of QFP a particular property will not be considered to have been used in the course of carrying on the business of farming in Canada unless the ownership test described in paragraph 110.6(1.3)(a) of the Act is met and one of the two farming-use tests described in paragraph 110.6(1.3)(b) or paragraph 110.6(1.3)(c) of the Act are met.

The ownership test in paragraph 110.6(1.3)(a) of the Act requires that the particular property be owned throughout the period of at least 24 months prior to the disposition by one or more specified persons, which include inter alia, the individual, the individual's spouse or common-law-partner, the individual's child or parent, the individual from whom a personal trust acquired the property (or spouse, common-law-partner, child or parent of that individual) or a personal trust from which the individual (or a child or parent of such individual) acquired the property.

The determination of the applicable farming-use tests described in paragraph 110.6(1.3)(b) or paragraph 110.6(1.3)(c) of the Act will depend on when the particular property was last acquired.

While a question of fact, since it appears that the land was last acquired by Y and Z after June 17, 1987, the farming-use test in paragraph 110.6(1.3)(b) of the Act appears to be the relevant test. This farming use test will be met if, according to the statutory wording of paragraph 110.6(1.3)(b) of the Act, either:

"(i) in at least two years while the property was owned by one or more persons referred to in paragraph (a),

(A) the gross revenue of a person (in this clause referred to as the "operator") referred to in paragraph (a) from the farming business referred to in clause (B) for the period during which the property was owned by a person described in paragraph (a) exceeded the income of the operator from all other sources for that period, and

(B) the property was used principally in a farming business carried on in Canada in which an individual referred to in paragraph (a), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis, or

(ii) throughout a period of at least 24 months while the property was owned by one or more persons or partnerships referred to in paragraph (a), the property was used by a corporation referred to in subparagraph (a)(iv) of the definition "qualified farm property" in subsection (1) or by a partnership referred to in subparagraph (a)(v) of that definition in a farming business in which an individual referred to in any of subparagraphs (a)(i) to(iii) of that definition was actively engaged on a regular and continuous basis;"

Based on the wording used in clauses 110.6(1.3)(b)(i)(A) and (B), the person meeting the gross revenue test need not be the same individual who meets the ownership test. However, the ownership test in paragraph 110.6(1.3)(a) does require that the farming use test described in paragraph 110.6(1.3)(b) occur during an uninterrupted period of ownership by one or more eligible owners referred to in paragraph 110.6(1.3)(a). In addition, for the purposes of these rules, an individual's "parent" or "child" would include a grandparent or grandchild, as the case may be, by virtue of the definition of "child" in subsection 110.6(1), which refers to the expanded meaning of "child" assigned by subsection 70(10) of the Act.

While ultimately a question of fact, in respect of the land acquired by Y and Z from X in XXXXXXXXXX , provided that X had, in at least two years, gross revenue from the farming business that exceeded his income from all other sources and provided that such land was used principally in the farming business in Canada in which X was actively engaged on a regular and continuous basis, such land would be considered QFP.

We trust that these comments will be of assistance.

Yours truly,

Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch