REASONS
FOR JUDGMENT
Hogan J.
I. Overview
[1]
In 2003, Ronald and Donna Otteson (the
“Appellants”) purchased 50.16 acres of land (the “Land”) for the purpose, inter
alia, of using the Land in a tree farm business and producing hay (the
“Tree Farm”).
[2]
Early in 2007, a significant quantity of gravel
was unexpectedly found on the Land. Shortly thereafter, the Appellants began to
receive unsolicited and persistent offers for the Land. In the fall of 2008,
the Land was sold by the Appellants to an arm’s length buyer for $1,600,000.
[3]
In filing their tax returns for the 2008 and
2009 taxation years, each of the Appellants claimed the maximum capital gains
deduction with respect to the capital gain amount included in their income for
each of those years (the “Farming Capital Gains Exemption”), they did so
on the basis that the Land was “qualified farm property” within
the meaning of the definition of that term. The Minister of National Revenue
(the “Minister”) reassessed the Appellants to deny their claim for the Farming
Capital Gains Exemption on the basis that the circumstances surrounding
the ownership and use of the Land did not satisfy the eligibility requirements for
that exemption.
II. Factual Background
[4]
The Appellants were married to each other and
were residents of Alberta at all times material to these appeals.
[5]
Mr. Otteson retired from the Canadian air force
in 1994 after serving as a pilot throughout his career.
[6]
It was Mr. Otteson’s understanding that, following
his death, the surviving spouse annuity paid to his wife would be half of the pension
amount that he was receiving.
[7]
In 2003, the couple learned that an elderly
gentleman they had befriended planned to sell the Land. Both of the Appellants
had grown up on a farm and were schooled in farm operations. The evidence shows
that the couple believed that they could launch a successful tree farm on the
Land.
[8]
The Appellants’ business plan called initially
for the planting of 10,000 trees. The Appellants estimated that this would allow
them to harvest 1,000 trees per year starting in 2010. It was anticipated that 1,000
trees, when harvested, would yield $200,000 of gross revenue per year. The
harvested trees would be replaced by new trees planted on the Land, thus
ensuring a steady stream of revenue for the Appellants that was expected to
start in 2008.
[9]
To begin their Tree Farm, the Appellants jointly
purchased the Land on May 30, 2003 for $100,000.
[10]
The evidence shows that, from 2003 to 2008, but
for a small amount of revenue received from hay sales to roadside buyers for
cash and from the rental of part of the Land to Kevin Frey, the Appellants’
principal source of income was Mr. Otteson’s air force pension, old age
security and Canada Pension Plan benefits.
[11]
The Appellants testified that they worked on the
Land from 2003 to 2008. The farm work consisted of cleaning waste that had been
dumped on the Land before the Appellants bought the Land, the removal of dead
trees from the original bush, planting young trees, planting and harvesting
hay, buying and applying fertilizer, weed control, and watering the trees.
[12]
The evidence shows that the Appellants bought
and repaired farm equipment for use on the Tree Farm. This equipment included a
farm tractor, a tree planter, a little yard tractor, a mower, a side-delivery
rake, a front-end loader, bale forks, bale stookers, chainsaws and small
construction equipment. In addition, the Appellants also repaired and reconstructed
the farm buildings on the Land for the purpose of storing their farm equipment.
[13]
The Appellants testified that all the expenses
associated with the operation of the Tree Farm and the costs for the farm
equipment were paid from their joint bank accounts.
[14]
The Appellants described their tree-planting
activities during the period from 2003 to 2008. According to the Appellants,
they planted 250 trees in 2004 and 2,000 trees in 2005. With regard to the
following years, there is no specific reference to the number of trees planted.
However, Ms. Otteson testified in cross‑examination that by 2008 there
were 5,000 trees planted on the Land.
[15]
The Appellants testified during direct and
cross-examination that most of the Land was used for the Tree Farm but for the
acreage they rented to Mr. Frey, a local farmer who used the rented acreage
for hay production. While both Appellants were questioned as to the area of the
Land used for the Tree Farm and the area rented to Mr. Frey, it was obvious
that Mr. Otteson had a much better grasp of the subject matter as he had measured
the Land and was the one who had made the rental arrangements with Mr. Frey.
[16]
During direct examination, Mr. Otteson
testified that the Appellants rented 30, 27, 24.25, and 22.9 acres in 2004,
2005, 2006 and 2007 respectively. During cross‑examination, Mr. Otteson
testified that in 2004 he and his wife charged Mr. Frey for 36 acres, even
though they had only agreed to rent 30 acres, because Mr. Frey had
exceeded his allocated area when seeding. In cross‑examination, Mr.
Otteson also explained that he had calculated the amount of the total rent by
measuring the Land and multiplying the acreage so determined by the amount of
the rent per acre. According to Mr. Otteson, the rent per acre was $50 in
2004, $50 in 2006, $55 in 2007 and $60 in 2008. He did not specify the amount
of rent charged for 2005. He referred to the amount of money paid each year
(the cheques were submitted in the Joint Book of Documents). According to the cheques, Mr.
Frey paid Mr. Otteson $1,800 in 2004, $1,350 in 2005, $1,215 in 2006, $1,260 in
2007, and $1,350 in 2008.
[17]
I found each of the Appellants to be very
credible witnesses. I note that their answers on cross-examination were
consistent with their testimony in direct.
[18]
Mr. Frey’s testimony differed from that of Mr.
Otteson with respect to the area of the Land that he had rented in each of the
years in question. He was confident that the area was greater than that
described by Mr. Otteson because he had a reader on his seeder that calculated
the acreage that he seeded. Mr. Otteson said that the discrepancy could be
explained by the fact that Mr. Frey had seeded land that belonged to a contiguous
land owner and that he mistakenly believed belonged to the Appellants.
[19]
Prior to March of 2009, neither of the
Appellants reported any income or losses from their farming activities.
According to the Appellants’ testimony, they had been advised by their
bookkeeper that their farm expenses had to be carried forward and then deducted
only once they started to report farm revenue.
[20]
The Appellants’ new accounting advisor advised
Mr. Otteson to file requests for adjustments for his 2003 to 2007 taxation
years to claim the following:
|
Year
|
Gross Farming Income LINE 168
|
Net Farming Income (Loss) LINE 141
|
|
2003
|
NIL
|
($13,358.14)
|
|
2004
|
$2,094
|
($19,107.71)
|
|
2005
|
$2,371
|
($13,621.05)
|
|
2006
|
$3,315
|
($11,168.69)
|
|
2007
|
$4,265
|
($8,997.12)
|
[21]
The Appellants now claim that they received
incorrect advice from their accountant. The losses should have been reported
jointly by the couple as the Land was jointly owned by them and the Tree Farm
was operated as a 50/50 partnership. They have accordingly submitted amended
adjustment requests to the Minister.
[22]
During 2007, an aerial geological survey was conducted
on the Land. A follow-up investigation led to the discovery of a significant
quantity of gravel there. Shortly thereafter, the Appellants began to receive
persistent unsolicited offers for the Land. Ultimately, they decided to list
the Land for sale.
[23]
The Appellants received multiple offers to
purchase the Land. After an accepted offer to purchase failed to result in the
transaction being closed, the Appellants finally accepted a less favourable
offer in November of 2008. As part of that transaction, the Appellants agreed
to take back a mortgage of $1,000,000 for the balance owing (the “VTB Mortgage”), $600,000 having been paid in cash on closing.
[24]
With respect to the 2008 taxation year, the
Appellants reported the capital gain realized on the disposition of the Land
while claiming a capital gain reserve with respect to the VTB Mortgage. They
claimed a portion of the maximum Farming Capital Gains Exemption with regard to
the gain included in income in 2008. Because the VTB Mortgage was paid in full
in 2009, the Appellants included the full amount of the prior year’s reserve in
the calculation of their income for the 2009 taxation year. They claimed the
balance of the Farming Capital Gains Exemption in 2009 in connection with the
gain included in income in that year.
III. Positions of the
Parties
A. Appellants’ Arguments
[25]
The Income Tax Act (the “Act”) imposes
different eligibility requirements for the Farming Capital Gains Exemption
depending on who owns the farm land and who uses the farm land in a farming
business. At various stages of these proceedings, the Appellants adopted inconsistent
positions with respect to the ownership of the Land. Each of these positions presents
different challenges to the Appellants.
[26]
In their initial Notice of Appeal, the
Appellants argued that the Land was owned by them directly and used in the
course of operating the Tree Farm through a partnership. In their Amended
Notice of Appeal, the Appellants changed this argument and claimed that the Land
was owned and used by the partnership in its Tree Farm operation. During the trial,
the Appellants advanced both arguments: that the Land was owned by the
partnership and that the Land was owned by the Appellants. In their written submissions, the Appellants appear to
have settled on the argument that the evidence shows that the Land was owned by
the Appellants.
[27]
With respect to the existence of a partnership,
the Appellants argue that they were actively engaged in carrying on a business
in common with a view to making a profit. According to the Appellants, they
both contributed skill, capital and time to the farming business, which was carried
on through a de facto partnership up to the time the Land was sold by
them.
[28]
The Appellants argue that more than half of the
Land was used directly by the partnership for its farming activities during the
relevant period. According to the Appellants, they planned to eventually use
all the Land for the Tree Farm. Renting part of the Land to Mr. Frey helped
them finance the Tree Farm and his activities helped control the spreading of
weeds that could impede the growth of trees. The Appellants favour a broad notion
of “use” such that the acreage rented to Mr. Frey should be considered as
having been used indirectly by the partnership for its Tree Farm operation.
[29]
On the basis of these arguments, the Appellants
claim that they satisfy all of the eligibility requirements for the Farming
Capital Gains Exemption because:
(i)
they owned the Land in the 24-month period preceding its disposition
(the “Relevant Ownership Period”), a fact that is admitted by the
Respondent;
(ii) throughout
any 24-month period during which they owned the Land (the “Relevant
Use Period”), more than 50% of the Land was directly used by a de facto
partnership of which they were 50/50 partners (the balance of the Land was
used indirectly by the partnership throughout the same period);
(iii)
throughout the Relevant Use Period, the
Appellants were engaged on a regular and continuous basis in the Tree Farm
operation; and
(iv)
all or substantially all of the fair market
value of the property of the partnership was attributable to property used in
the Tree Farm business throughout the Relevant Use Period such that the
Appellants’ interest in the partnership was an “interest in a family farm partnership” with respect to
that period.
B. Respondent’s
Arguments
[30]
The Respondent submits that the Appellants did
not conduct their farming business through a partnership. Rather, the
Appellants were engaged in activities as spouses acting for the common good of
the couple. The Respondent notes that the existence of the de facto
partnership was raised after the Minister challenged the Appellants’ right to
the Farming Capital Gains Exemption and the Appellants hired counsel to
represent them in their appeal.
[31]
The Respondent notes that, in circumstances
where the land is owned by individuals and the farming business is carried on
by them directly, subsection 110.6(1.3) of the Act mandates, inter alia,
that in at least two years while the land was owned by them their gross revenue
from farming must exceed their income from all other sources. Because the
Appellants admit that they failed to meet this test, the Respondent argues that
their appeal must be dismissed for this reason alone.
[32]
In the alternative, should I find that the
Appellants carried on their farming activities through a partnership, the
Respondent argues that the Appellants’ appeals must nonetheless be dismissed
because their interest in the partnership did not qualify as an “interest in a family farm partnership” throughout the Relevant Use Period. The Respondent submits that a
partnership interest qualifies under the aforementioned definition only if (i) throughout
the Relevant Use Period, more than 50% of the assets were principally used in a
farming business, and (ii) at the time the land was sold, all or substantially
all of the fair market value of the property of the partnership was used in a
farming business. With respect to these two asset tests, the Respondent submits
that, because of the allegation in their Amended Notice of Appeal to the
contrary effect, the Appellants are barred from arguing that the Land was not
transferred to the partnership.
[33]
The Respondent adds that the Appellants must also
fail in their appeals because they were not actively and continuously involved
in the activities of the partnership.
C. Issues
[34]
Considering the contrary positions advanced by
the parties, I have identified the following issues for my determination:
(i) Is the Court barred from finding that the Land remained the
sole property of the Appellants because the Appellants alleged in their Amended
Notice of Appeal that it belonged to a partnership?
(ii) Did the Appellants carry on the Tree Farm business through
a de facto partnership?
(iii)
Assuming a partnership existed, were the
Appellants both engaged on a regular and continuous basis in the activities of
the partnership throughout the Relevant Use Period? Was the Appellants’ interest
in the partnership an “interest in a family farm
partnership” during the Relevant Use Period?
(iv)
Assuming a partnership existed, what part of the
Land is “qualified farm property” as defined in
the Act?
IV. Analysis
A. Preliminary Matter: Can the Court find
that the Land was owned by the Appellants and used by a partnership?
[35]
As noted earlier, the Appellants have changed
their arguments and factual assertions three times during the course of the
proceedings. In their Notice of Appeal, the Appellants argued that they owned
the Land, on which the Tree Farm was operated. The Appellants subsequently amended
their Notice of Appeal to argue that they transferred the Land to the partnership.
Then, during closing submissions, the Appellants’ counsel reverted to the
argument that the Appellants owned the Land that was used by the partnership.
[36]
I note that the Respondent, in her Amended
Reply, did not accept the view that the Appellants transferred the Land to a
partnership. In contrast to the Appellants’ assertion, the Minister assumed
that “[n]o partnership existed between the Appellant and Donna
Otteson with respect to the tree farm on the [Land].” In addition to this, the Minister assumed
that it was the Appellants who sold the Land. By
virtue of these assumptions, it follows that the Respondent assumed that the
Land was sold by the Appellants directly and not as agents dealing with
partnership property.
[37]
The ordinary rule with respect to the burden of
proof in tax appeals is that the taxpayer has to “demolish”
the Minister’s assumptions.
The Crown’s factual assumptions are taken as true unless the taxpayer rebuts
them.
The exception to this principle is when the pleaded assumptions of fact are
exclusively or peculiarly within the Minister’s knowledge.
[38]
Invariably, in tax appeals, there are contested
facts, such as who owned the Land in the instant case. The Court’s role is to
make factual findings based on the rules of evidence. Considering the evidence
as a whole, I am satisfied that the Appellants did not transfer the Land to a
partnership. At the very least, the Appellants did not rebut the Minister’s
assumption that they owned and sold the Land in their personal capacity. From a
procedural fairness standpoint, I am also satisfied that the inconsistent
positions taken by the Appellants have not caused prejudice to the Respondent.
The Respondent cross‑examined the Appellants on this point and had the
opportunity to address this issue fully in both her oral and written
submissions.
B. Did the Appellants carry on the Tree
Farm business as partners of a de facto partnership in which they
were both engaged on a regular and continuous basis?
[39]
As will be seen later in these reasons for judgment,
the eligibility requirements for the Farming Capital Gains Exemption vary according
to the circumstances surrounding the ownership and use of the property. As
noted earlier, the Respondent claims that the owners of the Land and the
operators of the farm were the Appellants acting as husband and wife. In
contrast, the Appellants argue that they were the operators of the Tree Farm in
their capacity as de facto partners.
[40]
The Alberta Partnership Act (the “APA”) defines
“partnership” as “the
relationship that subsists between persons carrying on a business in common
with a view to profit.”
Similar definitions are found in most common law jurisdictions.
[41]
The APA enumerates factors that may or may not
be considered relevant in determining whether a partnership exists. Factors
that by themselves do not give rise to a finding that there is a partnership
include: how property is held by the parties, how revenues are shared between
parties, the receipt of certain payments and the lending of money:
4 In determining
whether a partnership does or does not exist, regard shall be had to the
following rules:
(a)
joint tenancy, tenancy in common, joint property, common property or part
ownership does not of itself create a partnership as to anything so held or
owned, whether the tenants or owners do or do not share profits made by the use
of it;
(b)
the sharing of gross returns does not of itself create a partnership, whether
the persons sharing the returns have or have not a joint or common right or
interest in property from which or from the use of which the returns are
derived;
(c)
the receipt by a person of a share of the profits of a business is proof, in
the absence of evidence to the contrary, that that person is a partner in the
business, but the receipt of the share, or of a payment contingent on or
varying with the profits of the business, does not of itself make the person
receiving the share or payment a partner in the business, and in particular:
(i)
the receipt by a person of a debt or other liquidated amount by instalments or
otherwise out of the accruing profits of a business does not of itself make
that person a partner in the business or liable as a partner;
(ii)
a contract for the remuneration of a servant or agent of a person engaged in a
business by a share of the profits of the business does not of itself make the
servant or agent a partner in the business or liable as a partner;
(iii)
a person who is a surviving spouse or adult interdependent partner or child of
a deceased partner and who receives by way of annuity a portion of the profits
made in the business in which the deceased person was a partner does not by
reason only of that receipt become a partner in the business or liable as a
partner;
(iv)
the advance of money by way of loan to a person engaged or about to engage in a
business on a contract with that person that the lender shall
(A)
receive a rate of interest varying with the profits, or
(B)
receive a share of the profits arising from carrying on the business,
does
not of itself make the lender a partner with the person or persons carrying on
the business or liable as a partner, so long as the contract is in writing and
signed by or on behalf of all the parties to the contract;
(v)
a person receiving by way of annuity or otherwise a portion of the profits of a
business in consideration of the sale by the person of the goodwill of the
business is not by reason only of that receipt a partner in the business or
liable as a partner.
[42]
The APA, like most laws regulating partnerships,
recognizes that an agency relationship exists between partners: “[e]ach partner is an agent of the firm and of the partner’s other partners for the purpose of the
business of the partnership.” In
addition, the APA creates a presumption that property bought with partnership
money belongs to the partnership: “[p]roperty bought with
money belonging to the firm is deemed to have been bought on account of the
firm unless there appears to be a contrary intention.”
[43]
The existence of a partnership is fact-specific.
The criteria applied to determine the existence of a partnership include the contribution
by the parties of money, property, effort, knowledge, skills or other assets to
a common undertaking, the sharing of profits and losses, a mutual right of
control or management of the enterprise, the filing of income tax returns as a
partnership and joint bank accounts.
[44]
The case law on the matter of the existence of a
partnership suggests that I must apply a pragmatic approach when dealing with
this question:
. . . Whether a
partnership has been established in a particular case will depend on an
analysis and weighing of the relevant factors in the context of all the
surrounding circumstances. That the alleged partnership must be considered in
the totality of the circumstances prevents the mechanical application of a
checklist or a test with more precisely defined parameters.
[45]
The Respondent cited a few cases that stand for
the proposition that the courts should be cautious in finding that spouses are members
of a partnership.
In my opinion, the cited cases are almost exclusively dependent on the factual
findings of the court. For example, in Sedelnick Estate, this Court had
to deal with a transaction that occurred before a statutory change to the
prevailing common law position that a married woman in Saskatchewan could not
enter into a legal relationship binding on her husband or herself. As well, a witness who could
have given relevant evidence was not called to testify, from which the Court drew
a negative inference. The Court observed that the only witness who testified “did not create a favourable impression.” In my opinion, these cases
stand for the often-cited principle that the parties’ subjective declaration of
an intent to carry on a business in common for profit must be supported by
evidence as to their actual conduct.
[46]
The objective evidence discussed below
established by the Appellants’ uncontradicted testimony shows that the
circumstances surrounding the operation of the Tree Farm are consistent with their
declared intention to supplement their pension income by carrying on a tree-farming
business in common with a view to making a profit as partners in an
undocumented partnership. The Appellants’ evidence also shows that both were
fully engaged on a regular and continuous basis in the operation of the Tree
Farm, and that they pursued that venture with the plan of realizing significant
annual profits when the trees were ready for harvesting.
[47]
The Appellants actively worked together in
developing the Tree Farm. The Tree Farm was set up as a long-term venture: the
Appellants were expecting to start selling their first trees by 2008. The
Appellants testified during both examination and cross-examination that before
gravel was discovered on their property the Tree Farm was developing as
projected. The discovery of gravel on the Land had an impact on their plans
regarding the Tree Farm. However, until the Land was sold, the Appellants
invested time, effort and capital in the Tree Farm operation.
C. Was all or part of the
Land “qualified farm property” for the purpose of subsection 110.6(2) of the Act?
[48]
The starting point for determining whether the
Appellants were entitled to claim the Farming Capital Gains Exemption is the definition
of “qualified farm property” in section 110.6(1)
of the Act, which reads as follows:
“qualified farm property” of an individual (other than a trust that
is not a personal trust) at any time means a property owned at that
time by the individual, the spouse or common-law partner of the individual
or a partnership, an interest in which is an interest in a family farm
partnership of the individual or the individual’s spouse or common-law partner
that is
(a) real
or immovable property that was used in the course of carrying on the business
of farming in Canada by,
(i)
the individual,
(ii)
if the individual is a personal trust, a beneficiary of the trust that is
entitled to receive directly from the trust any income or capital of the trust,
(iii)
a spouse, common-law partner, child or parent of a person referred to in
subparagraph (i) or (ii),
(iv)
a corporation, a share of the capital stock of which is a share of the capital
stock of a family farm corporation of an individual referred to in any of
subparagraphs (i) to (iii), or
(v)
a partnership, an interest in which is an interest in a family farm
partnership of an individual referred to in any of subparagraphs (i) to (iii),
(b) a share
of the capital stock of a family farm corporation of the individual or the
individual’s spouse or common-law partner,
(c) an
interest in a family farm partnership of the individual or the individual’s
spouse or common-law partner, or
(d) an
eligible capital property (which is deemed to include capital property to which
paragraph 70(5.1)(b) or 73(3.1)(f) applies) used by a person or
partnership referred to in any of subparagraphs (a)(i) to (v), or by a
personal trust from which the individual acquired the property, in the course
of carrying on the business of farming in Canada;
[Emphasis
added.]
[49]
This definition merits a few observations. In
the context of this appeal, I note that the provision refers to how the real
property was used. The actual use of the real property at the time of its
disposition is not relevant. In addition, earlier versions of this definition
referred to the principal use of the real property. The definition was amended in
2013 retroactive to 2006 to delete the concept of “principal
use” and replace it by the less restrictive concept of “use”.
[50]
Subsection 110.6(1.3) of the Act
supplements the ownership and use requirements laid out in the definition of “qualified farm property” by providing as follows:
110.6(1.3) For the
purposes of applying the definition “qualified farm property”, in subsection
(1), of an individual, at any time, a property owned at that time by
the individual, the spouse or common-law partner of the individual, or a
partnership, an interest in which is an interest in a family farm partnership
of the individual or of the individual’s spouse or common-law partner, will
not be considered to have been used in the course of carrying on the business
of farming in Canada, unless
(a)
throughout the period of at least 24 months immediately preceding that time,
the property or property for which the property was substituted (in this
paragraph referred to as “the property”) was owned, by any one or more of
(i)
the individual, or a spouse, common-law partner, child or parent of the
individual,
(ii)
a partnership, an interest in which is an interest in a family farm partnership
of the individual or of the individual’s spouse or common-law partner,
(iii)
if the individual is a personal trust, the individual from whom the trust
acquired the property or a spouse, common-law partner, child or parent of that
individual, or
(iv)
a personal trust from which the individual or a child or parent of the
individual acquired the property;
(b)
if paragraph (c) does not apply, either
(i)
in at least two years while the property was owned by the 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; or
(c)
if the property or property for which the property was substituted was last
acquired by the individual or partnership before June 18, 1987 or after June 17,
1987 under an agreement in writing entered into before that date,
(i)
in the year the property was disposed of by the individual, the property was
used principally in the course of carrying on the business of farming in Canada by
(A)
the individual, or a spouse, common-law partner, child or parent of the
individual,
(B)
a beneficiary referred to in subparagraph (a)(ii) in the definition
“qualified farm property” in subsection (1) or a spouse, common-law partner,
child or parent of that beneficiary,
(C)
a corporation referred to in subparagraph (a)(iv) in the definition
“qualified farm property” in subsection (1),
(D)
a partnership referred to in subparagraph (a)(v) in the definition
“qualified farm property” in subsection (1), or
(E)
a personal trust from which the individual acquired the property, or
(ii)
in at least five years during which the property was owned by a person
described in clauses (A) to (E), the property was used principally in the
course of carrying on the business of farming in Canada by
(A)
the individual, or a spouse, common-law partner, child or parent of the
individual,
(B)
a beneficiary referred to in subparagraph (a)(ii) in the definition
“qualified farm property” in subsection (1) or a spouse, common-law partner,
child or parent of that beneficiary,
(C)
a corporation referred to in subparagraph (a)(iv) in the definition
“qualified farm property” in subsection (1),
(D)
a partnership referred to in subparagraph (a)(v) in the definition
“qualified farm property” in subsection (1), or
(E)
a personal trust from which the individual acquired the property.
[Emphasis
added.]
[51]
As noted earlier, the parties do not agree on
which of the alternative requirements set out in subsection 110.6(1.3) of the
Act need to be satisfied. The Appellants argue that the requirements of
subparagraph 110.6(1.3)(b)(ii) must be satisfied. In contrast, the
Respondent, because she denied the existence of a partnership, focused her main
argument on subparagraph 110.6(1.3)(b)(i), which in many instances can
be more restrictive. Because the law on partnership and the evidence favours
the Appellants’ position, I will consider whether the conditions laid out in
subparagraph 110.6(1.3)(b)(ii) that are relevant for this appeal have
been satisfied.
[52]
For the purposes of the instant case, the
eligibility requirements stated in subparagraph 110.3(1.3)(b)(ii) can be
broken down as follows:
(i) Continuous use
The real property (or part thereof) owned by the Appellants must be shown
to have been used by the partnership throughout the Relevant Use Period. I am
satisfied, on the evidence, that part of the Land was actually used by
the partnership on a continuous basis during the Relevant
Use Period chosen by the Appellants.
(ii) Actively engaged
The Appellants must have been engaged
on a regular and continuous basis in the partnership’s Tree Farm business
throughout the Relevant Use Period. As previously noted, I am satisfied that
this was the case.
(iii) Conditions
affecting the partnership
The
Appellants’ interest in the partnership must qualify as an “interest in a family farm partnership” (the “Qualified Farm Partnership
Operator”) throughout the Relevant Use Period.
[53]
The term “interest in a
family farm partnership” is defined as follows in
subsection 110.6(1):
“interest in a
family farm partnership” of an individual (other than a trust that is not a
personal trust) at any time means a partnership interest owned by the
individual at that time if
(a)
throughout any 24-month period ending before that time, more than 50%
of the fair market value of the property of the partnership was
attributable to
(i)
property that was used principally in the course of carrying on the business
of farming in Canada in which the individual, a beneficiary referred to in
clause (C) or a spouse, common-law partner, child or parent of the individual
or of a beneficiary referred to in clause (C) was actively engaged on a
regular and continuous basis, by
(A)
the partnership,
(B)
the individual,
(C)
where the individual is a personal trust, a beneficiary of the trust,
(D)
a spouse, common-law partner, child or parent of the individual or of a
beneficiary referred to in clause (C),
(E)
a corporation, a share of the capital stock of which was a share of the capital
stock of a family farm corporation of the individual, a beneficiary referred to
in clause (C) or a spouse, common-law partner, child or parent of the
individual or of a beneficiary referred to in clause (C), or
(F)
a partnership, a partnership interest of which was an interest in a family farm
partnership of the individual, a beneficiary referred to in clause (C) or a
spouse, common-law partner, child or parent of the individual or of a
beneficiary referred to in clause (C),
(ii)
shares of the capital stock or indebtedness of one or more corporations all or
substantially all of the fair market value of the property of which was
attributable to properties described in subparagraph (iv),
(iii)
a partnership interest in or indebtedness of one or more partnerships all or
substantially all of the fair market value of the property of which was
attributable to properties described in subparagraph (iv), or
(iv)
properties described in any of subparagraphs (i) to (iii), and
(b)
at that time, all or substantially all of the fair market value of the
property of the partnership was attributable to property described in
subparagraph (a)(iv);
[Emphasis added.]
[54]
In the context of the requirements of
subparagraph 110.6(1.3)(b)(ii) relevant to the instant case, the
evidence must show that the partnership met the following asset thresholds
during the Relevant Use Period in order for it to be a Qualified Farm
Partnership Operator:
(i) more than 50% of the fair market value of the property of
the partnership was attributable to property that was used principally in the
course of carrying on the Tree Farm business in Canada (the “More Than Majority
Threshold”); and
(ii) at the relevant time, all or substantially all of the fair
market value of the partnership’s property was attributable to property that
was used in the Tree Farm business (the “All or Substantially All Threshold”).
[55]
In the context of the Relevant Use Period chosen
by the Appellants, it is unclear when each of these asset thresholds must be met.
From my reading of the relevant provisions, it appears that the definition of an “interest in a family farm
partnership” was introduced into the Act for the main purpose of
defining when a partnership interest is itself “qualified
farm property”. For that purpose, the two different asset thresholds
work properly because they operate at well-identified different times.
[56]
In the context of these appeals, it is unclear
when exactly each of the asset thresholds must be met. The More Than Majority
Threshold is the less problematic of the two. I am of the view that it must be met
throughout the Relevant Use Period. It is in respect of that period that the
Appellants’ partnership interest must qualify as an “interest
in a family farm partnership”. When then must the All or Substantially
All Threshold be met? At the end of the Relevant Use Period only? Throughout
the Relevant Use Period? Contrary to the Respondent’s position, I do not
believe that the particular time is the time immediately before the disposition
of the Land by the Appellants. In any event, I note that, at the later time,
although the farm equipment had been sold, there remained trees on the Land.
[57]
Because I am satisfied
that the higher All or Substantially All Threshold was met throughout
the Relevant Use Period, I do not have to decide this issue to dispose of
these appeals. The evidence shows that, during that period, which started on
January 1, 2006 and ran to December 31, 2007, the Land was not
transferred to the partnership and the assets of the partnership consisted of
farm equipment and the trees planted on the land used by the partnership. Consequently,
the Appellants’ interest in the partnership was an “interest
in a family farm partnership”, as defined in the Act, during the Relevant Use
Period.
D. What part of the Land was used by the partnership?
[58]
As noted earlier,
because the Land was owned by the Appellants and not the partnership, the
Appellants must show that it was used by the partnership throughout the
Relevant Use Period. The evidence shows that a portion of the Land (the “Rented Land”) was rented to Mr. Frey directly by the Appellants. Mr. Frey used the Rented Land to grow hay that he then harvested for his own purposes. I infer from the
evidence that the Appellants rented land to Mr. Frey because it was not needed
at the time in the partnership’s Tree Farm operation. From the Appellants’ perspective, they used the Rented Land to earn rental income. Had the Appellants decided not to sell the Land and continued
expanding the Tree Farm, conceivably at some point the Rented Land could have qualified under the exemption. This did not occur. Therefore, the area
corresponding to the greatest number of acres rented to Mr. Frey during the
Relevant Use Period does not qualify as “qualified farm property”.
[59]
In their written
submissions, the Appellants and the Respondent suggest that the Land should be
regarded as a whole. The Appellants suggest that if the majority of the Land
was used by the partnership, it should all be considered to have been used for the
partnership’s purposes. I disagree.
[60]
Farm owners often describe
their farm by reference to their property’s boundaries. In general terms, their
farm may be made up of contiguous or non‑contiguous parcels of land.
Farmers and their families often reside on their land. A portion of that land
may be used for their family home and serve as a front and back yard. That part
of the property is not used for farming. It is for personal use. If the
principal residence is sold as part of the sale of the farm, the gain
attributable thereto may be exempt from tax under the principal residence
exemption. A different parcel of land may be used for a non‑farm business
purpose: the owner may, for example, operate a campground on that parcel.
Subsection 110.6(1.3) of the Act makes allowance for all of these possibilities
by referring to the use of property throughout the Relevant Use Period.
[61]
In my opinion,
nothing in the provision bars consideration of a section or part of a larger
piece of land, otherwise land that has been legally subdivided would be
preferred to land that has not been. This would mean that farmers would be
inclined to seek subdivision of land where a portion representing
quantitatively and qualitatively more than 50% of the total area was used for a
non-farm purpose. As noted earlier, the land owner and the farm operator do not
have to be the same person. However, subsection 110.6(1.3) of the Act mandates
that there be a close connection between the parties in such a case. In the
instant case, the real property (or part thereof) belonging to the Appellants
must have been used by the Qualified Farm Partnership Operator throughout the
Relevant Use Period.
E. What part of the Land is “qualified farm property”?
[62]
The parties disagree on the area of the Land
that was rented to Mr. Frey during the Relevant Use Period chosen by the
Appellants. On this point, I prefer the Appellants’ evidence. That evidence
shows that the Appellants worked daily on the Land. They knew the boundaries of
the Land better than Mr. Frey, who spent much less time producing hay thereon.
Mr. Otteson offered a convincing explanation as to why his evidence differed
from that of Mr. Freys. According to Mr. Otteson, Mr. Frey
planted hay on land that did not belong to the Appellants. That parcel of land
belonged to the County of Strathcona. According to Mr. Otteson, in rural
areas, this sort of thing is a common occurrence as land owners often do not
strictly enforce property rights over land that they are not using.
[63]
As noted earlier, the Appellants chose the
period of January 1, 2006 to December 31, 2007 as the Relevant Use Period. Mr. Otteson’s
evidence was that, during that period, the Appellants rented 24.25 and 22.9
acres to Mr. Frey, that is, in 2006 and 2007 respectively. Both Appellants
testified that they used the balance of the land for the Tree Farm. That
included the area on which they were growing the trees and hay, the buildings
where the farming equipment was stored, and a small woodlot that acted as a natural
barrier to protect the buildings from the wind. I accept the Appellants’
evidence on this point.
[64]
Subtracting the greatest number of acres rented
to Mr. Frey during the Relevant Use Period from the total number of acres owned
by the Appellants, I conclude that 25.91 acres of the Appellants’ Land fell
within the definition of “qualified farm property”.
V. Conclusion
[65]
For the reasons outlined above, I conclude that
25.91 acres out of the total area of 50.16 acres were “qualified
farm property” within the meaning of the Act. The Appellants were
entitled to claim the Farming Capital Gains Exemption with respect to the
capital gain attributable to that acreage. The remaining 24.25 acres that were
rented to and used by Mr. Frey during the Relevant Use Period were not “qualified farm property”.
Signed at Magog, Quebec, this 13th day of August 2014.
“Robert
J. Hogan”
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