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) Does a particular farm qualify as a "qualified farm property'?
(2) To qualify as a "qualified farm property", the property must be used by certain entities "in the course of carrying on the business of farming in Canada". If a taxpayer is relying on the use of a property in the business of farming by a partnership of which he is a member, must his interest in the partnership be "an interest in a family farm partnership"?
Position:
(1) General comments.
(2) Yes.
Reasons:
(1) Depends on the facts of a particular situation.
(2) It is the Agency's position that a member of a partnership carries on the business of the partnership (see for example IT-183). It does not follow that each property used by the partnership is also used by each member of the partnership. To accept such a proposition would render subparagraph (a)(v) of the definition "qualified farm property" in subsection 110.6(1) nugatory.
XXXXXXXXXX 1999-001419
J. E. Grisé
February 24, 2000
Dear Sir:
Re: Qualified Farm Property
This is in reply to your letter of December 3, 1999, requesting our comments on whether a particular property is a "qualified farm property" that would qualify for the $500,000 capital gains exemption if the property were donated to a registered charity.
You purchased the particular property in June, 1973. With the exception of a period in 1984 to 1989, the property was rented to a farmer who, we assume, is not related to you. In 1984 to 1989, the property was used in an equal partnership with a farmer.
Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transaction is proposed and is the subject matter of an advance ruling request submitted in the manner set out in the attached Information Circular 70-6R3, Advance Income Tax Rulings. The following comments are, therefore, of a general nature only, and are not binding on the Agency.
Subsection 110.6(2) of the Income Tax Act (the Act) permits a capital gains deduction of $500,000 for an individual resident in Canada throughout a year who disposed of "qualified farm property" in the year. One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property has been used by certain persons or partnerships in the course of carrying on the business of farming in Canada. In your situation, the property will be required to have been used by either yourself or a partnership that is a "family farm partnership" in the course of carrying on the business of farming in Canada.
A lessor of farm property is not considered to be using the property in the business of farming. Thus, a farm property that is only leased to an arm's length lessee throughout the period it is owned would not fall within the definition of a "qualified farm property".
A farm property owned by an individual that is used by a partnership in the course of carrying on the business of farming may be a "qualified farm property" providing the individual's interest in the partnership is an "interest in a family farm partnership". An "interest in a family farm partnership" of an individual at a particular time is defined in subsection 110.6(1) of the Act. In the situation you have presented, 50% of the fair market value of the partnership's property throughout any 24 month period must have been attributed to property that was used by the partnership principally in the course of carrying on the business of farming in Canada in which you were "actively engaged on a regular and continuous basis". Furthermore, at some time after the 24 month period, all or substantially all of the fair market value of the partnership property must have been attributable to property that has been used principally in the course of carrying on a farm business in Canada by the partnership. If 90% of the fair market value of the property of a partnership is used principally in qualifying use, then the "all or substantially all" requirement will be considered to have been met.
Whether a person is "actively engaged on a regular and continuous basis" in the business of farming is a question of fact. However, the requirement is considered to have been met when the person is "actively engaged" in the management 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 operation 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. If farming is not a person's chief source of income, it may be more difficult to demonstrate that the person was actively engaged on a regular and continuous basis in the business of farming.
It is 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, Farm Losses. In addition, the Agency's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R, Farming or Fishing - Use of Cash Method. We have enclosed copies of these bulletins for your convenience.
In conclusion, unless your interest in the partnership constituted an "interest in a family farm partnership", it is unlikely that the particular property is a "qualified farm property" that would qualify for the capital gains deduction when it is disposed of.
We hope our comments are helpful.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Enclosures
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