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: Does each share in a particular corporation qualify as a "share of the capital stock of a family farm corporation" for purposes of subsection 73(4) of the Act or as a "share of the capital stock of a family farm corporation" for purposes of subsection 110.6(2) of the Act or as a "qualified small business corporation share" for purposes of subsection 110.6(2.1) of the Act.
Position: General comments.
Reasons: Depends on the facts of a particular situation.
XXXXXXXXXX 2000-000111
J. E. Grisé
March 9, 2000
Dear Madam:
Re: Disposition of Property
This is in reply to your letter of October 25, 1999, requesting our advice or rulings on whether certain property is eligible for a tax-deferred transfer to your children or qualifies for the $375,000 capital gains deduction. We apologize for the delay.
You are the sole shareholder of a Canadian corporation (your corporation) that owns approximately XXXXXXXXXX acres of farm land (the farm land). The farm land is leased on a crop share basis to another Canadian corporation (the sister corporation) that is owned by your sister. The sister corporation uses the farm land in its farming business. The farming of the farm land is subject to a leasing agreement that is renewable every three years.
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.
Generally, when anything is disposed of by an individual to a person with whom the individual does not deal at arm's length for no proceeds or for proceeds less than its fair market value, the individual is deemed to have received proceeds of disposition equal to its fair market value. There is an exception to this rule that applies when a parent, while living, transfers shares of the capital stock of a family farm corporation to her or his child or children. In this respect, we have enclosed a copy of interpretation bulletin IT-268R4, Inter Vivos Transfer of Farm Property toa Child, that, in part, discusses the requirements for a share to be considered "a share of the capital stock of a family farm corporation." You will note in paragraph 25 of the bulletin that the lessor of farm property (e.g. the farm land) is not considered to be using the property in the business of farming. Accordingly, a share of your corporation may not qualify as a share of the capital stock of a family farm corporation.
Subsection 110.6(2) of the Income Tax Act (the Act) permits a capital gains deduction of $375,000 for an individual resident in Canada throughout a year who disposed of "qualified farm property" in the year. One of the components of the definition of "qualified farm property" is a "share of the capital stock of a family farm corporation." For the same reason set out in the previous paragraph, it is unlikely that a share in your corporation would qualify as a "share of the capital stock of a family farm corporation" for purposes of subsection 110.6(2) of the Act.
Subsection 110.6(2.1) of the Act permits a capital gains deduction of $375,000 for an individual resident in Canada throughout a year who disposed of a share in a corporation that was a "qualified small business corporation share" of the individual. Please refer to pages 11 and 12 of the attached 1999 Capital Gains guide for a brief description of the conditions that must be met for a share to be considered a "qualified small business corporation share." The first condition listed is that, at the time of disposing of the share, the share must be a share of the capital stock of a "small business corporation." The definition of that latter term on page 6 of the guide stipulates that all or most (90% or more) of the fair market value of the corporation's assets must be used mainly in an active business (use test) carried on primarily in Canada by the corporation or by a related corporation. An asset of your corporation that is leased to a related corporation that uses the asset mainly in an active business carried on primarily in Canada would be an asset that would meet the use test. Accordingly, depending of the particular facts, it is possible that the shares of your corporation could meet the definition of qualified small business corporation shares and a gain from their disposition could qualify for the deduction pursuant to subsection 110.6(2.1) of the Act.
Your letter contemplates the possible sale of the farm land by your corporation, the dissolution of your corporation and the distribution of your corporation's assets. The sale of the farm land may result in a capital gain to the corporation. The taxable portion of such a gain (66 2/3% proposed in the recent budget) would be included in your corporation's income and taxed at the normal corporate tax rate. Subsection 84(2) of the Act provides that where a corporation resident in Canada distributes funds or property to shareholders on the winding-up, discontinuance or reorganization of its business, it will be deemed to have paid a dividend. The rate of income tax on such a dividend received by an individual will depend on certain factors, such as the individual's income from other sources.
We have enclosed a copy of interpretation bulletins IT-73R5, IT- 434R and IT-322R that you have mentioned in your letter.
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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