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: Whether a particular property is qualified farm property as defined in subsection 110.6(1) of the Act.
Position: Question of fact.
Reasons: See 9618765, 9628495, 9919475, 992378, 9821269, 9822875, 9832245, 9900153, 9919475, 9709285, 9709965, 9715205, 9802093, 9811605, 9818025.
XXXXXXXXXX 2000-001105
G. Moore
April 10, 2000
Dear XXXXXXXXXX:
Re: Qualified Farm Property
We are replying to your letter of February 29, 2000, regarding "qualified farm property", as defined in subsection 110.6(1) of the Income Tax Act (the "Act"). We also acknowledge the additional information you provided in our telephone conversation (Moore/XXXXXXXXXX) of March 10, 2000, regarding the hypothetical situation described in your letter.
You are asking for our opinion in the following hypothetical situation regarding entitlement to the capital gains exemption upon the disposition of qualified farm property:
In 1986, a taxpayer (Grandfather) died. At the time of death, Grandfather had farmed full time for more than two years and this was his sole source of income. Upon the Grandfather's death, the farm property was rolled over to Grandmother at its adjusted cost base. Grandmother owned the land for more than two years. Grandmother used the land in the business of farming and always had a positive income; however, her pension income, Canada Pension Plan benefits and Old Age Security income exceeded her farm income. In 1999, Grandmother transferred the land to her son for proceeds of disposition equal to the fair market value of the land pursuant to paragraph 73(3)(b) of the Act. A capital gain arose on the disposition of the land and Grandmother was entitled to claim the capital gains deduction pursuant to subsection 110.6(2) of the Act. The son's other sources of income exceeded his farm income by a significant amount. The son owned the farm for more than two years and upon his death, transferred the land to his son (Grandchild) for proceeds equal to the fair market value. You have indicated that the capital gain realized on the deemed disposition of the property at the time of death of the son qualified for the capital gains deduction pursuant to subsection 110.6(2) of the Act.
The Grandchild owns the farm for more than two years before disposition. The only capital gains realized by the Grandchild upon disposition of the property would be capital gains accrued after the death of his father. You are asking if the land would be eligible for the capital gains deduction if the Grandchild sold the land and it had been held by the Grandchild for more than two years.
It appears that the transaction described in your letter may relate to an actual transaction. Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature.
Subsection 110.6(2) of the Act permits a lifetime capital gains deduction of $500,000 for an individual resident in Canada throughout the 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 qualified farm property, within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada.
You are asking whether the farm property would be considered to be "qualified farm property", as defined in subsection 110.6(1) of the Act, at the time of disposition of the property by the grandchild. Upon the disposition of the property by the grandchild, the farm property may be considered to have been used in the course of carrying on the business of farming if the requirements of subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act are met. Pursuant to subparagraph (a)(vi) of that definition, real property may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned, by the individual, spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, throughout the 24 months preceding the sale. In addition, the real property must meet the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Clause (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act will only apply when farm land was used by a corporation or a partnership and does not appear to apply in this situation.
Under clause (a)(vi)(A) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, a child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual's income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who currently owns the property and may be the parent or spouse of the individual where that parent or spouse previously owned the property. For the purposes of section 110.6 of the Act, "parent" would include a "grandparent".
The determination of whether real property is used principally by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used principally in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Furthermore, it is also 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 (copy enclosed). 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, (copy enclosed) and paragraph 9 of Interpretation Bulletin IT-145R, Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax (copy enclosed).
In the situation described above, with respect to the grandchild, it is a question of fact whether a particular property is a "qualified farm property" as defined in subsection 110.6(1) of the Act and whether it is used principally in the course of carrying on the business of farming in Canada. However, it would appear that the farm property owned by the grandchild would likely meet the 24-month holding test in subparagraph (vi) and the gross revenue test in clause (vi)(A) of the definition of "qualified farm property" in subsection 110.6(1) of the Act at the time of disposition of the property. Accordingly, the grandchild would likely be entitled to claim the capital gains exemption in respect of any capital gain realized on the disposition of the qualified farm property.
We trust our comments will be of assistance to you.
Yours truly,
J. Wilson.
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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