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: Would 69(11) apply in particular situations?
Position: purpose test depends on facts of situation. would not apply where subsequent disposition occurs after 3 year limit. potential application of GAAR depending on situation.
Reasons: wording of provision
XXXXXXXXXX D.Yuen
2000-001559
Attention: XXXXXXXXXX
December 14, 2000
Dear Sirs:
Re: Farm Property Rollover and Transfer
We are writing in response to your letter of March 10, 2000 wherein you requested a technical interpretation in respect of the situations described below. Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c. 1, as amended, (the "Act").
Situation 1
1. Father owns farm land utilized in his farm business (a proprietorship) with a fair market value ("FMV") of $1,500,000 and an adjusted cost base of nil. The farm land is "qualified farm property". The terms "adjusted cost base"("ACB") and "qualified farm property", as used here and subsequently, have the meanings assigned by section 54 and subsection 110.6(1), respectively.
2. Son is employed by Father as an active employee of the farm business.
3. As part of an estate and succession plan, and/or to comply with provincial land use regulations, Father wishes to incorporate his farming business and include Son as a shareholder.
4. Father and Son will incorporate Farmco. They will both own common shares. Preferred shares will also be authorized to facilitate the transfer of farming assets to the company.
5. Father will transfer a portion of his farm land, having a FMV of $500,000 and an ACB of nil, to Son. Father will receive no consideration from Son for this transfer.
6. Father will then transfer the remaining farm land, having a FMV of $1,000,000 and an ACB of nil, to Farmco. As consideration, Father will receive a non-interest-bearing demand note in the amount of $500,000 and preferred shares of Farmco with a redemption and retraction amount equal to $500,000. In executing this transfer, Father will elect under the provisions of section 85 to transfer the land at an agreed amount of $500,000.
7. After receiving the farm land from Father, Son will transfer the land, having a FMV of $500,000 and an ACB of nil, to Farmco. As consideration, Son will receive a non-interest-bearing demand note in the amount of $500,000.
8. Son will be the beneficial owner of the land received from Father, and will not be acting as an agent for Father in respect of the land. Neither Father nor Son will have a history of real estate transactions so that the land dispositions will be capital transactions and not income transactions.
Situation 2
Facts 1 to 6 are the same as in Situation 1 above.
1. Son will be the beneficial owner of the land received from Father for a period of three years. After Son will have owned the land for three years, he will transfer the land to Farmco. As it is not possible to know the FMV of the land, Son and Farmco will, if necessary, elect under the provisions of section 85 to transfer the land at an agreed amount equal to $500,000. As consideration, Son will receive a non-interest-bearing demand note of $500,000 and preferred shares of Farmco having a redemption and retraction amount equal to the FMV of the land in excess of $500,000. During the period in which Son owns the land, Farmco will use such land in its operations.
2. Upon Father's transferring a portion of the farm land to Son, no agreements or arrangements will be entered into which would require Son to transfer the land to Farmco after owning the land for three years.
Situation 3
1. Father owns farm land that is "qualified farm property" with a FMV of $1,000,000 and an ACB of nil, which is utilized by Farmco in a farming business. Prior to Farmco using the land, Father had farmed the land for many years in a farming business (a proprietorship), which was his sole source of income.
2. The common shares of Farmco are held by Son-In-Law, who is married to Father's daughter ("Daughter").
3. Daughter is not employed by Farmco and is not active in the farming business.
4. As part of an estate plan, Father will transfer all the farm land to Daughter. Father will receive no consideration from Daughter on the transfer.
5. Daughter will then transfer all the land to Farmco receiving as consideration a non-interest-bearing demand note in the amount of $500,000 and preferred shares of Farmco with a redemption and retraction amount equal to $500,000. In executing this transfer, Daughter will elect under the provisions of section 85 to transfer the farm land at an agreed amount of $500,000.
6. During the time that she owns the farm land, Daughter will be the beneficial owner of the farm land received from Father and will not be acting as an agent for Father in respect of the land. None of Father, Daughter or Son-In Law will have a history of real estate transactions so that the land dispositions will be capital transactions and not income transactions.
Situation 4
1. Father owns farm land utilized in his farm business (a proprietorship) with a FMV of $1,500,000 and an ACB of nil. The farm land is "qualified farm property". Son is employed by Father as an active employee of the farm business.
2. As part of an estate and succession plan, and/or to comply with provincial land use regulations, Father wishes to change the entity in which he conducts his farming business.
3. Father will transfer a portion of his farm land, having a FMV of $500,000 and an ACB of nil, to Son. Father will receive no consideration from Son on the transfer.
4. Father and Son will form a partnership ("FarmPart") in which to continue the farming business. The partnership agreement will provide that in matters pertaining to the partnership, Father will have 51% of the "votes" and Son will have 49% of the "votes". Income will be shared in the same proportions.
5. Father will transfer the remaining farm land, having a FMV of $1,000,000 and an ACB of nil, to FarmPart. As consideration, Father will receive a partnership interest in FarmPart. In executing the transfer, Father will elect under the provisions of subsection 97(2) to transfer the land at an agreed amount of $1.
6. After receiving the farm land from Father, Son will transfer the land with a FMV of $500,000 and an ACB of nil to FarmPart. As consideration, Son will receive a partnership interest in FarmPart. In executing the transfer, Son will elect under the provisions of subsection 97(2) to transfer the land at an agreed amount of $1.
7. After one year, Farmco will be incorporated. Father and Son will be the common shareholders, with Father owning sufficient shares to control the company.
8. FarmPart will transfer the farm land, having a FMV of $1,500,000 and an ACB of nil, to Farmco. As consideration, FarmPart will receive a $1,000,000 non-interest-bearing demand note and preferred shares of Farmco with a redemption and retraction amount of $500,000. In executing the transfer, FarmPart will elect under the provisions of subsection 85(2) to transfer the land at an agreed amount of $1,000,000.
9. Utilizing the provisions of subsection 85(3), the note and shares will be distributed to Father and Son. In accordance with the income sharing formula, Father will be allocated 51% of the taxable capital gain resulting from the transfer of the land to Farmco and Son will be allocated 49%.
10. Son will be the beneficial owner of the land received from Father and will not be acting as an agent for Father in respect of the land. None of Father, Son or FarmPart will have a history of real estate transactions so that the land dispositions will be capital transactions and not income transactions.
Your Views
Situation 1
As all of the land under consideration is used principally in the business of farming by Father, the provisions of paragraph 73(3)(b) will initially apply to the transfer of a portion of land to Son. Thus, subject to subsection 69(11), Father's proceeds of disposition will be nil, representing the ACB of the land and the cost of the land received by Son will be nil, as determined by paragraph 73(3)(d).
The definition of "affiliated person" in section 251.1 does not include parents and their children. Thus it is your view that where Father has transferred property to Son for proceeds that are less than FMV, and, as part of the series of transactions, Son will utilize the capital gains deduction on a subsequent disposition of the property, then, where the disposition by Son occurs within three years of the original transfer by Father, Father will be deemed to have disposed of the property at FMV on the original transfer pursuant to subsection 69(11). In the facts presented, Father would have an additional $500,000 capital gain.
You also refer to the phrase in the preamble in subsection 69(11) "Where.....it can reasonably be considered that one of the main purposes of the series.....". You have stated the following: "Some provinces have legislation which limits the amount of land that individuals and corporations can own. Some farmers have exceeded their individual limits, but are very sensitive to disposing of their real estate to others outside the family unit as a means of compliance. Therefore, it is possible to conform with the legislation by transferring the 'excess' land to a relative (i.e., child), and/or transferring to a corporation with shareholdings that include individuals other than the original owner. As well, many farms are passed from generation to generation, so that estate and succession planning is instrumental in carrying out the series of transactions." It is your view that it is debatable whether "one of the main purposes" of the series of transactions was to obtain some benefit from deductions or exemptions available to a non-affiliated person on a subsequent disposition. You would take the position that the main purposes of the series of transactions described in this situation would be to comply with provincial land use regulations and/or to provide for estate planning and, while one of the purposes may be to derive some benefit, it would not be one of the main purposes.
Situation 2
Since the disposition by Son of the land occurs three years after the original transfer, it is your view that the provisions of subsection 69(11) will not be applicable.
Situation 3
Based on the wording of subsection 73(3) and the definition of "qualified farm property" in subsection 110.6(1), it is your view that your comments to situation 1 described above will be applicable to this situation and the fact that Daughter was not involved in the farming business would not have an effect on the tax consequences of the situation.
Situation 4
Upon Son's receiving the land from Father, he, in turn, will transfer the land to a partnership for which he only receives a partnership interest with nominal cost. No balance of undeducted outlays, expenses or exemptions will be claimed. No deductions will be utilized by Son in calculating income, taxable income or tax payable. The partnership interest received by Son will become "substituted property" to him.
When the land is sold by FarmPart to Farmco, FarmPart realizes a capital gain which is allocated to the partners (i.e., Father and Son). It is your understanding that the Canada Customs and Revenue Agency (the "CCRA") is of the view that where a partnership realizes a capital gain on the disposition of qualified farm property, any partner who is an individual to whom a portion of the capital gain is allocated may claim the enhanced capital gains deduction under subsection 110.6(2) in respect of his or her share of the gain. In addition, upon the sale, assuming the provisions of subsection 85(3) have been satisfied, there will be a tax-free wind up of the partnership.
You have stated the following: "The important aspect of the preceding is that there have been no deductions or undeducted outlays utilized with regards to the substituted property (i.e., the partnership interest owned by Son). Even though the partnership interest would be qualified farm property, the capital gains exemption was not so applied. It was utilized against allocated capital gains from the disposition of partnership property, not the substituted property. Therefore, the conditions described in subsection 69(11) have not been met so that this subsection should not apply to this series of transactions."
Our Views
It has been assumed that the farm land is capital property, within the meaning of section 54, to Father. We have difficulty understanding how the transactions described could achieve the non-tax purposes indicated (i.e. how does the transfer to Son before a transfer to Farmco avoid the provincial limits on land owned by individuals and corporations?).
Situation 1
It is a question of fact whether the purpose test in a provision has been met. Accordingly, we are unable to comment on whether transactions which may be undertaken to either comply with provincial land use regulations or to facilitate estate planning, but which also result in the obtaining of a benefit specified in subsection 69(11), will result in a finding that the purpose test in subsection 69(11) has been met. The test in subsection 69(11) is whether one of the main purposes of the series is to obtain a benefit described in paragraphs (a) or (b). Thus it is our view that subsection 69(11) may apply even though there may be non-tax purposes for the transfer of property.
Situation 2
Unless arrangements are made for the transfer of land to Farmco after three years, we agree that the provisions of subsection 69(11) would not be applicable since the transfer would occur after the time limit specified in that subsection.
Situation 3
Please refer to our comments to situation 1 above. Subparagraph (a)(iii) of the definition "qualified farm property" in subsection 110.6(1) indicates that the land would meet the definition since Father used the land in the business of farming. There is no requirement for Daughter to be in the farming business.
Situation 4
We agree that where a partnership realizes a capital gain on the disposition of qualified farm property, any partner who is an individual to whom a portion of the capital gain is allocated may claim the enhanced capital gains deduction under subsection 110.6(2) in respect of his or her share of the gain subject to the conditions referred to in that subsection and subsection 110.6(11).
You have taken the view that subsection 69(11) will not be applicable since the deduction under section 110.6(2) was in respect of the sale of partnership property rather than the substituted property (that is, the partnership interest received in exchange for the farm land). It is our view that subsection 69(11) does not require that the non-affiliated person dispose of the property; it only requires that a deduction be available to the non-affiliated person in respect of the subsequent disposition. Therefore, it is our position that subsection 69(11) will be applicable in this situation.
The provisions of subsection 103(1.1) may be applicable if the facts of the situation (in addition to the capital contribution of land to the partnership) indicate that the 51%-49% income allocation is not reasonable in the circumstances.
Whether subsection 245(2) would apply to a situation similar to any of those described above could not be determined without an examination of all the circumstances of the particular situation.
These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R3 dated December 30, 1996 issued by Revenue Canada and are not considered binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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