21 July 2000 External T.I. 2000-0026115 - FARM ROLLOVERS

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: General comments on subsection 70(9), 73(3), 73(1) and 70(6) of the Act.

Position: N/A

Reasons: N/A

		2000-002611
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
July 21, 2000

Dear XXXXXXXXXX:

Re: Farm Rollovers

We are writing in reply to your letter of April 18, 2000, wherein you requested our comments on the application of subsections 70(9) and 73(3) of the Income Tax Act (the "Act").

You have asked the following questions:

1. If a spouse ("Mrs. A") is bequeathed a farm on the death of her husband ("Mr. A"), can she during her lifetime roll the farm over to her son ("Child")?

2. If an individual ("Taxpayer") receives a farm pursuant to a subsection 70(9) transfer, upon the Taxpayer's death, can the farm be transferred to his or her child?

3. Is a rollover available to a farmer ("Mr. B") to roll the farm property tax-free to his spouse ("Mrs. B")?

Our Comments

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 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 and are not binding on the Canada Customs and Revenue Agency (the "Agency").

Inter Vivos Transfer of Farm Property to a Child

Subsection 73(3) of the Act provides for the deferral of the tax consequences on the transfer of farm property to a child during the taxpayer's lifetime. Interpretation Bulletin IT-268R4 provides relevant interpretations of subsection 73(3) of the Act, a copy has been provided for your files. In order for a farm property to be eligible for the subsection 73(3) rollover, the following conditions must be met:

• the farm must be in Canada;
• the property must be transferred to a child who was resident in Canada immediately before the transfer;
• before the transfer, the property must have been used principally in the business of farming in which the parent, the parent's spouse or any of their children, were actively engaged on a regular and continuous basis.

Intergenerational Transfers of Farm Property on Death

Subsection 70(9) of the Act provides for the deferral of the tax consequences on intergenerational transfers of farm property on death. As you have noted, Interpretation Bulletin IT-349R3 dated November 7, 1996 provides relevant interpretations of subsection 70(9) of the Act, a copy has been provided for your files. In order for a farm property to be eligible for the subsection 70(9) rollover, the following conditions must be met:

• the farm must be in Canada;
• the property must be distributed to a child who was resident in Canada immediately before the death of the person;
• the farm property must be land in Canada or depreciable property in Canada of a prescribed class;
• the property must, before the parent's death, have been used principally in the business of farming in which the parent, the parent's spouse or any of their children, were actively engaged on a regular and continuous basis;
• the property must vest indefeasibly in the child within 36 months after the death of the parent, or a longer period if reasonable in the circumstances.

Concept Used in Both Rollover Provisions

One of the requirements needed to utilize either of the rollover provisions in subsections 70(9) and 73(3) of the Act, is that the land or property must have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis. The following provides our comments on each specific aspect of this requirement:

Spouse

Bill C-23 which received royal assent on June 29, 2000 has replaced "spouse" with "spouse or common-law partner" for the purposes of subsection 70(9) and 73(3) of the Act. This change is applicable to the 2001 and following taxation years.

Used Principally

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. For example, where a property is used for farming and for some other purpose, if more that 50% of the property's use is for farming, then it will qualify as being used principally in the business of farming. If part of the property is lying idle, then that part cannot qualify as being used principally in the business of farming.

If, prior to the taxpayer's death, more than 50% of the property was used by the taxpayer, the taxpayer's spouse or any of the taxpayer's children in the business of farming, the property can be rolled over to a child under subsection 70(9) or 73(3) of the Act. Accordingly, it is not necessary that the taxpayer or the deceased farmed the property for more than 50% of the time during which he/she owned the property. However, one or more of the persons mentioned in the preamble of subsections 70(9) and 73(3) of the Act, must have so used the property prior to the transfer or the deceased's death.

Farming Business and Used in the Business of Farming

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. 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.. We have enclosed copies of these interpretation bulletins for your files.

Actively Engaged on a Regular and Continuous Basis

For farm property to qualify for rollover treatment, it must be used in the business of farming in which a qualified person was actively engaged on a regular and continuous basis . It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Questions of fact of this nature are usually resolved by officials of the local taxation services office who are generally in a better position to appreciate all of the circumstances of a particular case.

Paragraph 27 of Interpretation Bulletin IT-268R4, entitled Inter Vivos Transfer of Far Property to a Child, reflects the Agency's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates the requirement is considered to have been met when the person is actively engaged in the management and/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 operations 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. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.

We have not been provided with sufficient information to establish whether any individual in your situations was actively engaged on a regular and continuous basis or whether the farm land owned was used principally in the business of farming. Such determinations would require a review of all the facts surrounding a situation including whether or not the taxpayer had other sources of income and which portions of the farm land were utilised throughout the period of ownership.

However, in the situation described in question 1 above, if the farm property was used by Mrs. A, Mr. A or the Child in the business of farming for more than 50% of the time during which the property was owned from the date of its acquisition, the property may be eligible for the subsection 73(3) rollover.

In addition, in the situation described in question 2 above, if the farm property was used by the Taxpayer, the Taxpayer's spouse or any of the Taxpayer's children in the business of farming for more than 50% of the time during which the property was owned from the date of its acquisition, the property will be eligible for the subsection 70(9) rollover.

The provisions of subsections 70(9) and 73(3) are not applicable to the situation in question 3 in which Mr. B transfers the farm property to Mrs. B. However, if the transfer is to be done during the lifetime of Mr. B subsection 73(1) of the Act provides that where an individual transfers capital property to his/her spouse and both are resident in Canada at the time of the transfer, the particular property transferred shall be deemed to have been disposed of for proceeds equal to the ACB of the property immediately before the transfer and to have been acquired by the individual's spouse for an amount equal to those proceeds.

Accordingly, if the transferor does not elect out of the provisions of subsection 73(1) of the Act, he/she is not required to report any capital gains resulting from the sale of the property to their spouse. However, pursuant to subsections 74.1(1) and 74.2(1) of the Act and subject to subsection 74.5(11) of the Act, any dividends or other income from the property after the sale to the spouse, will be deemed to be the transferor's income, and any capital gains or losses realized on the subsequent disposition of the property will be deemed to be the transferor's capital gains or losses. In this regard, income from property would generally be the income after deducting those expenses that are deductible in computing income from that particular property. Finally, subsection 82(2) of the Act provides that where a dividend is included in the transferor's income because of the attribution rules, the dividend is deemed to have been received by the transferor. This will enable the transferor to claim the dividend tax credit.

There are rollover rules in subsection 70(6) of the Act that apply to a spouse that acquires certain capital properties upon the death of a taxpayer (generally, the surviving spouse assumes the deceased taxpayer's tax cost of the property). Provided that all of the requirements of subsection 70(6) of the Act are satisfied, he farm property may be transferred on a tax deferred basis to Mrs. B upon Mr. B's death.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 5 -