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 property can be rolled using 73(3) and whether the capital gains exemption can be claimed for QFP.
Position TAKEN:
General comments provided.
Reasons FOR POSITION TAKEN:
Insufficient (and conflicting facts) to provide conclusive comments. This is a proposed transaction and should be addressed in the context of an advance tax ruling.
XXXXXXXXXX 2000-003097
C. Tremblay, CMA
March 1, 2001
Dear XXXXXXXXXX:
Re: Farm Property
This is in reply to your letter received June 8, 2000, requesting our views on the income tax implications regarding a proposed disposition of your farm.
Facts:
In XXXXXXXXXX, you and your husband purchased a farm in XXXXXXXXXX. It was subsequently discovered (in XXXXXXXXXX) that the property was two separate parcels of adjoining land. A parcel was then registered in your name, while the other in your husband's name, individually as owners. One week prior to you husband's death, which occurred on XXXXXXXXXX, he transferred his parcel of land into the names of yourself and your daughter as joint tenants. Although your husband had pension income, you state that the gross revenue from the farming business exceeded all the income from all other sources for a minimum of two years. The farm consisted of XXXXXXXXXX acres of land in total, comprising a XXXXXXXXXX outbuildings and the principal residence. You propose to transfer ownership of both parcels of land to include your XXXXXXXXXX children and yourself as joint tenants.
You have asked us to confirm whether:
1) The disposition of the parcel of land by your husband to you and your daughter in XXXXXXXXXX, would take place at fair market value, and he would recognize a capital gain and be entitled to claim the capital gains deduction on his final return.
2) This parcel of land now owned by you and your daughter as joint tenants would be transferred into a joint tenancy comprising yourself and your XXXXXXXXXX children at fair market value.
3) The parcel of land owned solely by you would be transferred into a joint tenancy with your XXXXXXXXXX children at adjusted cost base.
4) Subsequently, both parcels of land could be sold, such that you and each of your children may utilize the maximum capital gains deduction of $500,000 each, for qualified farm property.
The particular circumstances described in your letter on which you have requested our views are factual situations involving completed and proposed transactions. Written confirmation of the tax implications inherent in particular transactions is 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 70-6R4 (copy enclosed). Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. It should also be noted that the transactions described in your letter involve a number of legal and tax issues which must first be resolved in establishing the tax consequences of the transactions you propose. For instance, from the information provided, it is unclear how the property was first acquired in XXXXXXXXXX, the impact of the subsequent transfer of ownership in XXXXXXXXXX would then have to be reviewed, and it would be necessary to establish whether any attribution or partnership issues arise. In light of the complexity of the tax and legal issues involved in your situation, you may wish to consider consulting with a tax and/or legal advisor. However, we are prepared to offer the following general comments which may be of assistance to you.
Transfer of Property
Except as expressly provided in the Income Tax Act (the "Act"), when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, or to any person by way of gift inter vivos, the taxpayer is deemed, under paragraph 69(1)(b) of the Act, to have received proceeds of disposition equal to the fair market value.
Subsection 73(3) of the Act is one exception to the general rules of subsection 69(1) of the Act. Subsection 73(3) of the Act essentially provides for the deferral of the tax consequences on the transfer of farm property to a child during the taxpayer's lifetime. We have enclosed a copy of Interpretation Bulletin IT-268R4 which provides relevant interpretations of subsection 73(3) of the Act. In general terms, 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; and
- before the transfer, the property must have been used principally in the business of farming in which the parent, the parent's spouse (or common-law partner) or any of their children, were actively engaged on a regular and continuous basis.
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. 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 general position of the Canada Customs and Revenue Agency (CCRA) with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R. We have enclosed copies of these Interpretation Bulletins for your information.
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, reflects the CCRA'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.
As regards inter vivos transfers between spouses, subsection 73(1) of the Act essentially provides for a rollover when capital property is transferred between spouses who are resident in Canada at the time of transfer, unless the transferor elects in his or her tax return for the year of the transfer to not have this rollover provision apply.
Qualified Farm Property
Subsection 110.6(2) of the Act provides the capital gains deduction in respect of "qualified farm property" which is defined in subsection 110.6(1) of the Act. 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 in the course of carrying on the business of farming in Canada. Whether a property is considered to have been used in the course of carrying on the business of farming is dependent on when the property was last acquired by the individual.
Pursuant to subparagraph (a)(vi) of the definition of qualified farm property in subsection 110.6(1) of the Act, 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, inter alia, the individual, or a spouse, child or parent of the individual, throughout the 24 months preceding the disposition. 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)(A) of the definition of qualified farm property in subsection 110.6(1) of the Act provides, in part, that in at least 2 years while the property was owned by a previously noted person the gross revenue of such a person from the farming business carried on in Canada in which the property was principally used, and in which such a person was actively engaged on a regular and continuous basis, must have exceeded the person'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 owns the property, such that, for instance, it may be the spouse or parent of the individual. For example, if a parent has met the gross revenue test in at least two years while he or she owned the property, and the parent later transfers the property to a child, the requirements of clause (a)(vi)(A) of the definition of qualified farm property in subsection 110.6(1) of the Act may be met even though the child has not farmed the property. Clause (a)(vi)(B) of the definition of qualified farm property in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership as described therein.
In addition, pursuant to subparagraph (a)(vii) of the definition of qualified farm property in subsection 110.6(1) of the Act, real property last acquired before June 18, 1987 (or after June 18, 1987 under an agreement in writing entered into before that date) will be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as qualified farm property provided the property was used by, inter alia, the individual, or a spouse, child or parent of the individual, principally in the course of carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by a such a person.
We trust that these comments will be of assistance.
Yours truly,
M. Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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