2 November 2001 External T.I. 2000-0032475 - Transfer of Farm Property on Death

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. When farm land is bequeathed to a spouse can an election be made under ss.70(6.2) on less than the full parcel of land?

2.When a parcel of farm land is bequeathed to several children so to create separate percentage interests in the land (ie. 1/3 of the land to each of 3 children) can the legal representative elect to have an interest in the farm land disposed of at a value between fmv and acb per ss. 70(9) to the exclusion of another interest? (ie. 1/3 elected disposed of at fmv and 1/3 on a rollover basis?)

Position:

1. No
2. Yes- provided other conditions are met

Reasons:

1.70(6.2) election cannot be made wrt an arbitrary portion of the entire parcel bequeathed.

2.provided separate interests have been created by testamentary instrument & provided property (interest in land) vests indefeasibly within 36 month period & beneficiary is Cdn resident before death of the parent.

								2000-003247
XXXXXXXXXX 							Lena Holloway
								613-957-2104
November 2, 2001

Dear XXXXXXXXXX:

This is in reply to your letter of June 13, 2000 wherein you requested our comments on the tax consequences of a specific hypothetical situation concerning the disposition of farm property at death. We apologize for the delay in replying to your letter.

The hypothetical facts presented in your letter follow:

1. A husband and wife own farm property, as joint tenants.

2. The property is one legal title.

3. The husband and wife have 3 children. The first child ("Son 1") is married and has a child. The second child ("Son 2") is married and has a child. The third child ("Daughter 1") is not married and lives in the United States.

4. The will of both the husband and the wife provides that the property will be left as follows:

1/3 Son 1

1/3 Daughter 1

1/3 To a trust (the "Trust"). The trustees of the Trust are the 3 children. The discretionary beneficiaries of the Trust are Son 2, his wife and child.

Event #1 - Death of the Husband

Upon the death of the husband, the wife becomes the sole owner of the property. Pursuant to subsection 70(6.2) of the Income Tax Act (the "Act"), the husband's legal representative elects not to have subsection 70(6) of the Act apply such that the husband is deemed to have disposed of his interest in the property at fair market value.

You have asked whether it is necessary for the legal representatives to file the subsection 70(6.2) election with respect to the husband's entire interest in the property or whether the election could be made to defer a portion of the gain that would otherwise be triggered on a full fair market value disposition and the qualified farm property capital gains exemption remainder of the enhanced capital gains deduction could be used on another portion of the gain.

Event #2 - Death of the Wife

On the death of the wife, the property is transferred 1/3 to Son 1, 1/3 to Daughter 1 and 1/3 to the Trust.

Within 36 months, the 1/3 interest in the property held by the Trust is distributed to the wife of Son 2.

The legal representatives of the wife would like to elect, pursuant to subsection 70(9) of the Act to have disposed of its 1/3 interest in the property transferred to Son 1 and the wife of Son 2 (via the Trust) at an amount which is between the fair market value of a 1/3 interest in the property and her ACB of a 1/3 interest in the property.

You have asked us to comment on the ability of her legal representatives to make such an election provided a 1/3 interest in the farm property has vested indefeasibly with Son 1 and a 1/3 interest in the farm property has vested with the wife of Son 2, within 36 months of her death. No election would be made with respect to Daughter 1 as she is not resident in Canada.

Our Comments

Event #1

Your specific question is whether the reference in subsection 70(6.2) of the Act to any property can be interpreted as a reference to a portion of a property. Subsection 70(6.2) of the Act provides that the mandatory provisions of subsection 70(6) of the Act do not apply to any property in respect of which the legal representative of the deceased taxpayer has elected to have subsection 70(5) of the Act apply.

In our opinion, subsection 70(6.2) of the Act does not permit an election in respect of an arbitrary portion of a real property owned by the deceased. Where a particular real property consists of land and building, as both subsections 70(5) and (6) treat the land and building as two separate properties, the same would be true for subsection 70(6.2) notwithstanding that they are legally one property.

Event #2

Our comments above indicate that when an entire parcel of property is bequeathed to a spouse, subsection 70(6.2) does not permit an election with respect to an arbitrary portion of that property. Where however one wishes to elect out of the rollover of farm property to a child under paragraph 70(9)(b) and the division of property is not arbitrary but rather is set out by the terms of the testamentary instrument, the situation is different from the one set out above. It is generally understood that a reference to land includes an interest therein. In the second scenario described above, the children's individual interests were created by their parents' will. Whether one can elect in respect an interest in the land bequeathed to a particular individual will depend upon whether "it can be shown, within the period ending 36 months after the death, or where written application therefore has been made to the Minister by the taxpayer's legal representative within that time period, within such longer period as the Minister considers reasonable in the circumstances, that the property has vested indefeasibly, in the child."

You have provided as a fact that the interests of the children have vested indefeasibly within the time period required by subsection 70(9). It is our opinion that the legal representative may elect the proceeds of disposition of the properties to be any amount between ACB and fair market value in respect of the farm properties (interests in land) acquired by the children as a consequence of their parents' death provided that the child is a resident of Canada immediately before the parent's death. Given the scenario presented, such an election could be made in respect of the property inherited by Son 1 and the wife of Son 2. No such election could be made with respect to the property inherited by Daughter 1, as she is not resident in Canada.

While we trust our comments will be of assistance, they do not constitute an advance income tax ruling and consequently they are not binding on the Canada Customs and Revenue Agency.

Yours truly,

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch