22 January 2001 External T.I. 2000-0042985 - NISA

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:

1. Does ITA 70(12), which deems the value of NISA to be nil, also apply to all patronage refund reserve accounts ("PRRA")?

2. Are all PPRAs in co-operatives considered property used in the business of farming?

Position:

1. No
2. Depends

Reasons:

1. The wording of ITA 70(12) only deems the value of NISA to be nil.

2. Question of fact.

XXXXXXXXXX 2000-004298
S. Parnanzone
January 22, 2001

Dear XXXXXXXXXX:

Re : Technical Interpretation - Subsection 70(12) Value of NISA

We are replying to your letter of August 14, 2000, concerning patronage refund reserve accounts ("PRRA").

You explained that PRRAs are accounts that farmers require in order to obtain necessary discounts from vendors and in some cases even to conduct business. You posed two questions. The first is whether the provisions of subsection 70(12) of the Income Tax Act ("Act"), which deems that the fair market value of a net income stabilization account ("NISA") is nil for the purposes of the definition of "share of the capital stock of a family farm corporation" in subsection 70(10) of the Act, would also apply for purposes of PRRAs such as XXXXXXXXXX."

Your second question effectively asks if we share your view that the just-mentioned PRRAs are farm assets which are relevant for the purposes of the definition of "share of the capital stock of a family farm corporation". In support of your view that PRRAs in the mentioned entities are eligible farm assets, you enclosed a copy of our opinion letter # 9420855, dated May 25, 1995, a portion of which dealt with PRRAs in a Wheat Pool.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

A requirement of the definition of "share of the capital stock of a family farm corporation" in subsection 70(10) of the Act is that "all or substantially all of the fair market value of the property owned by the corporation was attributable to property ...that has been used ...principally in the course of carrying on the business of farming in Canada...". In determining whether this requirement is met, the fair market value of NISA is deemed to be nil, pursuant to subsection 70(12) of the Act.

Similar treatment is accorded to NISA for purposes of the capital gain exemption. Subsection 110.6(1.1) of the Act provides that the fair market value of NISA is assumed to be nil for purposes of the definitions of "qualified small business corporation share" and "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Act.

In answer to your first question, it is our view that the deeming provision in subsections 70(12) and 110.6(1.1) of the Act only apply for purposes of NISA. Accordingly, the fair market value of other PRRAs is a determination of fact.

As regards your second question, in our view it is a determination of fact whether a PRRA in an entity such as you mentioned can be regarded as property that has been used principally in the course of carrying on the business of farming in Canada. As we have not been provided with sufficient details regarding the PRRAs you referred to, we are unable to express an opinion on whether all or any one of such PRRAs would be regarded as property that has been used principally in the course of carrying on the business of farming in Canada.

We would mention that our May 25, 1995 letter dealt with the PRRA in a Wheat Pool which was built up over the years of farming based on a percentage of a patronage refund that was retained by the Wheat Pool until the member was no longer farming. Based on the facts, we concluded in that letter that the PRRA in the Wheat Pool would be regarded as an asset used in the course of carrying on the business of farming until it was either repaid, became due or the farming business ceased, provided the PRRA was a requirement for a member to sell grain to the Wheat Pool. In our view, whether a PRRA in an entity would be treated in a similar manner as the PRRA in the Wheat Pool would be affected by their degree of similarity. Generally, relevant factors would include the nature of the entity requiring the PRRA, the circumstances giving rise to the PRRA, the use of the PRRA funds made by the entity, whether any investment return is paid on the PRRA and the type of restrictions, if any, on the liquidation of the PRRA funds.

We trust that these comments will be of assistance to you.

Yours truly,

Jim Wilson, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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