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 real property qualifies as "property for which the property was substituted", as that expression is used in the definition of "qualified farm property" in subsection 110.6(1) of the Act, when the previous property was a leasehold interest in the same real property.
Position: Yes, provided the leasehold interest in real property is not described in the exclusions in subsection 248(4) of the Act.
Reasons: Subsection 248(4) of the Act provides that real property includes a leasehold interest in real property. The disposition of a leasehold interest in real property for the real property itself would therefore qualify as a substitution for the original property for purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act, unless the leasehold interest is specifically excluded pursuant to subsection 248(1) of the Act.
2000-004612
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
March 20, 2001
Dear XXXXXXXXXX:
Re: Qualified Farm Property
This is in reply to your email dated September 11, 2000 in which you requested our views as to whether the disposition of certain real property would be "qualified farm property" within the meaning thereof in subsection 110.6(1) of the Income Tax Act (the "Act").
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
A property will qualify as "qualified farm property" if it meets all of the requirements in the definition thereof in subsection 110.6(1) of the Act (hereinafter referred to as the "QFP Definition"). The QFP Definition includes real property that is owned by, and used by, an individual in the course of carrying on the business of farming in Canada.
With respect to the ownership of the property, the QFP Definition requires that the particular property be owned by, amongst others, the individual. A leasehold interest in a property is not an ownership interest in that property such that a leasehold interest in land, even though the land may be used in the course of carrying on the business of farming in Canada, would not satisfy the ownership requirement in the QFP Definition. However, subsection 248(4) of the Act specifically provides that an interest in real property includes a leasehold interest in real property unless the leasehold interest is an interest as security only derived by virtue of a mortgage, agreement for sale or similar obligation". Therefore, in the situation where a leasehold interest in land is an interest in real property that is described in subsection 248(4) of the Act, such a leasehold interest in land would satisfy the ownership requirement in the QFP Definition.
A property is considered to have been used "in the course of carrying on the business of farming in Canada" in those situations where the requirements of subparagraph (a)(vi) or (a)(vii) of the QFP Definition are met. The first requirement of subparagraph (a)(vi) of the QFP Definition is met when property, or property for which the property was substituted, has been owned throughout the 24 months preceding the sale and the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the QFP Definition are satisfied.
Paragraph 248(5)(a) of the Act provides that, for purposes of the Act, other than paragraph 98(1)(a) of the Act, "where a person has disposed of or exchanged a particular property and acquired other property in substitution therefor and subsequently, by one or more further transactions, has effected one or more further substitutions, the property acquired by any such transaction shall be deemed to have been substituted for the particular property". Therefore, in the situation where an individual held a leasehold interest in a real property, as described in subsection 248(4) of the Act, and subsequently exercised an option to purchase that same real property, the individual would generally be considered to have owned "the property or property for which the property was substituted" throughout the period that commences with the acquisition of the leasehold interest in the particular real property.
Once the ownership requirement is met, clause (a)(vi)(A) of the QFP Definition requires that, in at least 2 years while the property was owned by, amongst others, the individual, the gross revenue from the farming business that is carried on by the individual in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual's income from all other sources for the year. Clause (a)(vi)(B) of the QFP Definition applies where the property was used by a corporation or a partnership. The determination of whether the gross revenue test is met and whether the real property is used principally by a taxpayer in carrying on a farming business are each questions of fact which can only be determined by a review of completed transactions. However, an asset will generally be considered to be used "principally" in the business of farming in those situations where more than 50% of the asset's use is in the business of farming.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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