20 March 2001 External T.I. 2001-0069075 - Transfer of shares of a farm corporation

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: Issues relating to the transfer of the shares of a farm corporation upon the death the shareholder: a) eligibility of the shares for subsection 70(9.2) rollover; b) entitlement to the capital gains deduction provided in subsection 110.6(2); and c) designation of taxable and non-taxable dividends under subsections 104(19) and (20).

Position: General comments regarding the application of subsections 70(9.2), 110.6(2), 104(19) and 104(20) of the Income Tax Act.

Reasons: Subsections 70(9.2), 70(10), 104(19), 104(20), 110.6(1), 110.6(2), 110.6(6) to (8) and 248(8).

XXXXXXXXXX 						2001-006907
							Éric Allard-Pouliot
March 20, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request
Transfer of Shares of a Farm Corporation on Death

This is in reply to your letter of January 29, 2001 regarding the above-noted subject. More specifically, you have requested our opinion as to the application of subsections 70(9.2), 110.6(2), 104(19) and 104(20) of the Income Tax Act (the "Act") to the situation hereinafter described.

Situation

In your request, you mention that Mr. A is the sole shareholder of a holding corporation ("Holdco") and that the sole asset of Holdco is a number of shares in an operating corporation ("Opco") whose sole undertaking is to carry on the business of farming in Canada. You also indicate that Opco is a "small business corporation" for the purposes of the Act and that the shares of Holdco would at all material times, in the absence of the planning outlined in your letter, qualify as shares of a "family farm corporation".

In your letter you state that Mr. A has four children but that only one of them is interested in farming. Mr. A's intention is that the shares of Holdco be left by his will to his child who is interested in the farming business but he also wishes to leave three quarters of the value of his estate to his three other children. The assets of the estate of Mr. A are mainly made up of the shares of Holdco.

In order to do so, Mr. A, along with the remaining shareholders of Opco, would implement a shareholders' agreement under which Opco would be required, upon the death of Mr. A, to repurchase three quarters of its shares held by Holdco. Under the terms of the shareholders' agreement, Opco would be required to elect, pursuant to subsection 83(2) of the Act, that the deemed dividend resulting from the repurchase of its shares is to be paid from its capital dividend account resulting from the receipt of insurance proceeds. Opco would purchase sufficient insurance on the life of Mr. A to allow it to repurchase three quarters of its shares held by Holdco on the death of Mr. A. By the terms of his will, Mr. A would leave the shares of Holdco to his child who is interested in farming on condition that the executors of his estate firstly direct Holdco to declare and pay to his estate a dividend on its shares equal to the value of the proceeds received by Holdco from Opco upon the repurchase of its shares. Such a dividend would be paid by Holdco from its capital dividend account to the extent that it has a balance in that account. The balance of the dividend, if any, would constitute a taxable dividend received by the estate of Mr. A. These proceeds would then be left by the terms of the will of Mr. A to his other three children. The executors of the estate would then make a designation under subsections 104(19) and (20) of the Act to the effect that the dividends received by the estate be deemed to have been received by the three children of Mr. A not taking the shares of Holdco.

Questions

In light of these facts, you require our comments on the following issues:

1. Will the shares of Holdco be eligible for the rollover provided under subsection 70(9.2) of the Act?

2. Would this type of planning have the effect of disentitling the deceased from claiming the capital gain exemption provided under subsection 110.6(2) of the Act?

3. Would we challenge the amounts of the dividends designated to each of the three children in the absence of a designation of part thereof to the child receiving the shares of Holdco?

Our comments

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance to you.

Question 1. - Subsection 70(9.2)

In order to qualify for the rollover provision under subsection 70(9.2) of the Act, certain conditions must be met. First of all, this rollover provision only applies with respect to a property of a taxpayer that was, immediately before the taxpayer's death, a share of the capital stock of a family farm corporation of the taxpayer or an interest in a family farm partnership of the taxpayer to which subsection 70(5) would otherwise apply. Secondly, the property must, as a consequence of the taxpayer's death, be transferred or distributed to a child of the taxpayer who was resident in Canada immediately before the death. Finally, the property must have vested indefeasibly in the taxpayer's child within the period ending 36 months after the taxpayer's death.

Pursuant to subsection 70(10), the expression "share of the capital stock of a family farm corporation" means the share of corporation owned by a person at a particular time where, at that time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of that definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, child or parent of the person was actively engaged on a regular and continuous basis. We refer you to paragraphs 12 to 16 of Interpretation Bulletin IT-349R3 with respect to the Canada Customs and Revenue Agency's (the "CCRA") interpretation of the expressions "farming business", "used in the business of farming" and "actively engaged on a regular and continuous basis".

Pursuant to subsection 248(8) of the Act, a transfer, distribution or acquisition of property will be considered to have occurred as a consequence of a taxpayer's death where such transfer, distribution or acquisition was made under, or as a consequence of, the terms of a will or other testamentary instrument of a taxpayer.¹

In Interpretation Bulletin IT-449R, the CCRA's position with respect to the expression "vested indefeasibly" is stated as follows:

"1. [...] In the Department's view a property vests indefeasibly in a spouse or child of the deceased when such a person obtains a right to absolute ownership of that property in such a manner that such right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all the benefits arising from that right. [...]

2. Property is considered to vest indefeasibly in the person to whom it is bequeathed when that person has an enforceable right or claim to the ownership thereof. This will be so even though the formal legal conveyance and registration of ownership of the property has not been completed. Accordingly, the ownership of property described in a specific bequest in a will will vest in the beneficiary immediately after the death of the testator."

In light of the foregoing, the shares of a corporation would be eligible for the rollover under subsection 70(9.2) of the Act provided that they qualify as "shares of the capital stock of a family farm corporation" within the meaning of subsection 70(10), that they are transferred or distributed to a child of the deceased taxpayer under, or as a consequence of, the terms of the will or other testamentary instrument of the deceased taxpayer, and that the child has a right to absolute ownership or has an enforceable right or claim to the ownership of these shares within the period ending 36 months after the death of the taxpayer.

Question 2. - Subsection 110.6(2)

The definitions of "shares of the capital stock of a family farm corporation" in subsections 110.6(1) and 70(10) of the Act are not identical. The definition in subsection 110.6(1) of the Act applies for the purposes of section 110.6, whereas the definition in subsection 70(10) applies for the purposes of sections 70 and 73. Therefore, the fact that a particular property qualifies for one of the family farm rollovers in section 70 does not by itself signify that the enhanced capital gains exemption in subsection 110.6(2) will also be available to the individual making the disposition.²

In order for a share to qualify as a "share of the capital stock of a family farm corporation" under the definition of subsection 110.6(1) at any time ("the determination time"), the requirements of both paragraphs (a) and (b) of the definition must be met. Generally, the requirement in paragraph 110.6(1)(a) of the definition is met if, throughout any 24-month period ending before the determination time, more than 50% of the fair market value of the property owned by the corporation was attributable to property used principally in the course of carrying on the business of farming in Canada in which an individual described in subparagraph (a)(i) of that definition was actively engaged on a regular and continuous basis. Such an individual could be the spouse, child or parent of the individual and the 24-month period could be any 24 continuous months while the corporation owned the property. The requirement in paragraph 110.6(1)(b) of the definition will generally be met if, at the determination time, all or substantially all (90% or more) of the fair market value of the corporation's property is used in carrying on a business of farming in Canada or is attributable to shares of the capital stock of one or more corporations all or substantially all of the fair market value of the property of which is attributable to property used in the course of carrying on the business of farming in Canada.

Therefore, providing that the shares of a corporation qualify as "shares of the capital stock of a family farm corporation" within the meaning of subsection 110.6(1) of the Act at the time they are disposed of, a taxpayer disposing of such shares would be entitled to the capital gains deduction provided under subsection 110.6(2), subject to the limitations provided under subsections 110.6(6) to (8) of the Act.

Question 3. - Subsections 104(19) and (20)

The portion of a taxable dividend which may be designated by a trust pursuant to subsection 104(19) of the Act in respect of a beneficiary corresponds to such portion of the taxable dividend as may reasonably be considered (having regards to all the circumstances including the terms and conditions of the trust agreement) to be part of the amount that is required, pursuant to subsection 104(13) or (14) or section 105, to be included in computing the beneficiary's income for that particular taxation year.³

Similarly, the portion of non-taxable dividends which shall be designated by a trust pursuant to subsection 104(20) of the Act in respect of a beneficiary corresponds to such portion of the non-taxable dividends that can reasonably be considered (having regards to all the circumstances including the terms and conditions of the trust agreement) to be part of an amount that became payable in the year to the beneficiary.

It flows therefrom that subsections 104(19) and (20) of the Act limit the amount of a trust's taxable and non-taxable dividends which may be considered to form part of a beneficiary's income. Therefore, provided that the amounts designated under subsections 104(19) and (20) by the executors of the estate of a taxpayer comply with the conditions set out in these subsections, we would not challenge the amounts so designated.

The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ See Interpretation Bulletin IT-349R3, paragraphs 17 and 18.

¹ Technical Interpretations No. 9114917, 9804285 and 9902585.

¹ Interpretation Bulletin IT-524, paragraphs 1 and 2.