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: Is property transferred from husband to wife qualified farm property in the wife's hands for purposes of the capital gains deduction.
Position: Attribution rules would apply to wife's capital gain and would be attributed back to the husband. Question of fact whether land is qualified farm property.
Reasons: As per 74.2 and 106.1(1) of the Income Tax Act.
XXXXXXXXXX 2001-007744
Cornelis Rystenbil, CGA
May 8, 2001
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - Qualified Farm Property
This is in reply to your letters of February 20, 2001 and February 27, 2001 in which you ask our views on whether the transfer, by way of gift, by your father to your mother of 50% of his interest in a farm property would allow your mother to take advantage of the capital gains deduction when the property is sold shortly after the transfer. You indicated that your father had purchased the land in question from his father's estate in XXXXXXXXXX with funds received under the Veterans' Land Act. You have indicated that the property in question is to be sold on XXXXXXXXXX (closing date).
Written confirmation of the consequences inherent in particular transactions are 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. It should also be noted that we would need the appropriate authorization from the above taxpayers in order to discuss their tax affairs with you. However, we are prepared to provide the following comments that are of a general nature.
Subsection 110.6(2) of the Income Tax Act (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.
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. In our view, when determining whether assets will meet the more than 50% requirement, the test has to be applied on a property-by-property basis.
We have not been provided with sufficient information to determine whether the above property meets the requirements of the definition of qualified farm property in subsection 110.6(1) of the Act. However, based on the information provided, in the situation you describe, if the transfer takes place, in our view, the capital gain realized by your mother
in respect of a subsequent disposition of her interest in the property would likely be attributed back to your father, to be included in his income, as a result of the attribution rules of subsection 74.2(1) of the Act. In such circumstances, your father would be considered to have disposed of the transferred property by virtue of subsection 74.2(2) of the Act for purposes of the capital gains deduction. We have enclosed Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property, which provides additional information on attribution rules.
In closing, we would also note that, based on the limited information provided, it appears questionable whether the above transfer would result in a transfer of beneficial ownership of part of the property to your mother, as there appears to already be an arranged sale of the property to other parties, even prior to the transfer.
We trust that these comments will be of assistance.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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