12 October 2001 External T.I. 2001-0078715 - QUALIFIED FARM PROPERTY

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: Whether we should reconsider our position in letter #1999-0008385 to allow a 50% undivided interest (joint ownership or ownership in common) in farmland to be considered "principally" used in the separate business of farming of each co-owner of the land for the purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act, and the rollover under subsection 70(9) of the Act.

Position: No.

Reasons: Each co-owner uses only 50% of the farmland in each their own separate businesses while each co-owner's interest in the farmland allows for undivided seisin, concurrent possession, use and occupancy of the entirety of the farmland. Each co-owner holds the entirety concurrently and nothing separately. The undivided interest of each co-owner in such a situation cannot be considered "principally" used in the business of farming. The tax results that could be obtained by partitioning the farmland or through the use of a partnership cannot be allowed in this case unless legal arrangements are ignored. Recent decisions of the Supreme Court of Canada (Shell Canada Ltd, Continental Bank Leasing Corp, Singleton, etc.) are clear indication that, for tax purposes, legal relationships must be respected absent a sham.

XXXXXXXXXX 2001-007871
Patrick Massicotte
October 12, 2001

Dear XXXXXXXXXX:

Re: Qualified Farm Property

We are writing in response to your letter of April 2, 2001, wherein you requested we review once again previous comments made in respect of the principal use of a property in specific circumstances, for purposes of the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act (the "Act"), and a transfer under subsection 70(9) of the Act.

You raised concerns in respect of comments made in previous letters we issued and in particular our letter #1999-0008385 of April 10, 2000 (the "original interpretation"). You also expressed disappointment in our refusal to reconsider the position in our original interpretation. As you may know, the primary role of the Income Tax Rulings Directorate is to issue advance income tax rulings on seriously contemplated proposed transactions and, accordingly, priority is given to such requests. We also issue technical interpretations, and are prepared to review such interpretations when compelling arguments are presented to us. As indicated to you in our letter of March 20, 2001, in our view, the position in our original interpretation is supportable in law. Upon reviewing the submissions presented in your letter of March 1, 2001, we did not feel that it was necessary to review this position, as further explained below.

As mentioned in the original interpretation, the determination of whether a particular property falls within the ambit of subsection 70(9) of the Act or of the definition of QFP in subsection 110.6(1) of the Act is a question of fact which requires a review of all relevant facts of each particular case. In that specific situation, very limited information was available and the discussion was focused on the "principally" used requirement found in those provisions.

Although the original interpretation provides sufficient justification for our position, given the facts submitted to us, we nonetheless considered once again your representations and, in particular, in respect of the nature of ownership rights under the land system in Canada, in light of the provisions of the Act.

After careful review, we do not feel that the position set out in letter #1999-008385 needs to be revisited, contrary to your submissions. It remains therefore our opinion that in the fact specific situation given to us in the original interpretation, the "principally" used requirement in the definition of QFP in subsection 110.6(1) of the Act, and in subsection 70(9) of the Act, would not be met.

You have submitted extensive representations on the issue of whether rights may be considered property for the purposes of the Act. You draw our attention to the definition of the term "property" in subsection 248(1) of the Act and, in particular, to the portion stating that it includes "... a right of any kind whatever...". Moreover, you cite the decision of the Federal Court of Appeal in the case of Jens Larsen (99 DTC 5757) in support of your submission that interests or rights pertaining to property such as land can be considered "property" for the purposes of inter alia the QFP definition in subsection 110.6(1) of the Act. We generally agree that an interest or rights pertaining to property can be considered "property" for the purposes of the Act. In fact, we have confirmed that position in a number of situations in the past and particularly, as you mentioned, with respect to grazing leases for the purposes of the definition of QFP in subsection 110.6(1) of the Act.

Rather, the issue in the original interpretation was whether such property could be considered to be "principally" used in the separate business of farming of each respective co-owner of the land. In that respect, we do not agree with your analysis as it fails to recognize that an owner has the same underlying property rights in a particular piece of land, whether held in co-ownership or in severalty. Co-ownership merely involves concurrent ownership rather than sole ownership of the same rights, privileges and powers incident to such title.

In our opinion, the position in the original interpretation is supported in law when due consideration is given to the nature of a co-owner's rights in a particular piece of land. Under this type of ownership, each co-owner has undivided possession of the whole land and none can point to a particular part as being his share. We agree the law of property in common law provinces of Canada is unique in that it does not recognize allodial ownership of land but rather refers to concepts of estates or interests in land, as opposed to civil law where ownership of land is absolute. In common law provinces therefore, a person does not own the land, instead that person owns an estate or interest in the land which, as you mention, represents a bundle of rights, privileges and powers pertaining to a particular piece of land.

Such estate or interest in land may be held by one person (a sole owner) or a number of persons concurrently (co-owners). Co-ownership is therefore a mere form of ownership of such bundle of rights, privileges and powers, and, in our opinion, is not descriptive of the nature of the rights held by the owner (or co-owners). A fee simple estate in a particular land may therefore be held by a number of co-owners, each having concurrently the same rights, privileges and powers as the sole owner, to inter alia exploit, use and enjoy the entirety of land, albeit concurrently.

According to Anger and Honsberger Law of Real Property, Second Edition (1985), co-owners are seised of the land "per mie et per tout", that is, they hold the whole and nothing separately, their occupation being undivided. This is referred to as the unity of possession, according to which each co-owner has undivided seisin of the whole of the property and none holds any part separately to the exclusion of others, except by partition. This involves that, assuming there is no partition between the co-owners, each co-owner has an equal right of access, that is, to enter upon every part of the whole acreage of the land. Although a co-owner cannot be restricted by law in the legitimate exploitation, use and enjoyment of any portion of the whole land, each may restrain another from carrying out any activity which could destroy or injuriously affect any part of the whole land.

As mentioned above, the determination of whether a property is "principally" used in a business is a question of fact. In our opinion, use of a particular property is determined by reference to the actual use to which the entire property is put in the course of the business. Moreover, such determination must be made on a property-by-property basis. It should be noted that, as mentioned in paragraph 1 of IT-349R3, Intergenerational Transfers of Farm Property on Death, any part of a property not used or lying idle cannot qualify as being used principally in a business. Finally, a property is considered to be used principally in the business of farming if more than 50% of its use is in that business.

In that context, it is our opinion that the use of property rights, in particular an undivided interest in land, cannot be considered in a vacuum and should be determined by reference to the actual use of the object to which the rights pertain to, such as the land. In the case of ownership of a fee simple estate in land, the owner is seised of the entirety of the land and has all rights, privileges and powers to exploit, use and enjoy the entirety of the land. Such rights being in respect of the entirety of the land, the "principally" used requirement in subsection 70(9) and the definition of QFP in subsection 110.6(1) of the Act must be considered by referring to the actual use of the entirety of the land in a particular business of farming. In our opinion, such determination is not affected by the form of ownership of the estate or interest (sole or concurrent).

Therefore, in the case of the original interpretation, we maintain that the determination of whether the entirety of the land is principally used in the separate business of farming of each co-owner is the proper interpretation as, in that specific situation, each co-owner had, in law, property rights that pertained to the entirety of the land. Indeed, the land was not partitioned and the co-owners maintained inter alia their unity of possession throughout.

Moreover, as the two co-owners held concurrently the fee simple estate in the entirety of the particular land, the restriction to enter upon and use only 50% of the land's total acreage would have resulted from a subsequent agreement between the co-owners (written or otherwise). Even though such an agreement may exist (and it did not in the particular facts of the original interpretation), each co-owner remains seised in law of the whole acreage of the land. Choosing not to exercise the right to occupy part of the whole property does not, by itself, destroy the unity of possession. Each co-owner still has undivided seisin of the whole. It is therefore not appropriate to consider the use of property rights of co-owners as though a partition had resulted from such an agreement.

You suggest our position can lead to absurd results based on your finding that the use of land in conditions similar to those in the original interpretation, except through a partnership, may yield different results. In our opinion, such finding does not lead to absurd results as different tax consequences may flow from different transactions or legal relationships. Courts have consistently supported the view that legal relationships, as established by the taxpayers, must be respected and given full effect, absent a sham, even in the most recent Supreme Court of Canada decisions of Singleton (2001 SCC 61) and Enterprises Ludco Ltd (2001 SCC 62). In the case of the original interpretation, it would not be appropriate to ignore the legal relationships created between the co-owners and treat the situation as though a partnership existed when they explicitly did not want to be considered as such. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect (Shell Canada, SCC, 99 DTC 5669; Continental Bank Leasing Corp., SCC, 98 DTC 6505).

We trust that the above comments will be of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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