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: What are the tax implications if the wife purchases a half interest in piece of land currently owned by the husband.
Position: General comments given
Reasons: Proposed transaction, tax planning and insufficient information provided.
XXXXXXXXXX 2001-008276
Cornelis Rystenbil, CGA
June 6, 2001
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - Qualified Farm Property
This is in reply to your letter of April 25, 2001 in which you ask our views on what the tax implications would be, in relation to the capital gains deduction for qualified farm property, if XXXXXXXXXX purchases a half interest in piece of land currently owned by XXXXXXXXXX.
Written confirmation of the consequences inherent in particular transactions is 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 (copy enclosed). In light of the tax issues involved in the transactions you are contemplating, you may also wish to consider consulting with a tax professional. We would also note that we were not provided with sufficient information to determine whether the above land is "qualified farm property"; however, we are prepared to provide the following general comments that may be of assistance.
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. It is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria that should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the general position of the Canada Customs and Revenue Agency (CCRA) with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 7 of Interpretation Bulletin IT-145R (Consolidated). We have enclosed copies of these Interpretation Bulletins for your information. We have also enclosed a copy of Interpretation Bulletin IT-268R4, which discusses, in its paragraph 27, the CCRA's interpretation of whether a person is actively engaged on a regular and continuous basis in a farming business.
It should also be noted that pursuant to subsection 73(1) of the Act, when a taxpayer transfers capital property to a spouse and they are both resident of Canada at the time, the property is generally deemed to have been disposed of by the taxpayer for proceeds equal to the adjusted cost base of the property. The spouse is also deemed to have acquired the capital property for an amount equal to those proceeds. Any taxable capital gain or allowable capital loss from the subsequent disposition of the property by the spouse is generally attributed to the taxpayer by virtue of subsection 74.2(1) of the Act. The taxpayer may elect in his or her tax return for the year of the transfer to not have the provisions of subsection 73(1) of the Act apply. If the election is made and fair market value consideration was received by the transferor, subsection 74.5(1) of the Act provides that the gain or loss from a disposition of the property by the spouse will not be attributed to the taxpayer in any year in which the spouse subsequently disposes of the property. The rules concerning transfers of property between spouses are discussed in greater detail in Interpretation Bulletin IT-511R (copy enclosed).
We trust that these comments will be of assistance.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Encl.
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