28 January 2002 External T.I. 2001-0115515 - SALE OF A FARMING BUSINESS

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:

(1) Whether a taxpayer that carries on a farming business and reports income on the cash basis is entitled to a reserve on the sale of a depreciable property for the proceeds that are due after the taxation year in which the disposition occurred.

(2) Does paragraph 12(1)(b) provide for such a reserve?

Position:

(1) Even though the taxpayer may report income on the cash basis under subsection 28(1) of the Act, paragraph (d) of the provision specifically requires that amounts determined under subsection 13(1) are to be included in calculating income for the farming business. With respect to the recapture of capital cost allowance, there is no provision in the Act that provides for a reserve on proceeds due after the end of the taxation year of disposition. However, if there is a capital gain on the disposition of the property, the taxpayer may be eligible for a reserve on that gain under paragraph 40(1)(a) of the Act.

(2) No. While the income inclusion required by paragraph 12(1)(b) for amounts that are receivable is not applicable when the method regularly followed by the taxpayer provides otherwise, the cash basis of reporting income from a farming business in subsection 28(1) requires the inclusion of recaptured CCA in income by virtue of paragraph 28(1)(d).

Reasons:

(1) Subsection 13(1), paragraph 28(1)(d) and paragraph 40(1)(a).

(2) Paragraph 12(1)(b) & 28(1)(d)

XXXXXXXXXX 2001-011551

Randy Hewlett, B.Comm.

January 28, 2002

Dear XXXXXXXXXX:

Re: The Sale of a Farming Business

We are writing in response to your letter dated December 14, 2001, wherein you requested our opinion on the above-noted matter.

You outlined a situation in which an individual who was engaged in a farming business for the past twenty-five years is in the process of ceasing operations by selling the depreciable property used in that business. The proceeds of disposition will exceed the undepreciated capital cost of the particular class in which the depreciable property is included. You did not indicate whether the proceeds of disposition would exceed the original capital cost of the property. You inquired whether there is a reserve available on the portion of the proceeds that will not be received in the year of disposition.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Subsection 28(1) of the Income Tax Act (the Act) sets out the general rules for calculating income from a farming business on a cash basis. Paragraph 28(1)(d) specifically includes in computing such a taxpayer's income, the full amount of recapture of capital cost allowance determined under subsection 13(1). As noted in paragraph 6 of Interpretation Bulletin IT-478R2, Capital Cost allowance - Recapture and Terminal Loss, dated September 17, 1999, if recapture of capital cost allowance results from the disposition of a depreciable property in a particular year and full payment of the proceeds of disposition is not received in that year, the taxpayer must nevertheless include the entire amount in income for that year and is not entitled to any reserve on the recaptured amount.

If the proceeds of disposition also exceed the adjusted cost base of the depreciable property, thereby generating a capital gain, and some or all of the proceeds of disposition are payable after the end of the year, the taxpayer may be entitled to a reserve on the gain determined under subsection 40(1) of the Act. For more information see Interpretation Bulletin IT-236R4 Reserves - Disposition of Capital Property, dated July 30, 1999.

Your letter referred to paragraph 12(1)(b) of the Act as authority for claiming a reserve in this situation. This provision requires that a taxpayer include in income from a business or property, amounts receivable in respect of property sold in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, "unless the method adopted by the taxpayer for computing income from the business does not require the taxpayer to include any amount receivable in computing the taxpayer's income for a taxation year." As noted above, for farmers that have used the cash method of computing income described in subsection 28(1) of the Act, paragraph 28(1)(d) specifically requires recaptured capital cost allowance to be included in income.

The publications referred to above can be found on our Internet website at www.ccra-adrc.gc.ca.. We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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