10 April 2002 External T.I. 2002-0117805 - QUALIFIED FARM PROPERTY - PARENT

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 land owned by an individual and farmed by the grandparents can meet the "qualified farm property" requirements in ss. 110.6(1).

Position: Yes.

Reasons: Consistent with previous positions.

XXXXXXXXXX 2002-011780
Patrick Massicotte, CA

April 10, 2002

Dear XXXXXXXXXX:

Re: Qualified Farm Property

We are writing in response to your letter of January 7, 2002, wherein you requested an advance income tax ruling with respect to the eligibility of farm land as "qualified farm property", for the purposes section 110.6 of the Income Tax Act (the "Act"), in a specific fact situation. The relevant facts you submitted are as follows:

1. A parcel of land was acquired in XXXXXXXXXX by XXXXXXXXXX which he actively farmed until his death;

2. The parcel of land was then transferred to his son XXXXXXXXXX in XXXXXXXXXX who actively farmed it until his death in XXXXXXXXXX;

3. Title to this parcel was transferred to his wife, XXXXXXXXXX , in XXXXXXXXXX after being held by her as executrix of the estate of XXXXXXXXXX between XXXXXXXXXX and XXXXXXXXXX. She and her son XXXXXXXXXX continued to actively farm the land until XXXXXXXXXX;

4. From XXXXXXXXXX until XXXXXXXXXX, the land was farmed on a XXXXXXXXXX sharecropping basis with neighbors;

5. Since XXXXXXXXXX, the land has been and continues to be rented out to neighbors on a cash basis;

6. In XXXXXXXXXX, legal ownership of the land was transferred from XXXXXXXXXX to her son XXXXXXXXXX and his XXXXXXXXXX minor children, in common. However XXXXXXXXXX continued to receive all the income derived from the property (i.e. sharecropping and rental income) until her death in XXXXXXXXXX;

7. All income earned from renting the land since XXXXXXXXXX 's death in XXXXXXXXXX has been paid to XXXXXXXXXX, notwithstanding that legal ownership has been held by him and his three children since XXXXXXXXXX.

You mention that you are concerned about the impact the transfer of legal ownership of the land in XXXXXXXXXX from XXXXXXXXXX to her grandchildren at the time when they were minors might have on the eligibility of the land as qualified farm property for the purposes of section 110.6 of the Act, assuming the land were sold in the future by the present owners on title.

Our Comments

As discussed in Information Circular 70-6R4, Advance Income Tax Rulings, dated January 9, 2001, advance income tax rulings are issued for transactions which are seriously contemplated and are not of a hypothetical nature. A ruling request will therefore be considered only in respect of a specific proposed transaction, and where it is submitted in the manner set out in this circular. Your request involves transactions of a hypothetical nature and accordingly, as advised in our telephone conversation of January 15, 2002 (Massicotte/XXXXXXXXXX), we are unable to provide you with an advance ruling. Your deposit will be returned to you under separate cover. Nevertheless, in accordance with paragraph 22 of this circular, we can provide you the following general comments, which are not binding on the Canada Customs and Revenue Agency ("CCRA") with respect to any specific taxpayer.

The term "qualified farm property" of an individual 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 have been used in the course of carrying on the business of farming in Canada.

Whether 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. Where the property was last acquired by the individual after June 17, 1987, subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act requires inter alia that the property have been owned by a person who was the individual, a beneficiary referred to in subparagraph (a)(ii) or a spouse, common-law partner, child or parent of the individual or of such a beneficiary, by a personal trust from which the individual acquired the property or by a partnership referred to in subparagraph (a)(v) throughout the period of at least 24 months immediately preceding the disposition of the property. In addition, clause (a)(vi)(A) of that definition requires, inter alia, that in at least 2 years while the property was so owned, 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 income of the person from all other sources for the year. In our opinion, the person meeting this gross revenue test need not be the person who owns the property and may be, for instance, the parent of the individual or any other person described in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property".

Alternatively, pursuant to subparagraph (a)(vii) of that definition, real property acquired by an individual before June 18, 1987 will also be considered to have been used in the course of carrying on the business of farming in Canada, and therefore constitute a "qualified farm property", provided the property was used by the individual, a beneficiary referred to in subparagraph (a)(ii) or a spouse, common-law partner, child or parent of the individual or of such a beneficiary, a corporation referred to in subparagraph (a)(iv) or a partnership referred to in subparagraph (a)(v) or by a personal trust from which the individual acquired the property, 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 the individual, a beneficiary referred to in subparagraph (a)(ii) or a spouse, common-law partner, child or parent of the individual or of such a beneficiary, by a personal trust from which the individual acquired the property or by a partnership referred to in subparagraph (a)(v).

Where property is transferred from a person to his/her grandchild, it is our view that such a person would be considered a "parent" of the grandchild for purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act, due to the interaction of the definition of "child" in subsection 70(10) of the Act (which applies for the purposes of section 110.6 of the Act) and subparagraph 252(2)(a)(i) of the Act. This result would not be affected by the fact that the grandchild is a minor. In addition, it is our view that, pursuant to these provisions, "parent" also includes great-grandparents such that, in this case, XXXXXXXXXX, her husband XXXXXXXXXX and her father-in-law XXXXXXXXXX may all be considered a "parent" in relation to XXXXXXXXXX's XXXXXXXXXX children.

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. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the CCRA's general position 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). As indicated in paragraph 9 of IT-433R, the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming.

In the situation you submitted, the requirements of subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act appear to be met in respect of each of XXXXXXXXXX's grandchildren, if in fact, in at least 2 years while the property was owned by a parent (including a grandparent or great-grandparent), they were carrying on a farming business in Canada in which they were actively engaged on a regular and continuous basis and in which the property was principally used and if, in fact, the gross revenue from that farming business exceeded their income from all other sources. However, we have no information available in that respect at this particular time.

The requirements of subparagraph (a)(vii) also appear to be met, if in fact, in at least 5 years during which the property was owned by a parent (including a grandparent or great-grandparent), the property was used by them principally in the course of carrying on the business of farming in Canada.

Since the requirements of both subparagraph (a)(vi) and (a)(vii) of the definition of "qualified farm property" in subsection 110.6(1) of the Act appear to have been met, it is our view that the farm land could be considered as "qualified farm property" regardless of when the grandchildren last acquired the property.

In closing, we would also note that there may be an issue with respect to the beneficial ownership of the above-noted property, as it appears that XXXXXXXXXX was entitled to all the income generated from the property until her death, and that XXXXXXXXXX is now entitled to all of this income. For a discussion on beneficial ownership, reference may be made to paragraphs 2 to 4 of IT-437R. As this issue involves a question of fact and completed transactions, we would suggest that you contact your local Tax Services Office should you require further assistance in this regard.

We trust the above comments are of assistance to you.

Yours truly,

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

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