3 July 2002 Internal T.I. 2002-0143097 - 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 the land owned by a taxpayer is considered to be "qualified farm property"?

Position: Perhaps

Reasons: Question of fact.

		2002-014309
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
July 3, 2002

Dear XXXXXXXXXX :

Re: Capital Gains Deduction - "Qualified Farm Property"

We are writing in reply to your letter of May 15, 2002, which was forwarded to us on May 27, 2002 by the Calgary Tax Services Office, wherein you requested our views on whether certain taxpayers would be entitled to claim the $500,000 capital gains exemption under subsection 110.6(2) of the Income Tax Act (the "Act") on the sale of their farm property.

Our comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all of the relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to offer the following general comments which may be of assistance.

It should also be noted that the situation described in your letter involves a number of legal issues which must first be resolved in establishing the tax consequences of the future transfer or disposition of the farm property. For instance, each spouse's entitlement to proceeds of disposition on the sale of the farm property is dependent on their legal ownership interests in the property. The legal ownership of a property is a question of fact and you may wish to contact legal counsel to assist you in determining the legal ownership of this particular property. It is also unknown whether local zoning restrictions would permit a subdivision of the existing farm property.

Transfer of Farm Property to a Child

Except as expressly provided in the Act, when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, or transferred to any person by way of gift inter vivos, the taxpayer is deemed, under paragraph 69(1)(b) of the Act, to have received proceeds of disposition equal to the fair market value.

Subsection 73(3) of the Act is one exception to the general rules of subsection 69(1) of the Act. Subsection 73(3) of the Act essentially provides for a partial or full deferral of the tax consequences on the transfer of farm property to a child during the taxpayer's lifetime. Under the rules in paragraph 73(3)(b), a parent's deemed proceeds of disposition may be any amount between the fair market value of the property and its adjusted cost base. Where the deemed proceeds of disposition exceed the taxpayer's adjusted cost base, the taxpayer may be entitled to claim the $500,000 capital gains exemption on the transfer of the farm property.

Interpretation Bulletin IT-268R4 discusses the application of the exception found in subsection 73(3) of the Act. In general terms, in order for a farm property to be eligible for the subsection 73(3) rollover, the following conditions must be met:

? the farm must be in Canada;

? the property must be transferred to a child who was resident in Canada immediately before the transfer; and

? before the transfer, the property must have been used principally in the business of farming in which the parent, the parent's spouse (or common-law partner) or any of their children, were actively engaged on a regular and continuous basis.

For farm property to qualify for rollover treatment, it must be used in the business of farming in which a qualified person was actively engaged on a regular and continuous basis. It is a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Paragraph 27 of Interpretation Bulletin IT-268R4, reflects the CCRA's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates the requirement is considered to have been met when the person is actively engaged in the management and/or day-to-day activities of the farming business. Ordinarily, the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operations of the business. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.

Capital Gains Exemption

Subsection 110.6(2) of the Act permits a lifetime capital gains deduction of $500,000 for an individual resident in Canada throughout the year who disposed of "qualified farm property" in the year. When spouses own a property jointly and the attribution rules in subsection 74.2(1) of the Act do not apply, each spouse should report a share of the capital gain or loss on the basis of his or her respective legal ownership interest. Where the property meets the definition of "qualified farm property", both spouses may be entitled to claim the capital gains deduction pursuant to subsection 110.6(2) of the Act provided all requirements of that subsection have been met.

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.

Under the definition of "qualified farm property" in subsection 110.6(1) of the Act (hereinafter referred to simply as the "definition"), the property must have been used in the course of carrying on the business of farming in Canada by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property. Further, the definition provides that property will not be considered to have been used in the course of carrying on the business of farming by the person unless it meets the conditions in either subparagraph (a)(vi) or (a)(vii) of the definition.

The requirement in subparagraph (a)(vi) of the definition will be met if the property was owned by, among others, the taxpayer or a spouse, child, or parent of the taxpayer, throughout the 24 months preceding the disposition of the property and, in at least 2 years while the property was so owned, the gross revenue of such an individual from the farming business carried on in Canada in which the property was principally used, and in which such an individual was actively engaged on a regular and continuous basis exceeded the person's income from all other sources for the year. In our view, the individual meeting the gross-revenue test in subparagraph (a)(vi) need not be the person who owns the property and may be the spouse, child or parent of such an individual. However, the determination of whether real property was used principally by an individual in carrying on a farming business, whether an individual was actively engaged in the farming business on a regular and continuous basis, and whether a particular operation constitutes a farming business at any particular time are all questions of fact.

Subparagraph (a)(vii) only applies to property acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date). Under subparagraph (a)(vii) of the definition, property must have been used by, among others, the taxpayer or a spouse, child or parent of the taxpayer principally in 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, among others, the taxpayer or the spouse, child or parent of the taxpayer.

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. Rental income would not be considered to be part of a farming business. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.

A review of all of the facts surrounding a situation would be required to conclusively resolve whether the parcel of land held by the taxpayer meets the requirements of "qualified farm property".

We trust our comments will be of assistance to you.

Yours truly,

Mickey Sarazin, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 4 -