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: Would land owned by a partnership be considered QFP.
Position: Likely.
Reasons: Where a partnership owns a parcel of land and carries on the business of farming, it may be considered to principally use the property in that business where all the other requirements of the definition of QFP are satisfied.
XXXXXXXXXX 2002-014322
P. Massicotte, CA, M.Fisc.
July 12, 2002
Dear XXXXXXXXXX:
Re: Qualified Farm Property
We are writing in response to your letter of May 27, 2002, wherein you request our comments regarding the application of the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act") to a number of hypothetical situations.
More specifically, you are concerned the "principally" used requirements within that definition may not be satisfied where two co-owners of a parcel of farm land both use the land in the course of carrying on a business of farming in Canada. You ask whether the formal recognition of their "partnership", by having a partnership agreement made and by provincially registering the partnership pursuant to the applicable laws, and the transfer of the farm land to the partnership may allow to satisfy those requirements upon a subsequent disposition by the partnership.
You also submit a number of alternative arrangements and ask whether the requirements of the definition of "qualified farm property" in subsection 110.6(1) of the Act may be satisfied.
Written confirmation of the tax implications arising from proposed transactions is given by this Directorate only where the transactions are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.
The Act does not define what constitutes a "partnership" and it is a question of fact whether or not a partnership exists (see Interpretation Bulletin IT-90). Generally speaking, a partnership is described as the relation that subsists between persons carrying on business in common with a view to profit. Reference should also be made to the applicable provincial law. The formal registration of a partnership would generally not in itself be a decisive factor because a declaration of this type would not be expected to prevail in partnership law over the actual facts of a situation (IT-90, paragraph 7).
As you know, one of the requirements of the definition of "qualified farm property" in subsection 110.6(1) of the Act is that real property be used principally in the course of carrying on the business of farming in Canada. The determination of whether real property is used principally in a particular business is a question of fact. Where reference is made to an asset being used principally in the course of carrying on the business of farming, it is our opinion that the asset will meet this requirement if more than 50% of its use is in the business of farming.
Where the business of farming is carried on by a partnership, the interest an individual owns in the partnership may be considered "qualified farm property" pursuant to paragraph (c) of that definition, if it is an "interest in a family farm partnership", as defined in subsection 110.6(1) of the Act.
The definition of an "interest in a family farm partnership" of an individual at any time requires that throughout any 24-month period ending before that time, more than 50% of the fair market value of the property of the partnership was attributable to certain properties, including property used inter alia by the partnership, the individual, a spouse, common-law partner, child or parent of the individual, principally in the course of carrying on the business of farming in Canada, in which inter alia the individual, a spouse, common-law partner, child or parent of the individual was actively engaged on a regular and continuous basis. In addition, at that time, all or substantially all of the fair market value of the property of the partnership must be attributable inter alia to property that was used principally in the course of carrying on the business of farming in Canada by the partnership or a person referred to above.
An interest in a partnership could not be considered an interest in a family farm partnership for the purposes of section 110.6 of the Act at any time if at that time the partnership was not in existence for at least 24 months, as it could not meet the "throughout any 24-month period ending before that time" requirement. This may be of concern in the hypothetical situation described in your request.
Whether a person is actively engaged on a regular and continuous basis in a particular business is a question of fact. Paragraph 27 of Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child, outlines the Canada Customs and Revenue Agency's interpretation in that respect. The requirement is generally 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. Whether an activity is engaged on a regular and continuous basis is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement.
Where a partnership, an interest in which is an interest in a family farm partnership, owns the real property it uses in the course of carrying on the business of farming in Canada, such real property may be considered qualified farm property of an individual. The definition of "qualified farm property" in subsection 110.6(1) of the Act provides that a qualified farm property of an individual at any time means a property owned at that time by inter alia the individual or a partnership, an interest in which is an interest in a family farm partnership of the individual, that is real property used by persons specified in subparagraphs (a)(i) through (a)(v) of that definition in the course of carrying on the business of farming in Canada. As the property is used by a partnership, such real property may be considered used in the course of carrying on the business of farming in Canada, where the real property was last acquired after June 17, 1987, if the requirements of clause (a)(vi)(B) of that definition are met.
Those requirements provide that the partnership must have used the property principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months, during which time inter alia the individual, a spouse, common-law partner, child or parent of the individual must have been actively engaged on a regular and continuous basis in the farming business in which the property was used.
Where these requirements are met, the real property owned and used by the partnership may be considered a qualified farm property of an individual who has an interest in the partnership, allowing the individual to claim a deduction under subsection 110.6(2) of the Act, where all the other requirements are met, in respect of a capital gain included in the individual's income pursuant to subsection 96(1) of the Act as a result of the disposition of such property.
You also ask whether real property used in a husband and wife farm operation could meet the "principally used" requirement in the definition of "qualified farm property" in subsection 110.6(1) of the Act, even though the operation does not constitute a partnership. As the definition of qualified farm property in subsection 110.6(1) of the Act refers inter alia to property owned by the individual, the spouse or common-law partner of the individual, that is real property used by the individual, a spouse, common-law partner, child or parent of the individual, it is our opinion that real property owned jointly by a husband and wife and principally used by either or both the husband and the wife in the course of carrying on a business of farming in Canada may be considered qualified farm property where all the other requirements of the definition are met. Similarly, real property used in a father and son farm operation may be considered qualified farm property provided all the other requirements of the definition are met.
However, in our view real property, such as farm land, used by arm's length persons (or persons not specified in subparagraphs (a)(i) through (a)(v) of the definition of "qualified farm property" in subsection 110.6(1) of the Act) who own the property in common or jointly (tenancy-in-common or joint tenancy) in the course of carrying on the business of farming under an arrangement that does not constitute a partnership cannot be considered qualified farm property as each co-owner cannot be considered to principally use the farm land in the course of carrying on the business of farming in Canada. Our position on this issue is explained in our document 2001-0078715, to which you refer in your letter.
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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