23 December 2002 External T.I. 2002-0143635 - FARM ROLLOVERS

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: Where subsections 73(3) or (4) are first used to transfer (on a rollover basis) farm property to an adult child and the farm property is then sold within a three year period, does subsection 69(11) apply?

Position: Question of Fact

Reasons: Where the "one of the main purposes" test has been met, subsection 69(11) will apply because parents and children are not affiliated under subsection 251.1 of the Act. Where subsection 69(11) applies, the child's adjusted cost based computed under paragraph 73(3)(d) will reflect the parent's deemed proceeds of disposition as computed under subsection 69(11).

2002-014363
XXXXXXXXXX Karen Power, CA
(613) 957-8953
December 23, 2002

Dear XXXXXXXXXX:

Re: Subsections 69(11), 73(3) and 73(4)

This is in reply to your letter of May 29, 2002, requesting our comments regarding the application of subsection 69(11) of the Income Tax Act (the "Act"). You describe a situation where subsection 73(3) and/or 73(4) of the Act would be used to transfer farm property to an adult child (i.e. on a full or partial rollover basis) and the property is then sold within a three-year period resulting in the use of the qualified farm property capital gains deduction of the adult child. Specifically you enquire whether subsection 69(11) of the Act would apply where the main purpose of the transfer to the adult child is to allow the taxpayer to retire and enable the adult child to takeover the farming operations. We apologize for the delay in replying to your letter.

Secondly, where subsection 69(11) applies to deem the taxpayer to have disposed of the property at the particular time for proceeds of disposition equal to its fair market value at the particular time, you enquire whether there is a relieving provision in the Act which would increase the adult child's adjusted cost base of the 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.

The purpose of subsection 69(11) is to deny a tax deferred rollover to a taxpayer where the taxpayer, at any particular time as part of a series of transactions or events, disposes of property for proceeds of disposition that are less than its fair market value and one of the main purposes of the series can reasonably be considered to obtain the benefit of, inter alia, any deduction in computing taxable income available to a person who would not be affiliated with the taxpayer immediately before the series commenced, where the subsequent disposition of the property or property substituted for the property occurs, or arrangements for such disposition are made, within 3 years from the date of the first disposition. As a result of the definition of "affiliated persons" in section 251.1 of the Act, children and their parents are not affiliated.

It is a question of fact whether the purpose test in subsection 69(11) has been met. Accordingly, we are unable to comment on whether transactions which may be undertaken to facilitate estate planning, but which also result in the obtaining of a benefit specified in subsection 69(11), will result in a finding that the purpose test in subsection 69(11) has been met. The test in subsection 69(11) is whether one of the main purposes of the series is to obtain a benefit described in paragraph (a) or (b). Thus it is our view that subsection 69(11) may apply even though there may be non-tax purposes for the transfer of property.

Where subsection 73(3) applies to the transfer of farm property to a child, paragraph 73(3)(d) provides that the child shall be deemed to have acquired the depreciable property or land, as the case may be, for an amount determined under paragraph 73(3)(a) or (b) respectively. Subject to subparagraphs 73(3)(b)(ii) and (iii), subparagraph 73(3)(b)(i) deems a parent to have disposed of land for proceeds of disposition equal to the "proceeds of disposition otherwise determined". In our view, where subsection 69(11) applies to deem the taxpayer to have disposed of the property at the particular time for proceeds of disposition equal to its fair market value, the parent's "proceeds of disposition otherwise determined" shall be equal to the deemed proceeds of disposition as computed pursuant to subsection 69(11) of the Act. Consequently, the child's (purchaser/transferee) cost would be equal to the Parent's (vendor/transferor) deemed proceeds of disposition under subsection 69(11) of the Act.

We trust that our comments are of assistance to you.

Yours truly,

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