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: Can a particular property, acquired prior to June 18, 1987, which has not previously met the requirements of "qualified farmed property" qualify in the year of disposition if more than 50% of the property is used in the business of farming?
Position: Question of fact, but unlikely based on the limited information provided.
Reasons: "Qualified farm property" within the meaning of subsection 110.6(1) of the Act, is property that has been used in the course of carrying on the business of farming in Canada. Under clause (a)(vii)(A) 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 in the year the property is disposed of, in order to be considered to have been used in the course of carrying on the business of farming. While it is possible that a property acquired prior to June 18, 1987 may be considered "qualified farm property" if more than 50% of the property is used in the business of farming in the year of disposition, 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". Based on the information provided it is unclear whether more than 50% of the property would be used in the business of farming (it is a question of fact whether such a business would be carried on). One should also consider the implication of the subsection 45(1) change-in-use rules.
2002-017297
XXXXXXXXXX Karen Power, CA
(613) 957-8953
December 18, 2002
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - "Qualified Farm Property"
We are writing in reply to your facsimile of November 11, 2002, wherein you requested our comments on whether a specific property would be considered "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act").
More specifically you enquire whether a particular property, acquired prior to June 18, 1987, which has not previously met the requirements of the definition of "qualified farmed property" may qualify in the year of disposition under subparagraph (a)(vii) of the definition, if more than 50% of the property is used in the business of farming. For purposes of this reply we assume that no capital gains election was made under subsection 110.6(19) of the Act in respect of the property.
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.
Subsection 110.6(2) of the Act permits a capital gains deduction of $500,000 for an individual resident in Canada throughout the year who disposed of "qualified farm property" in the year. One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" as defined in subsection 110.6(1) of the Act, (hereinafter referred to simply as the "definition"), is that the property must have been used in the course of carrying on the business of farming in Canada by, among others, the individual or a spouse, child or parent of the individual. Further, the definition provides that property will not be considered to have been used in the course of carrying on the business of farming in Canada unless it meets the conditions in either subparagraph (a)(vi) or (a)(vii) of the definition.
Pursuant to clause (A) of subparagraph (a)(vii) of the definition, property last acquired by an individual before June 18, 1987, will qualify as qualified farm property if it was used by, among others, the individual or a spouse, child or parent of the individual principally in the course of carrying on the business of farming in Canada in the year the property was disposed of by the individual.
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. The Canada Customs and Revenue Agency ("CCRA") recognizes that a portion of the total area of a particular parcel of land may not be suitable for any use (ie., a portion may be absolutely useless for any purpose). While the conclusion in any particular case would necessarily depend on all the facts of the case, generally, in such a situation, the CCRA would not seek to deny that an asset had been used principally in the course of carrying on the business of farming for purposes of the definition by reason only of the existence of such a portion. However, in our view, land which cannot be used for farming due only to the presence of trees would generally not be excluded in determining whether more that 50% of the property is used.
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.
While it is possible that a property acquired prior to June 18, 1987 may be considered "qualified farm property" if more than 50% of the property is used in the business of farming in the year of disposition, 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 many requirements of "qualified farm property".
As a final consideration, in commencing a farming business in the year of disposition, it is possible that the taxpayer has had a complete or partial change in use of the property from personal use to income-producing (see paragraph 30 of IT-120R5). Where a taxpayer has partially converted a personal use property to an income-producing use, paragraph 45(1)(c) provides for a deemed disposition of the portion of the property so converted for proceeds equal to its proportionate share of the property's fair market value. Paragraph 45(1)(c) also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Based on the information you have provided, it is unlikely that the property was used for the purpose of gaining or producing income prior to the year of disposition and the change in use rules contained in subsection 45(1) of the Act may apply. At the time of the change in use a deemed disposition would be triggered, as described above, and any resulting gain would not qualify for the capital gains deduction under subsection 110.6(2) of the Act, as the property would not be qualified farm property at that time.
We trust our comments will be 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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