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 the farming use by an individual who was the father-in-law of the taxpayer prior to the taxpayer's spouse's death satisfy the test in ITA 110.6(1)(a)(vi)(A) of the definition of Qualified Farm Property (QFP) in respect of land acquired by the taxpayer from the individual after June 17, 1987 (and not pursuant to an agreement entered into before June 17, 1987) and after the taxpayer's spouse's death?
Position: No.
REASONS: The 2-year gross revenue test in ITA 110.6(1)(a)(vi)(A) must be satisfied by an eligible individual within the time period included in the ownership test (i.e., "while the property was so owned"). After the death of the taxpayer's spouse, the spouse's father ceased to be the taxpayer's father-in-law (parent) for purposes of the ownership test, which requires that the property be owned by an eligible individual "throughout" at least 24 months.
XXXXXXXXXX 2002-017646
S. Parnanzone
August 11, 2003
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Qualified Farm Property
This is in reply to your e-mail of November 27, 2002 regarding the above-noted subject. We apologize for the delay in responding to your request.
You referred to the situations in documents # 2000-0027385 (the "First Document") and #2000-0052385 (the "Second Document") and asked for clarifications regarding the farming revenue and use tests in the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act (the "Act"). You phrased your questions as follows:
In technical interpretation 2000-0052385 you state "Based on the foregoing, the 24-month gross revenue test in subparagraph (a)(vi) may be satisfied by the taxpayer's father-in-law, assuming the father-in-law relationship existed throughout the applicable 24-month period." Based on a conversation with Karen Power, there was no such equivalent requirement contained in technical interpretation 2000-0027385. In other words, there was no requirement that
Mrs. X have been married to Mr. X during the years that Mr. X's grand-mother met the 24-month gross revenue test. Please confirm what your position is on this issue.
In brief, the taxpayer in the First Document, Mrs. X, (and her children) received farmland post-1987 upon the death of her husband, Mr. X, who had inherited the land from his mother, who in turn had inherited it from her own mother. Mr. X's grandparents had farmed the land on a full-time basis for many years and derived their livelihood from it; however, Mr. X and his parents never reported any farming income.
The situation in the Second Document was somewhat different. The taxpayer, Mrs. A, received 1/3 of the farmland upon the death of her husband, Mr. A, prior to June 17, 1987, and 2/3 of the land directly from Mr. A's father upon his death in 1990. Mr. A's father had farmed all the land on a full-time basis for more than 5 years and during each of those years, his gross income from farming exceeded all of his income from other sources. As the facts submitted to us in the Second Document were somewhat incomplete, for purposes of this reply we have assumed that Mr. A acquired his 1/3 interest from his father and that the 5-year period referred to in the previous sentence occurred while the father owned 100% of the land.
Subsection 110.6(2) of the Act permits a capital gains deduction of $500,000 for an individual who is resident in Canada throughout the year and disposed of QFP in the year. One of the conditions that must be met for real property of an individual to be considered a QFP as defined in subsection 110.6(1) of the Act 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 of QFP provides that a 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 set out in either subparagraph (a)(vi) or subparagraph (a)(vii) of the definition.
The requirements in subparagraph (a)(vi) of the definition of QFP will be met if:
? the property was owned by a person who was, among others, the individual or a spouse, child, or parent of the individual, throughout the period of at least 24 months immediately preceding the disposition of the property ("ownership test"), and,
? 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 person was actively engaged on a regular and continuous basis exceeded the person's income from all other sources for the year ("2-year gross-revenue test").
In our view, the person meeting the 2-year gross-revenue test in subparagraph (a)(vi) need not be the individual who owns the property and may, for instance, be the spouse, child or parent of such individual. If a parent has met the 2-year gross-revenue test while he or she owned the property, and the parent later transfers the property to a child, the child is regarded as having met the 2-year gross-revenue test requirement of the definition of QFP, even though the child may have never farmed the property. It is also our view that the 2-year gross-revenue test must be satisfied during a period that is included in the ownership test.
Subparagraph (a)(vii) of the definition of QFP only applies to property last 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, the property must have been 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, either:
? in the year the property is disposed of, or
? in at least 5 years during which the property was owned by, among others, the individual or a spouse, child or parent of the individual ("5-year use test").
Similar to our comments regarding subparagraph (a)(vi), the individual's parent may satisfy the use tests in subparagraph (a)(vii) of the definition.
For the purpose of the definition of QFP, a reference to a parent or a child includes a reference to a grandparent or a grandchild, respectively, by virtue of the definition of "child" in subsection 110.6(1) [which has the meaning assigned by subsection 70(10)] and its interaction with subparagraph 252(2)(a)(i). In addition, pursuant to paragraph 252(1)(e) of the Act, a child of a taxpayer includes a spouse or common-law partner of a child of the taxpayer (e.g., son-in-law or daughter-in-law) and, by virtue of subparagraph 252(2)(a)(iii), a parent of a taxpayer includes a person who is a parent of the taxpayer's spouse or common-law partner (e.g., father-in-law or mother-in-law). A grandparent-in-law would also be considered a parent for purposes of the definition of QFP due to the interaction of the definition of "child" in subsection 110.6(1) with paragraph 252(1)(e) and subparagraph 252(2)(a)(i) of the Act.
The determination of whether real property was used by an individual principally in the course of 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. Useful comments may be found in Interpretation Bulletins IT-268R4, IT-322R, IT-433R and IT-145R.
As indicated above, since the individual's parent may satisfy the 2-year gross-revenue test and the use tests in subparagraphs (a)(vi) and (a)(vii), respectively, of the definition of QFP, the relationship between the person who satisfies the said tests and Mrs. X in the First Document and Mrs. A in the Second Document is relevant. In the situation described in the First Document, for purposes of the definition of QFP in subsection 110.6(1) of they Act, Mrs. X became a child of Mr. X's grandparents and each of them became a parent of Mrs. X when she married Mr. X. Similarly in the Second Document, Mrs. A became a child of Mr. A's parents and each of them became a parent of Mrs. A when she married Mr. A.
However, the relationship of child and parent between each of Mrs. X and Mrs. A and their respective spouse's parents ceased to exist when the spouses died. In Pembroke Ferry Limited (52 DTC 255), the Income Tax Appeal Board determined that a woman no longer is connected by marriage with her deceased husband's father subsequent to the death of her husband. (See also paragraph 4 of IT 419R.)
Nonetheless, the land of Mrs. X and Mrs. A will constitute QFP if the conditions set out either in subparagraph (a)(vi) or in subparagraph (a)(vii), where applicable, of the definition of QFP are met.
Based on the facts described in the First Document, Mrs. X would meet the ownership test in subparagraph (a)(vi) because the combined and uninterrupted period of ownership by Mrs. X, Mr. X and Mr. X's grandparents exceeds the test's 24-month de minimis period. Furthermore, Mrs. X would be considered to meet the 2-year gross-revenue test in subparagraph (vi) if in at least 2 years while Mr. X's grandparents owned the land the gross revenue of one of the grandparents from the farming business carried on in Canada in which the property was principally used, and in which the grandparent was actively engaged on a regular and continuous basis exceeded his or her income from all other sources for the year. In this situation, the subsequent death of Mr. X would not, in and by itself, preclude the years of farming by Mr. X's grandparents from being taken into account in establishing whether Mrs. X met the 2-year gross-revenue test. While the issue is not free from doubt, it is our view that the 2-year period for this test may have occurred prior to Mr. and Mrs. X's marriage.
However, the situation described in the Second Document requires a different analysis depending on which portion of the land is under consideration. With respect to the 1/3 portion of the land, this portion would meet the definition of QFP if it satisfies the test in either subparagraph (vi) or subparagraph (vii) of the definition of QFP. Based on the facts, the test in subparagraph (vi) may be met for reasons analogous to those indicated with respect to the situation in the First Document. Mrs. A would meet the ownership test in subparagraph (a)(vi) because the combined and uninterrupted period of ownership by Mrs. A, Mr. A and Mr. A's father exceeds the test's 24-month de minimis period. Furthermore, Mrs. A would be considered to meet the 2-year gross-revenue test in subparagraph (vi) if in at least 2 years while Mr. A's father owned the land the father's gross revenue from the farming business carried on in Canada in which the property was principally used, and in which he was actively engaged on a regular and continuous basis exceeded his income from all other sources for the year. In this situation, the subsequent death of Mr. A would not, in and by itself, preclude the years of farming by Mr. A's father from being taken into account in establishing whether Mrs. A satisfied the 2-year gross-revenue test in respect of the 1/3 portion and, as explained above, the 2-year period for this test may have occurred prior to Mr. and Mrs. A's marriage.
Similarly, based on the facts of the Second Document, Mrs. A would be considered to meet the 5-year use test in subparagraph (a)(vii) of the definition of QFP in respect of the 1/3 portion of land if Mr. A's father used the land principally in the course of carrying on the business of farming in Canada in at least 5 years during which Mr. A's father owned the land.
However, with respect to the 2/3 portion of land, the conditions to be met are only those in subparagraph (vi) of the definition of QFP. This requires that both the ownership test and the 2-year gross-revenue test be satisfied. Based on the facts in the Second Document, Mrs. A would satisfy the ownership test if she herself owned the 2/3 portion of land at least throughout the 24 months immediately preceding the disposition of the property. The period of ownership by Mr. A's father would be disregarded because, at the time of transferring the 2/3 portion of the land to her, he no longer was her parent, this relationship having ceased upon Mr. A's death.
If Mrs. A meets the ownership test in respect of the 2/3 portion of the land, Mrs. A would also have to satisfy the 2-year gross-revenue test which, as previously mentioned, is a test that must be met within the period included in the ownership test (i.e., "while the property was so owned"). Mrs. A would not be able to meet the 2-year gross-revenue test assuming that after she became the owner of the 2/3 portion, the land was not used in a business of farming. The use of the land in the business of farming by Mr. A's father would be disregarded because such use did not occur within the period included in the ownership test.
It would appear that you found confusing the statement made in the Second Document "(b)ased on the foregoing, the 24-month gross revenue test in subparagraph (a)(vi) may be satisfied by the taxpayer's father-in-law, assuming the father-in-law relationship existed throughout the applicable 24-month period." We share your concern about the clarity of this statement since it does not distinguish between the ownership test and the 2-year gross-revenue test in subparagraph (a)(vi) of the definition of QFP. The facts submitted may have also contributed to the confusion as it was unclear when and from whom Mr. A and his father acquired their interests in the property and when Mrs. A acquired her interest from Mr. A.
You also enquire whether a share of a corporation can qualify as a "share of the capital stock of a family farm corporation" as defined in subsections 70(10) and 110.6(1) of the Act, based on the use of a property by a parent of a taxpayer's former spouse and a predecessor corporation of an amalgamated corporation. The definitions of "share of the capital stock of a family farm corporation" in subsections 70(10) and 110.6(1) of the Act are not identical and contain various references to a parent, as well as a number of other requirements. Accordingly, a review of all relevant facts and documentation of each particular case is required in order to determine whether a particular share falls within the ambit of any of these definitions. As explained in Information Circular 70-6R5, if a particular situation involves proposed transactions, all relevant facts and documentation can be submitted in the context of an advance income tax ruling request and, if the situation involves completed transactions, the information can be submitted to the relevant tax services office for their views.
We trust, however, that the foregoing comments clarify the matter and address your concerns with respect to the two documents noted above.
Yours truly,
Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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