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 divorce satisfy the use tests in ITA 110.6(1)(a) of the definition of Qualified Farm Property (QFP) in respect of land acquired by the taxpayer from the individual at a point in time when the taxpayer was still married and the individual was the taxpayer's father-in-law?
Position: Yes
Reasons: ITA 110.6(1)(a) of the definition of QFP indicates that the use test may be met by a taxpayer if the farming use is by a person who qualifies as the taxpayer's parent [including a father-in-law under ITA 252(2)(a)(iii)].
March 28, 2003
Summerside Tax Centre HEADQUARTERS
E & A S.Parnanzone
Mr. Calvin Waugh 957-2133
2002-017858
Technical Interpretation Request: Qualified Farm Property
This is in reply to your round trip memorandum of December 5, 2002, regarding the above-noted subject.
Our understanding of the facts is as follows:
The taxpayer (Mr. X) and his spouse (Mrs. X) bought farmland from Mrs. X's father (Mr. A). During the period of his ownership, Mr. A used the land in the course of carrying on the business of farming in Canada on a full-time basis.
After they bought the land from Mr. A, Mr. and Mrs. X farmed the land only "on a small scale" during the period XXXXXXXXXX and never farmed it afterwards.
Mr. X and Mrs. X divorced in XXXXXXXXXX. Mr. X and his former spouse now plan to sell the farm, which they still jointly own.
Your question is whether Mr. X's share of the land meets the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act ("Act") on the basis that he is a "child of father-in-law". We assume that your references to farming "on a small scale" by Mr. and Mrs. X and to whether Mr. X can be considered a "child" of Mr. A, although he is no longer married to Mr. A's daughter, indicate that the requirements of the farming revenue and use tests under paragraph (a) of the definition of QFP would be met in respect of Mr. X's interest in the land only if Mr. A's farming revenue and use is accepted as satisfying the said tests. We understand that you consider Mrs. X's share of the land to be QFP in her hands.
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 24 months 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.
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, 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 the 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.
As indicated above, since the individual's parent may satisfy the use tests in subparagraphs (a)(vi) and (a)(vii) of the definition of QFP, the relationship between Mr. X and Mr. A is relevant. 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). Also, 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). In the situation at hand, Mr. X became a child of Mr. A, who in turn became Mr. X's parent, when Mr. X married Mr. A's daughter. However, as indicated in paragraph 4 of Interpretation Bulletin IT-419R, Meaning of Arm's Length, the relationship of child and parent between Mr. X and Mr. A ceased to exist when Mr. X and Mrs. X divorced.
Nonetheless, Mr. X's share of the land will constitute QFP if the conditions set out either in subparagraph (a)(vi) or in subparagraph (a)(vii) of the definition of QFP are met.
Based on the facts, Mr. X would meet the ownership test in subparagraph (a)(vi) because the combined period of ownership by Mr. X and Mr. A exceeds the test's 24-month de minimis period. Furthermore, Mr. X would be considered to meet the 2-year gross-revenue test in subparagraph (vi) if in at least 2 years while Mr. A owned the land Mr. A's gross revenue from the farming business carried on in Canada in which the property was principally used, and in which Mr. A was actively engaged on a regular and continuous basis exceeded his income from all other sources for the year. In this situation, the subsequent divorce of Mr. and Mrs. X would not, in and by itself, preclude the years of farming by Mr. A from being taken into account in establishing whether the 2-year gross-revenue test has been met by Mr. X.
Similarly, based on the facts, Mr. X would be considered to meet the 5-year use test in subparagraph (a)(vii) of the definition of QFP if Mr. A 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 owned the land.
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.
We trust that the foregoing comments are of assistance.
Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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