17 March 2003 External T.I. 2003-0005915 - QUALIFIED FARM PROPERTY

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:

Whether the land owned by a taxpayer is considered to be "qualified farm property"?

Position: Question of fact, general comments provided.

Reasons: Question of fact, insufficient facts provided.

		2003-000591
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
March 17, 2003

Dear XXXXXXXXXX:

Re: Capital Gains Deduction - "Qualified Farm Property"

We are writing in reply to your letter of February 12, 2003, wherein you requested our views on whether you and your brothers would be entitled to claim the $500,000 capital gains deduction under subsection 110.6(2) of the Income Tax Act (the "Act") on the future sale of a farm property (the "Property") which you inherited on the death of your mother in April of 2002.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We have not been provided with sufficient information to determine whether you and your brothers would be entitled to the $500,000 capital gains exemption. However, we can provide you with general comments that 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. Generally, where siblings own a property jointly, each sibling should report a share of the capital gain or loss on the basis of his or her respective legal ownership interest. Where the property meets the definition of "qualified farm property", they may then be entitled to claim the capital gains deduction pursuant to subsection 110.6(2) of the Act provided all requirements of that subsection have been met.

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.

Whether a property is considered to have been used in the course of carrying on the business of farming depends on whether the property was last acquired, or deemed acquired, on or before June 17, 1987 or after that date. In the situation you describe, it appears you and your brothers acquired the Property in 2002, upon the death of your mother. Consequently, the Property can be considered to have been used in the course of carrying on the business of farming if the requirements of subparagraph (a)(vi) of the definition are met.

The requirement in subparagraph (a)(vi) of the definition will be met if the property was owned by, among others, the individual or a spouse, child, or parent of the individual, throughout the 24 months preceding the disposition of the property 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 a person was actively engaged on a regular and continuous basis exceeded the person's income from all other sources for the year. In our view, the person meeting the gross-revenue test in subparagraph (a)(vi) need not be individual who owns the property and may, for instance, be the spouse, child or parent of such a person.

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. 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 Canada Customs and Revenue Agency's ("CCRA") 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.

It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Paragraph 27 of Interpretation Bulletin IT-268R4, reflects the CCRA's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates the requirement is 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. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.

A review of all of the facts surrounding a situation would be required to conclusively resolve whether the Property held by you and your brothers meets the requirements of "qualified farm property".

Please note that in determining your capital gain or loss on the disposition of the Property, you will need to determine the Property's adjusted cost base. When your mother died in 2002, she was deemed to have disposed of all her capital properties owned by her immediately before her death. Generally, the capital property is considered to have been disposed of for its fair market value immediately before death and the person who acquires the property of the deceased will acquire it at that fair market value. However, special rules may apply to farm property passing to a child. Subsection 70(9) of the Act provides for the deferral of the tax consequences on intergenerational transfers of farm property on death. In general terms, where certain conditions have been met, this rule permits the legal representative of the deceased taxpayer to elect to transfer the property at any amount between its cost amount and its fair market value immediately before the time of the death of the taxpayer. The elected amount is deemed to be the cost of the property to the child.

Considering the complexity of the issues involved with respect to this subject matter, you may want to consult with a tax professional to assist you in determining the cost of the Property and establishing your entitlement to claim the capital gains deduction under subsection 110.6(2) of the Act. We have enclosed copies of all relevant information circulars and interpretation bulletins for your information.

We trust our comments will be of assistance to you.

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