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.
2003-000920
XXXXXXXXXX Karen Power, CA
(613) 957-8953
April 17, 2003
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - "Qualified Farm Property"
We are writing in reply to your letter of March 14, 2003, wherein you requested our views on whether your clients 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") after the death of its current owners. We also acknowledge the additional information you provided in our telephone conversation (Power/XXXXXXXXXX) of April 14, 2003, regarding the situation described in your letter.
You describe a situation in which a taxpayer "Mrs. X" inherited the Property in about 1942. Mrs. X married Mr. X around 1950 and Mr. X farmed the Property on a full-time basis until his retirement in 1986. Since 1986 the land has been idle. Mrs. X has recently transferred a one-half undivided interest in the Property to Mr. X.
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 conclusively determine whether your clients 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, when spouses own a property jointly and the attribution rules of subsection 74.2(1) of the Act (discussed below) do not apply, each spouse 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", both spouses 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 that Mrs. X acquired her interest in the Property in 1942. Consequently, Mrs. X's interest in the Property can be considered to have been used in the course of carrying on the business of farming if the requirements of either subparagraph (a)(vi) or (a)(vii) of the definition are met. On the other hand, Mr. X's interest in the Property was acquired after June 17, 1987. Mr. X's interest in the Property will 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.
Subparagraph (a)(vii) only applies to property 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, a spouse, child or parent of the individual principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by any such 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 your clients meets, at this time, the requirements of "qualified farm property". However, in the situation you describe, the requirements of subparagraph (a)(vi) of the definition would be met in respect of both Mrs. X and Mr. X, if in fact, in at least 2 years while the property was owned by Mrs. or Mr. X, Mr. X was carrying on a farming business in Canada in which he was actively engaged on a regular and continuous basis and in which the Property was principally used and if, in fact, the gross revenue from that farming business exceeded Mr. X's income from all other sources.
Based on the information you have provided, it appears that the Property was recently transferred from sole ownership to joint ownership (we have assumed that Mrs. X received no proceeds). It is generally our view that the transfer of property solely owned by a person into a joint tenancy arrangement between that person and another person would result in a disposition pursuant to subsection 248(1) of the Act of 50% of that person's interest in the entire property, unless the transfer did not result in a change in beneficial ownership (in which case a true joint tenancy arrangement would not exist). The concepts of "beneficial ownership" and "legal ownership" as recognized under the common law jurisdictions are discussed in interpretation bulletin IT-437R. In a situation where a taxpayer transfers a property into joint tenancy with his or her spouse, and the taxpayer does not opt out of subsection 73(1) of the Act, this provision would deem the proceeds of disposition to be equal to 50% of the adjusted cost base or the undepreciated capital cost of the property, as the case may be. The particular spouse acquiring the property will be deemed to have acquired the property at that time for an amount equal to those proceeds. While no capital gain would be realized by the transferor, the attribution rules of section 74.2 may apply to attribute to the transferor any capital gains or capital losses resulting from a subsequent disposition. If the transferor elects not to have subsection 73(1) apply, then the proceeds of disposition of the transferred property would be deemed to be equal to the fair market value of the property at the time of the transfer in accordance with paragraph 69(1)(b) of the Act, and the attribution rules would not apply pursuant to paragraph 74.5(1)(c) of the Act. You may wish to refer to Interpretation Bulletin IT-511R for additional information on the application of the attribution rules.
If either Mr. X or Mrs. X dies before the disposition of the Property, the remaining spouse will become the sole owner of the Property. Generally upon death, capital property is considered pursuant to subsection 70(5) of the Act 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, subsection 70(5) of the Act does not apply in respect of any capital property of the deceased taxpayer that is, as a consequence of the death, transferred or distributed to the taxpayer's spouse or common-law partner who was resident in Canada immediately before the taxpayer's death, unless an election is made under subsection 70(6.2) of the Act to have subsection 70(5) apply. Where no election is made, pursuant to subsection 70(6) of the Act, such transfers or distributions are generally deemed to be made for proceeds of disposition equal to the property's adjusted cost base to the taxpayer immediately before death (or the lesser of the capital cost or cost amount, immediately before death, in the case of depreciable property). Accordingly, any capital gain that accrued prior to the date of death will be taxed in the hands of the transferee when he or she subsequently disposes of the property. If an election is made to have subsection 70(5) of the Act apply, depending on the facts, the attribution rules discussed above may apply to attribute the capital gain to the surviving spouse.
Copies of information circulars and interpretation bulletins referred to herein are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.
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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