23 May 2003 Ruling 2003-0015583 - 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.

		2003-001558
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
May 23, 2003

Dear XXXXXXXXXX:

Re: Capital Gains Deduction - "Qualified Farm Property"

We are writing in reply to your letter of April 28, 2003, wherein you requested an advance income tax ruling confirming that a particular farmland would be considered "qualified farm property" as that term is defined in subsection 110.6(1) of the Income Tax Act (the "Act"). As agreed in a recent telephone conversation (Power/XXXXXXXXXX), the Canada Customs and Revenue Agency ("CCRA") cannot provide an advance income tax ruling on this matter based on the information submitted, however we are prepared to provide you with the following non-binding technical opinion. Your deposit will be returned under separate cover.

You have provided us with the following information:

1. XXXXXXXXXX ("Mr. X") was a rancher and farmer in XXXXXXXXXX from the XXXXXXXXXX until the XXXXXXXXXX. His operations consisted of XXXXXXXXXX

2. It is your understanding that Mr. X acquired his farmland (the "Original Farm") in the early XXXXXXXXXX and farmed it continuously until his retirement in the XXXXXXXXXX. In XXXXXXXXXX, you ("Mrs. A") and your sister XXXXXXXXXX ("Mrs. B") purchased the Original Farm as tenants in common from Mr. X for $XXXXXXXXXX. Mrs. A and Mrs. B are Mr. X's daughters.

3. After the purchase, Mrs. B and Mr. X continued to farm the Original Farm. In XXXXXXXXXX , the Original Farm was subdivided and upon subdivision Mrs. A obtained full ownership of a portion of the Original Farm hereinafter referred to as the "Property", while Mrs. B obtained full ownership of the remainder of the Original Farm. The land associated with the Property was principally used in Mr. X's farming operations.

4. Since XXXXXXXXXX, the Property has been rented out on a sharecrop basis.

Our comments

It is our understanding that you filed a capital gains election with respect to the Property pursuant to subsection 110.6(19) of the Act. Subsection 110.6(19) of the Act sets out the rules in connection with the election relating to the elimination of the $100,000 capital gains exemption in 1994. It is our understanding that your capital gains election was disallowed. It would appear based on our review of the documentation provided, your capital gains election was disallowed because your total elected taxable capital gain from all your properties exceeded the taxable capital gains limit for the election (generally $75,000, where the individual had not previously claimed a capital gains deduction on any of their 1985 to 1993 tax returns). We have assumed that you did not file an amended election with respect to the Property; consequently no deemed disposition or re-acquisition took place in 1994.

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.

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 you acquired the Property before June 17, 1987. Consequently, 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.

The requirement in subparagraph (a)(vi) of the definition will be met if the property (including property for which the property was substituted) 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 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 (including property for which the property was substituted) 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. Such a determination must be made on a property-by-property basis. 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.

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 would be required to conclusively resolve whether the Property may be considered "qualified farm property" of Mrs. A. However, in the situation you describe, the requirements of subparagraph (a)(vi) of the definition would be met in respect of Mrs. A, if in fact, in at least 2 years while the Original Farm was owned by 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 Original Farm was principally used and if, in fact, the gross revenue from that farming business exceeded Mr. X's income from all other sources.

Similarly, based on the facts, the 5-year use test in subparagraph (a)(vii) of the definition would be met in respect of Mrs. A if Mr. X used the Original Farm principally in the course of carrying on the business of farming in Canada in at least 5 years during which Mr. X owned the Original Farm.

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. We have not been provided with sufficient information to determine the adjusted cost base of the Property following the XXXXXXXXXX subdivision. In relation to that year, it was generally the CCRA's position that no disposition for purposes of the Act would occur where land which was held by two persons as "tenants in common", was partitioned with each owner obtaining full ownership of one-half of the property. Based on information provided during our recent telephone conversation, it would appear that you and your sister did not receive equal halves following the partition. Such an unequal distribution of the property may have resulted in a disposition for purposes of the Act.

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. Copies of 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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