7 May 2004 External T.I. 2003-0024401E5 - Intervivos transfer of 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.

Principal Issues: Whether subsection 73(3) of the Act would apply to a particular situation.

Position: Likely yes.

Reasons: Question of fact, but requirements of subsection 73(3) appear to have been met

		2003-002440
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
May 7, 2004

Dear XXXXXXXXXX:

Re: Technical Opinion Request

We are writing in reply to your letter of June 12, 2003, wherein you requested our views on whether subsection 73(3) of the Income Tax Act (the "Act") would apply to the following situation. We apologize for the delay in responding.

1. Father (Mr. A) owns farmland located in Canada that he acquired 60 years ago. Mr. A farmed 100% of the land for 50 years.

2. Mr. A retired and has rented the land to a non-related party for the last 10 years.

3. Mr. A, and his spouse Mrs. A, have two adult children who are both residents of Canada.

4. Mr. A dies in 2004 and Mrs. A inherits the farmland. The farmland is transferred to Mrs. A on a rollover basis pursuant to subsection 70(6) of the Act.

5. Within a few months of Mr. A's death, Mrs. A will gift the land to the children. The farmland continues to be rented out while it is owned by Mrs. A.

Our comments

Written confirmation of the tax implications applicable to particular transactions is given by this Directorate only if the transactions are proposed and are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5. However, we are prepared to offer the following general comments.

Subsection 73(3) of the Act essentially provides for the deferral of the tax consequences on the transfer of farm property from a parent to a child during the parent's lifetime. In general terms, in order for a farm property to be eligible for the subsection 73(3) rollover, the following conditions, inter alia, must be met:

? the farm property must be in Canada;

? the property must be transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer; and

? before the transfer, the property must have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse (or common-law partner) or any of the taxpayer's children, was actively engaged on a regular and continuous basis.

The determination of whether real property is used principally 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. In our view, when determining whether assets will meet the more than 50% requirement, the test has to be applied on a property-by-property basis. Subsection 73(3) states, in part, that "... the property was, before the transfer, used principally in the business of farming...". There is no requirement that the property be used immediately before the transfer in the business of farming. However, as indicated in paragraph 24 of IT-268R4, if the property is used for some purpose other than farming for some period of time, a question may arise as to whether the property was used principally for that other purpose rather than in the business of farming.

Whether a particular farming operation constitutes a farming business at any particular time is a question of fact. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Canada Revenue Agency's ("CRA") 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 CRA'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.

In our view, in the circumstances described above and subject to the application of subsection 69(11) of the Act, the rollover provided under subsection 73(3) of the Act would be available to Mrs. A, provided that in the total time the land was owned by Mr. A and then by Mrs. A, it was in fact used principally in the business of farming in which Mr. A was actively engaged on a regular and continuous basis and provided that the other requirements of subsection 73(3) of the Act are met.

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 Planning Branch