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.
2003-003484
XXXXXXXXXX Karen Power, CA
(613) 957-8953
October 22, 2003
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - "Qualified Farm Property"
We are writing in reply to your recent letter, wherein you requested our views on whether you and your spouse 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 portion of your farm property.
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 spouse would be entitled to the $500,000 capital gains deduction. Although we are unable to provide an advance tax ruling, we can provide you with our general comments that may be of assistance.
It should also be noted that the situation described in your letter involves a number of legal issues which must first be resolved in establishing the tax consequences of the future transfer or disposition of the farm property. For instance, each spouse's entitlement to proceeds of disposition on the sale of the farm property is dependent on their legal ownership interests in the property. The legal ownership of a property is a question of fact and it is unclear based on the limited information provided who owns the property referred to in your letter. It is also unclear how many distinct legal properties you own. Where more than one legal property has been disposed, the determination of whether the property may be considered "qualified farm property" for purposes of the Act must be applied to each legal property. Furthermore, it is unclear whether a partnership existed between your father and his brothers or whether they carried on separate businesses.
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 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. We have not been provided with sufficient facts to establish whether the attribution rules apply to your situation; however, we have enclosed a copy of Interpretation Bulletin IT-511R which provides information on when the attribution rules may apply.
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, a spouse, child or parent of the individual or, a family farm partnership in which any of these persons have an interest. Further, the definition provides that property will not be considered to have been used in the course of carrying on the business of farming unless it meets the conditions in either subparagraph (a)(vi) or (a)(vii) of the definition.
The requirement of clause (a)(vi)(A) 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 period of at least 24 months immediately preceding the disposition of the property (the "continuous ownership period") 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 clause (a)(vi)(A) need not be the person who owns the property and may, for instance, be the spouse, child or parent of such a person. However, it is also our view that the 2-year gross revenue test must be satisfied during the continuous ownership period. Clause (a)(vi)(B) of the definition only applies when the property was used by a corporation or a partnership as described therein.
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, or a family farm partnership in which any of the above persons have an interest 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 such a person or partnership.
Properties acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date) may satisfy the requirements of either subparagraph (a)(vi) or (a)(vii) of the definition. It is unclear based on the information provided when you acquired each of your interests in the property. The determination of whether each of your interests may be considered "qualified farm property" for purposes of the Act must be evaluated separately.
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. As indicated in paragraph 9 of IT-433R, the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming.
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 parcel of land held by the taxpayer meets the requirements of "qualified farm property". Considering the complexity of the legal and tax issues involved with respect to this subject matter, you may want to consult with a legal and/or tax professional to assist you in 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 and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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