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 certain shares would constitute shares of the capital stock of a family farm corporation as defined in subsections 70(10) and 110.6(1) of the Act?
Position: Yes for purposes of subsection 70(10), no for purposes of subsection 110.6(1).
Reasons: The definition contained in subsection 110.6(1) of the Act does not permit the property of a corporation to be used by another corporation a share of the capital stock of which is a share of the capital stock of a family farm corporation
2003-005299
XXXXXXXXXX Karen Power, CA
(613) 957-8953
March 30, 2004
Dear XXXXXXXXXX:
Re: Share of the Capital Stock of a Family Farm Corporation
We are writing in reply to your letter of December 9, 2003, wherein you requested our views on whether particular shares constitute a "share of the capital stock of a family farm corporation" within the definitions contained in subsections 70(10) and 110.6(1) of the Income Tax Act (the "Act").
You have outlined the following hypothetical situation:
1. Mr. and Mrs. X ("Dad" and "Mom") each own 50% of the issued and outstanding shares of the capital stock of Holdco.
2. Holdco's only assets consist of 80% of the issued and outstanding shares of Opco and 100% of the issued and outstanding shares of Landco.
3. Mom and Dad's adult children, "Son" and "Daughter", each own 10% of the issued and outstanding shares of the capital stock of Opco.
4. At the particular time and throughout the 24 month period preceding the particular time, 40% of the fair market value of Holdco's property has been attributable to its shares of Opco and 60% of the fair market value of Holdco's property has been attributable to its shares of Landco.
5. Opco has carried on a farming business for many years and rents certain land and buildings from Landco for use in its farming business. All of the fair market value of the property of Opco has always been attributable to property used by it principally in the course of carrying on the farming business in Canada in which Mom, Dad and Son are each actively engaged on a regular and continuous basis.
6. The land and buildings that are rented to Opco have always been the only assets of Landco and Landco has not carried on any business other than renting these assets to Opco.
7. Mom, Dad and Son are all actively engaged in the farming business of Opco on a regular and continuous basis. Daughter is not involved in the farming business.
8. Mom, Dad, Son and Daughter have always been resident in Canada.
You have requested our comments on whether the issued and outstanding shares of Holdco held by Mom and Dad constitute shares of the capital stock of a family farm corporation as defined in subsections 70(10) and 110.6(1) of the Act.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If your situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.
Subsection 70(10) of the Act
Subsection 70(10) of the Act defines a "share of the capital stock of a family farm corporation" ("the subsection 70(10) definition") of a person at a particular time to mean a share of the capital stock of a corporation owned by the person at that time where, at that time, all or substantially all (90% or more) of the fair market value of the property owned by the corporation was attributable to
(a) property that has been used by
(i) the corporation or any other corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation of the person or of a spouse, common-law partner, child or parent of the person,
...
principally in the course of carrying on a farming business in Canada in which the person or a spouse, common-law partner, child or parent of the person was actively engaged on a regular and continuous basis (or, in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect of that woodlot),
(b) shares of the capital stock or indebtedness of one or more corporations all or substantially all of the fair market value of the property of which was attributable to property described in paragraph (c), or
(c) properties described in paragraph (a) or (b).
Holdco's only assets are the shares of Opco and Landco. Consequently, pursuant to paragraph (b) of the subsection 70(10) definition, all or substantially all of the fair market value of the property of each of Opco and Landco must be attributable to property described in paragraph (c). Paragraph (c) includes properties described in paragraph (a) or (b). Since neither Landco nor Opco own any shares or indebtedness of another corporation, paragraph (b) will be inapplicable to them.
You indicate that all of Opco's property has been used by Opco principally in the course of carrying on a farming business in Canada in which Mom, Dad and Son are actively engaged on a regular and continuous basis. Based on this assumption, the Opco shares would qualify as shares described in paragraph (b) of the subsection 70(10) definition and in turn 40% of the fair market value of Holdco's property would be attributable to property described in paragraph (b) of the subsection 70(10) definition.
Subparagraph (a)(i) of the subsection 70(10) definition provides that property may be used "by any other corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation of the person or of a spouse, common-law partner, child or parent of the person". In the situation described above, Landco's property is used by Opco. Consequently, in order for Landco's property to qualify as a property described in paragraph (a) of the subsection 70(10) definition, a share of Opco must be a share of the capital stock of a family farm corporation of Dad, Mom, Son or Daughter.
Based on the facts provided, the shares of Opco held by Son would be considered shares of the capital stock of a family farm corporation of Son, within the subsection 70(10) definition. These shares of Opco are owned by the person (Son), and 90% or more of the fair market value of the property owned by Opco is attributable to property used by Opco principally in the course of carrying on the business of farming in Canada in which the person (Son) or a parent (Mom or Dad) is actively engaged on a regular and continuous basis. Similarly the shares of Opco held by Daughter would also be considered shares of the capital stock of a family farm corporation of Daughter, as a parent (Mom or Dad) is actively engaged on a regular and continuous basis in the farming business.
As Opco is a corporation, a share of the capital stock of which is a share of the capital stock of a family farm corporation of Son or Daughter, within the subsection 70(10) definition, Landco's property is property described in paragraph (a) of the definition and in turn the remaining 60% of the fair market value of Holdco's property would be attributable to property described in paragraph (b) of the definition.
In our view, the shares of Holdco held by Mom and Dad are shares of the capital stock of a family farm corporation as defined in subsection 70(10) of the Act, since all or substantially all of the fair market value of Holdco's property is attributable to property described in paragraphs (a) to (c) of the subsection 70(10) definition.
Subsection 110.6(1) of the Act
Subsection 110.6(1) of the Act defines a "share of the capital stock of a family farm corporation" ("the subsection 110.6(1) definition") in part to mean:
a share of the capital stock of a corporation owned by the individual at that time where
(a) throughout any 24-month period ending before that time, more than 50% of the fair market value of the property owned by the corporation was attributable to
(i) property that was used by
(A) the corporation,
(B) the individual,
(C) where the individual is a personal trust, a beneficiary of the trust,
(D) a spouse, common-law partner, child or parent of the individual or of a beneficiary referred to in clause (C), or
(E) a partnership, an interest in which was an interest in a family farm partnership of the individual, a beneficiary referred to in clause (C) or a spouse, common-law partner, child or parent of the individual or of such a beneficiary,
principally in the course of carrying on the business of farming in Canada in which the individual, a beneficiary referred to in clause (C) or a spouse, common-law partner, child or parent of the individual or of such a beneficiary, was actively engaged on a regular and continuous basis,
(ii) shares of the capital stock or indebtedness of one or more corporations all or substantially all of the fair market value of the property of which was attributable to property described in subparagraph (iii), or
(iii) properties described in either subparagraph (i) or (ii), and...
The subsection 110.6(1) definition is narrower than the subsection 70(10) definition, in that it does not permit the property of a corporation to be used by another corporation a share of the capital stock of which is a share of the capital stock of a family farm corporation of specified individuals. Based on the current wording of the subsection 110.6(1) definition, since Landco's property is used by another corporation, the property would not qualify as property described in subparagraph (a)(i) above and in turn the shares of Holdco would not meet the subsection 110.6(1) definition as 60% of the fair market value of its property (i.e. its shares of Landco) is not attributable to eligible property.
You note that in a July 29, 2002 comfort letter regarding the subsection 110.6(1) definition, the Department of Finance has indicated that it would seem appropriate to permit a corporation that is related to a family farm corporation to qualify as an eligible user of the property of the family farm corporation where shares of the related corporation that are owned by the persons referred to in clauses (a)(i)(B) to (D) of the definition are shares of the capital stock of a family farm corporation of those persons. The Department of Finance has indicated it is prepared to recommend that such an amendment be made to the definition applicable to dispositions of shares that occur after 2001.
We cannot provide definitive comments without seeing the proposed amendments, however, we would agree that provided the Act is ultimately amended in a manner that is consistent with the stated intentions of the Department of Finance as described in the comfort letter referred to above, it would appear that the shares of Holdco in the above fact situation would constitute shares of the capital stock of a family farm corporation for purposes of subsection 110.6(1) of the Act, for reasons similar to those described above with respect to the subsection 70(10) definition.
In closing, we would note that whether any particular individual would be entitled to the capital gains deduction under subsection 110.6(2) of the Act requires a review of the facts of each case, such that we are not in a position to comment on whether any of the above individuals would be entitled to claim the deduction and, for example, whether any other provision of the Act would be applicable such as subsection 69(11) or section 74.2.
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
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