2004 Ruling 2003-0054531R3 - 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.

Principal Issues: Whether the fact that children of a deceased parent have not owned or used a property, transferred to them as a consequence of the parent's death, in a business of farming for at least 24 months would prevent the property from being considered "qualifed farm property" of the children if it was otherwise considered "qualified farm property" to the parent.

Position: No.

Reasons: Pursuant to the definition of "qualified farm property" in ss. 110.6(1) of the Act, the person meeting the ownership and use tests need not be the individual who owns the property and may be the spouse, child or parent of such an individual. In this case, a parent of the individual appears to have met those requirements prior to his death. As a result, the individual does not need to own the property inherited, nor use it principally in a business of farming, for at least 24 months to consider the property as "qualified farm property" for the purposes of s. 110.6 of the Act.

XXXXXXXXXX 2003-005453

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer")

This is in reply to your letter of XXXXXXXXXX, as amended by your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the taxpayer identified above. We also acknowledge the additional information provided to us by your letter of XXXXXXXXXX and our various telephone conversations (XXXXXXXXXX).

You confirmed that to the best of your knowledge and that of the Taxpayer, none of the issues involved in this ruling, as they apply specifically to the Taxpayer or any related person, is:

(i) in an earlier return;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return;

(iii) under objection;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(v) the subject of a ruling previously issued by this Directorate.

Except as otherwise noted, all statutory references in this document are references to the provisions of the Income Tax Act of Canada, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof (the "Act").

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX ("Mr. M") was born on XXXXXXXXXX and died on XXXXXXXXXX.

2. Mr. M was a resident of Canada.

3. Mr. M was a widower. His only wife passed away in XXXXXXXXXX.

4. Mr. M had XXXXXXXXXX children:

XXXXXXXXXX.

5. The Daughter is a resident of the United States of America and not a resident of Canada;

6. All XXXXXXXXXX of Mr. M's sons are residents of Canada.

7. All children are older than the age of 18.

8. On the date of his death, Mr. M owned XXXXXXXXXX acres of land in XXXXXXXXXX, Canada. The legal description of the land is XXXXXXXXXX.

9. Mr. M acquired the XXXXXXXXXX acres of land in XXXXXXXXXX and owned it continuously until the date of his death.

10. The fair market value of the land on XXXXXXXXXX was approximately $XXXXXXXXXX.

11. For the period of at least XXXXXXXXXX until the time of death, the land and the buildings thereon, excluding the building which constituted Mr. M's principal residence (collectively referred to as the "Real Property") were used principally (see paragraphs 24 and 25 below) by Mr. M to carry on the business of XXXXXXXXXX in Canada (the "Farm Business").

12. The aggregate fair market value of the entire land and buildings thereon at the time of death is approximately $XXXXXXXXXX based on a range of three (3) independent valuations made during the XXXXXXXXXX taxation year. The fair market value of the Real Property is approximately $XXXXXXXXXX, whereas the fair market value of Mr. M's principal residence is approximately $XXXXXXXXXX.

13. The Farm Business was operated as a sole proprietorship year-round.

14. Mr. M devoted the majority of his time (average of XXXXXXXXXX hours per week) to carrying on the Farm Business. A lesser portion of his time (average of XXXXXXXXXX hours per week) was allocated to property management duties for a small commercial property in XXXXXXXXXX, which earned rental income.

15. Mr. M, along with other related persons, were the only shareholders of the corporation that owned the commercial property, and Mr. M was its President until the time of his death. Mr. M earned both employment income and dividends from this corporation.

16. Mr. M lived on the land used in the Farm Business as it was essential for the required daily care of his XXXXXXXXXX and other livestock (XXXXXXXXXX) and the related farming operation, i.e. crops, XXXXXXXXXX, and twice daily chores.

17. Mr. M employed contract casual labour to assist with farming operations throughout the year and especially during haying and harvest times. A second residence was built by Mr. M on the property for his farm help.

18. Over the years, Mr. M regularly committed capital to maintaining and replacing farming machinery in order to assist him with his Farm Business as required.

19. Mr. M improved the barn, extended the arena, and built new sheds on the property to allow for more suitable and useful storage and XXXXXXXXXX facilities, which required capital investments of close to $XXXXXXXXXX over the last decade. Further, Mr. M re-fenced the entire land including the XXXXXXXXXX individual fields with "keep-safe" fencing - the safest fencing designed specifically to contain XXXXXXXXXX - which cost over $XXXXXXXXXX.

20. Mr. M also purchased XXXXXXXXXX at different times in order to grow his inventory of XXXXXXXXXX, which were not held for personal enjoyment but rather were purchased with the intent of XXXXXXXXXX.

21. Mr. M operated the business with an expectation of profit. Given the cyclical nature of the farming business, net income from the Farm Business was not always positive. Nonetheless, Mr. M always earned gross revenues and in some taxation years realized a profit. Listed below are examples of some taxation years in which Mr. M realized a profit from his Farm Business:

Taxation Year
Gross Revenues
from the Farm Business
Profit from the
Farm Business
XXXXXXXXXX
$XXXXXXXXXX
$XXXXXXXXXX
XXXXXXXXXX
$XXXXXXXXXX
$XXXXXXXXXX

22. During at least two (2) years while the Real Property was owned by Mr. M, the gross revenues from his Farm Business exceeded his income from all other sources for the year as illustrated below. All amounts were obtained from Mr. M's income tax returns as filed for the respective taxation years.

Taxation Year: XXXXXXXXXX
Gross Revenues from the Farm Business
$ XXXXXXXXXX

Less: Income from Other Sources:

Employment Income (note 1)
$ XXXXXXXXXX
Old Age Security Pension
$ XXXXXXXXXX
CPP Benefits
$ XXXXXXXXXX
Taxable Amount of Dividends (note 1)
$ XXXXXXXXXX
Interest and Other Investment Income
$ XXXXXXXXXX
Other Income
$ XXXXXXXXXX
Total Income from Other Sources
$ XXXXXXXXXX
Gross Revenues from Farm Business
In Excess of Income from Other Sources
$ XXXXXXXXXX

Taxation Year: XXXXXXXXXX
Gross Revenues from the Farm Business
$ XXXXXXXXXX

Less: Net Income from Other Sources:

Employment Income (note 1)
$ XXXXXXXXXX
Old Age Security Pension
$ XXXXXXXXXX
CPP Benefits
$ XXXXXXXXXX
Taxable Amount of Dividends (note 1)
$ XXXXXXXXXX
Interest and Other Investment Income
$ XXXXXXXXXX
Other Income
$ XXXXXXXXXX
Total Income from Other Sources
$ XXXXXXXXXX
Gross Revenues from Farm Business
In Excess of Income from Other Sources
$ XXXXXXXXXX

Note 1: The employment income and the dividend income in both taxation years were earned from the corporation referred to in paragraph 15 above.

23. Operating the Farm Business was Mr. M's main occupation. He was actively engaged on a regular and continuous basis in that business. Mr. M's activities included (but were not limited to) the following:

a. Management and/or day-to-day activities, including:

i. Maintenance of financial books and records of the Farm Business, including bookkeeping and the preparation of financial statements;

ii.Actively involved in the sale and purchase of XXXXXXXXXX throughout the year;

iii.Feeding and caring of XXXXXXXXXX on a daily basis, morning and night.

b. Operating the Farm Business, including:

i. XXXXXXXXXX Research including reading XXXXXXXXXX sales catalogues and periodicals;

ii.Selection of XXXXXXXXXX;

iii.Attendance at various auction sales at XXXXXXXXXX , with the intent of purchase and sale of XXXXXXXXXX;

iv.Farming the land in order to adequately feed XXXXXXXXXX.

24. The Real Property was used principally in the Farm Business. XXXXXXXXXX.

25. Throughout that same period, approximately XXXXXXXXXX acres of the land was bush and wetland. Approximately one (1) acre was used for XXXXXXXXXX, and approximately one (1) acre of land was used by Mr. M for residential purposes.

26. The Last Will and Testament of Mr. M established that the Real Property he owned be transferred equally to his XXXXXXXXXX sons upon death (the "Farm Beneficiaries").

Proposed Transactions

27. The Real Property will vest indefeasibly with the XXXXXXXXXX Farm Beneficiaries within the XXXXXXXXXX months after XXXXXXXXXX (date of death).

28. For tax purposes, the trustee of Mr. M's estate, the Taxpayer, intends to elect under subsection 70(9) of the Act and transfer the Real Property to the XXXXXXXXXX Farm Beneficiaries at an elected amount that is within the limits provided in paragraph 70(9)(b) of the Act.

29. Until sold, the Farm Business will continue to be operated by the Taxpayer. The other XXXXXXXXXX Farm Beneficiaries do not operate the Farm Business.

30. The Taxpayer, and the other XXXXXXXXXX Farm Beneficiaries, will sell the Real Property to an unrelated party.

31. The proceeds of disposition of the Farm Property will be divided equally between each of the XXXXXXXXXX Farm Beneficiaries, including the Taxpayer.

32. A capital gain is expected to be realized by the Taxpayer on the sale of the Real Property as his share of the current fair market value will exceed his adjusted cost base, as determined by the election made under the subsection 70(9) of the Act described in paragraph 28 above.

33. The Taxpayer has an unused Capital Gains Exemption balance to reduce the taxable income resulting from the disposition of the Real Property.

Purpose of the Proposed Transactions

34. Due to their other responsibilities, neither the Taxpayer nor any of the XXXXXXXXXX other Farm Beneficiaries intend to continue carrying on the Farm Business. The Taxpayer and the other Farm Beneficiaries wish to dispose of the Farm Property in order to settle the estate of Mr. M as soon as possible.

Ruling Given

Provided the above facts constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that the fact the Taxpayer has not owned the Real Property, nor operated the Farm Business, for a period of at least 24 months prior to the disposition referred to in paragraph 30 above will not, in and by itself, prevent the Taxpayer's interest in the Real Property from being considered "qualified farm property", as defined in subsection 110.6(1) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency ("CRA") provided the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments.

Other Comments

Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to or accepted:

a) that Mr. M carried on a business of farming at any particular time;

b) that the Real Property was used by Mr. M principally in a business of farming during any period of time;

c) that Mr. M was actively engaged on a regular and continuous basis in a business of farming in Canada;

d) that the gross revenue of Mr. M from any farming business exceeded his income from all other sources for any taxation year;

e) the determination of the fair market values referred to in this letter;

f) that the requirements of subsection 70(9) of the Act have been satisfied.

These were facts provided to us, and our ruling is given on the assumption that all the facts provided are correct.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch