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: 1. Do the attribution rules of 74.2(1) apply after a divorce? 2. Will the farmland be considered "qualified farm property" of particular individuals for purposes of subsection 110.6(1) of the Act.
Position: 1. No 2. Question of fact - general comments.
Reasons: 1. The attribution rules under subsection 74.2(1) of the Act, do not apply to the period after the transferee ceases to be the transferor's spouse (e.g. after divorce) 2. Insufficient facts provided
2004-009134
XXXXXXXXXX Karen Power, CA
(613) 957-8953
December 17, 2004
Dear XXXXXXXXXX:
Re: Qualified Farm Property
We are writing in reply to your letter of August 17, 2004, requesting our views on the application of the attribution rules in subsection 74.2(1) of the Income Tax Act (the "Act") and the definition of "qualified farm property" in subsection 110.6(1) of the Act.
You describe a situation where an individual ("Mother") purchased farmland in 1990 (using her own funds) which she used in a farming business. Subsequently, she transferred by way of gift to her spouse ("Father") and their adult son ("Son") a 1/3 undivided interest each in the farmland, on a rollover basis (all these individuals are Canadian residents). All three individuals then transferred their 1/3 interest to a partnership on a rollover basis. Due to marital problems, Mother and Father began to live separate and apart from each other and subsequently became legally divorced. After the divorce was finalized, Mother, Father and Son continue to own their respective interests in the partnership, which continues to use the farmland in its business of farming. The partnership sells the farmland five years after the finalization of the divorce of Mother and Father, resulting in a capital gain of $600,000.
The particular circumstances in your letter on which you have asked for our views appear to involve a factual situation concerning 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. Should your situation involve a specific taxpayer and 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
The attribution rules under subsection 74.2(1) of the Act, in respect of capital gains and capital losses, do not apply to dispositions occurring in the period after the transferee ceases to be the transferor's spouse (e.g. after divorce, see paragraph 16 of IT-325R2 and paragraph 18 of IT-511R). Consequently, it appears that the attribution rules of subsection 74.2(1) of the Act would not be an issue with respect to the above noted sale of the farmland.
As you are aware, where a partnership, an interest in which is an "interest in a family farm partnership" of an individual, owns the real property it uses in the course of carrying on the business of farming in Canada, such real property may be considered "qualified farm property" of the individual. The definition of "qualified farm property" in subsection 110.6(1) of the Act provides that a qualified farm property of an individual at any time means a property owned at that time by inter alia the individual or a partnership, an interest in which is an interest in a family farm partnership of the individual, that is real property that was used by persons specified in subparagraphs (a)(i) through (a)(v) of that definition in the course of carrying on the business of farming in Canada. As the property referred to in your letter was acquired after June 17, 1987, the definition provides that it will not be considered to have been used in the course of carrying on the business of farming in Canada unless it meets the conditions in subparagraph (a)(vi) of the definition.
In addition to meeting the above requirements, Mother, Father and Son's interests in the partnership must be considered an interest in a family farm partnership. The definition in subsection 110.6(1) of an "interest in a family farm partnership" of an individual at any time requires that throughout any 24-month period ending before that time, more than 50% of the fair market value of the property of the partnership was attributable to certain properties, including property used inter alia by the partnership, the individual, or a spouse, common-law partner, child or parent of the individual, principally in the course of carrying on the business of farming in Canada, in which inter alia the individual, or a spouse, common-law partner, child or parent of the individual was actively engaged on a regular and continuous basis. In addition, paragraph (b) of the definition of "interest in a family farm partnership" requires that, at that time, all or substantially all of the fair market value of the property of the partnership must be attributable inter alia to property that was used principally in the course of carrying on the business of farming in Canada by the partnership or a person referred to above.
You enquire whether the farmland may be considered "qualified farm property" of Mother, Father and Son for purposes of subsection 110.6(1) of the Act. As this definition contains a number of tests and we have not been provided with all the relevant facts of the case, we are not in a position to comment on whether the requirements of that definition can be met. For instance, it is unclear based on the information provided whether Mother, Father and Son have been actively engaged on a regular and continuous basis in the farming business and during which years (before and after the divorce). We also have not been provided any information concerning the gross revenue of Mother, nor can we confirm that Mother, Father and Son's interests in the partnership meet the requirements of an interest in a family farm partnership as defined in subsection 110.6(1) of the Act (for example, we have not been provided with any information concerning the property of the partnership).
We would also note that, as requested, we have assumed that the requirements of subsection 73(3) and 97(2) were met and that a partnership existed; however, these are all questions of fact. It would also be necessary to consider whether subsection 110.6(11) and section 103 of the Act could apply.
We trust that our comments are 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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