24 March 2005 External T.I. 2004-0092221E5 - rollover of family farm property on death

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. Can we look at the total collective time an original property and its replacement property were farmed for purposes of determining whether land was farmed "principally" under 70(9).

Position: 1. No- must look at the replacement property's use only.

Reasons: 1.ss 70(9) does not provide for property "substituted" --hence the legislation limits the test to the property being disposed of.

XXXXXXXXXX 								2004-009222

March 24, 2005

Dear Madame:

Re: Transfer of Farm Property to Child on Death

This is in reply to your letter of August 24, 2004. In that letter, you describe a specific scenario and ask whether subsection 70(9) could be used to transfer land to a child from a parent. The situation presented in your letter follows:

1. Son A is a full time farmer who was actively engaged in a farming operation on his own land for 10 years.

2. Son A was forced to sell his land in year 10 as a result of expropriation. In the same year, he purchased new farmland and continued to farm this land on a full time basis until his death 5 years later.

3. On his death, the replacement land was transferred to his parent.

4. Parent rented the land to an unrelated third party until Parent's death 10 years later.

5. The Executors wish to transfer the replacement land to other children of Parent pursuant to Subsection 70(9).

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Given the involuntary disposition of the original land that was owned and farmed by Son A for 10 years, it is your opinion that the replacement property should be regarded as a "substitution" for the original property. Your letter concludes that Parent should be able to transfer the property to the remaining surviving children pursuant to subsection 70(9) as Son A farmed the original property and the replacement property, on a regular and continuous basis, for a total of 15 years.

We do not agree with your conclusion. Where the Act is intended to apply to substituted property, the reference thereto is made. See for example the definition of "qualified farm property" in subsection 110.6(1) which refers to "the property or property for which the property was substituted". Subsection 70(9) does not refer to substituted property, therefore in your example, the relevant property for determining whether the land was used principally in a farming business is the replacement. As this parcel of land had been farmed for only 5 years prior to Son A's death and rented out for 10 years thereafter, it cannot be said that this land was used principally in a farming business. Subsection 70(9) is not applicable to transfer this property to the surviving children upon the death of the Parent.

Please note that the role of the Canada Revenue Agency is to administer and enforce the Act as passed by Parliament. Tax policy and amendments to the Act are the responsibility of the Department of Finance. Should you wish to pursue your concern further, you may contact the Tax Policy Branch of the Department of Finance by writing to L'Esplanade Laurier, 140 O'Connor Street, Ottawa ON, K1A 0L5.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch