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: Interaction of paragraph 40(2)(c) of the Act and the definition of "qualified farm property" in subsection 110.6(1) of the Act.
Position: Paragraph 40(2)(c) of the Act does not provide that a legal property may be regarded as two separate properties for purposes of determining whether the property is "qualified farm property" as defined in subsection 110.6(1) of the Act.
Reasons: Paragraph 40(2)(c) applies for purposes of computing the gain from the disposition of land used in a farming business carried on by the taxpayer that includes property that was at any time the taxpayer's principal residence.
2004-009407
XXXXXXXXXX Karen Power, CA
(613) 957-8953
February 28, 2005
Dear XXXXXXXXXX:
Re: Qualified Farm Property and Principal Residence
We are writing in reply to your letter of September 8, 2004, requesting our views on the interaction of subparagraph 40(2)(c)(i) of the Income Tax Act (the "Act") and the definition of "qualified farm property" in subsection 110.6(1) of the Act.
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.
If an individual disposes of land used in a farming business which he or she carried on at any time and such land includes property that was at any time his or her principal residence, paragraph 40(2)(c) of the Act provides that any gain on the disposition of the land may be calculated using either of two methods.
The first method as provided for in subparagraph 40(2)(c)(i) of the Act, basically allows the taxpayer, for purposes of computing the gain, to regard the property as being divided into two portions: the principal residence portion and the remaining portion, part or all of which was used in the farming business. The gain otherwise determined for the principal residence portion may be reduced or eliminated by the principal residence exemption provided for in paragraph 40(2)(b) of the Act; the gain on the remainder of the property results in a taxable capital gain. However a section 110.6 capital gains deduction may be claimed if the property is "qualified farm property" as defined in subsection 110.6(1) of the Act.
In our view, paragraph 40(2)(c) of the Act does not provide that a legal property may be regarded as two separate properties for purposes of determining whether the property is "qualified farm property" as defined in subsection 110.6(1) of the Act. Such a determination must be applied to each separate legal property on a property-by-property basis. In determining whether specific requirements of the definition of "qualified farm property" have been met, one would look at the usage of the entire legal property.
Whether or not the residence portion of a property would be considered to be used in the business of farming is a question of fact, which can only be determined after an examination of all the relevant facts. Factors that are relevant in determining whether a residence or a portion of the residence is used in the farming business would include the type and size of the operation and the extent of involvement of the farmer, who lives in the residence, in the day-to-day management of the operation. The nature of the farming operation must also be such that it may demand the farmer's attention at virtually any time.
As you are aware, if a property qualifies as a "principal residence", an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise realized on the disposition of the property. The term "principal residence" is defined in section 54 of the Act. If the land on which the housing unit is situated is one-half hectare or less, it will usually qualify as part of the taxpayer's "principal residence". Land in excess of one-half hectare may also qualify but only to the extent that it is established by the taxpayer as being necessary for the use and enjoyment of the housing unit as a residence. Whether such excess land can qualify for the principal residence exemption is therefore a question of fact and the onus is on the taxpayer to establish that the excess is necessary for the use and enjoyment of the housing unit as a residence. Accordingly, we are not in a position to comment on whether the excess land referred to in your letter qualifies for the principal residence exemption or whether it can be considered to be used in a farming business.
We would also note that, as indicated in paragraphs 14 and 16 of Interpretation Bulletin IT-120R6, where a portion of land on which a housing unit is situated is used for income-producing purposes such portion is usually not considered to be necessary for the use and enjoyment of the housing unit as a residence. In this regard, we have not been provided with any information with respect to the use of the land referred to as the "principal residence" in your letter, in order to comment on whether it in fact can qualify for the principal residence exemption.
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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