31 August 2005 Internal T.I. 2004-0103051I7 - QFP 110.6(1)(a) and CGD 110.6(2)

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: Break in continuous family ownership of property and taxpayer himself has never farmed the land but merely rented it out to sharecroppers for rental income - whether properties acquired before June 18, 1987 are qualified farm property as defined under 110.6(1)(a) for the purposes of capital gains exemption under 110.6(2).

Position: Yes. While the properties owned by the taxpayer would not qualify under 110.6(1)(a)(vi) because they fail the 2-year gross revenue test, the properties would satisfy the 5-year use test under (a)(vii) if they were each disposed of by the taxpayer today.

Reasons: The properties in question were acquired pre-1987 and formed part of the original XXXXXXXXXX acres that had been owned and farmed by the taxpayer's parent in each of the XXXXXXXXXX years from XXXXXXXXXX to XXXXXXXXXX . The apparent break in continuous family ownership would not be fatal in meeting the definition of QFP under 110.6(1)(a)(ii). Since each of the properties would meet the definition of qualified farm property under (a)(vii), the taxpayer would be entitled to a capital gains exemption on the disposition of these properties subject to the conditions and limitations set out in subsection 110.6(2).

		August 31, 2005

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
	XXXXXXXXXX 	Tim Fitzgerald, CGA
	VECR	(519) 973-7999 ext. 6509

		2004-010305

Qualified Farm Property SS 110.6(1) and capital gains deduction SS 110.6(2)

We are responding to your letter of November 8, 2004 wherein you requested our comments regarding Qualified Farm Property for the purposes of the Capital Gains Exemption. You indicate in your letter that a taxpayer within the XXXXXXXXXX tax service area is contemplating selling his farm property and from the information provided we understand the facts to be as follows:

1. In XXXXXXXXXX the taxpayer's father moved a house from XXXXXXXXXX, Ontario and relocated it on XXXXXXXXXX acres of land in what is now XXXXXXXXXX. The father, the taxpayer's older brothers and other relatives farmed the land, which had livestock including horses, pigs, chickens and a cow.

2. In XXXXXXXXXX the taxpayer's mother died. His father continued to farm the land until he passed away in XXXXXXXXXX.

3. The taxpayer's uncle took over operation of the farm under guardianship.

4. In XXXXXXXXXX the farm was sold to a cousin, and he and his wife continued to farm there. It's not clear to us how much of the land was sold to the cousin of the taxpayer.

5. In XXXXXXXXXX the uncle that had taken over the farm in XXXXXXXXXX, died.

6. The Estate was finally settled in XXXXXXXXXX. The taxpayer's two sisters each received XXXXXXXXXX acres of land as their portion of the Estate. Other brothers and sisters of the taxpayer also received acres of the property. The remaining XXXXXXXXXX acres, the house and the granary were left to the taxpayer and his older brother. In exchange for paying off all of the older brother's debts, his older brother transferred his interest in the property over to the taxpayer, leaving the taxpayer sole interest in the XXXXXXXXXX acres. The taxpayer repaired the house and with his wife and XXXXXXXXXX children, took up residence there.

7. Later in the XXXXXXXXXX, the taxpayer purchased XXXXXXXXXX acres of land from one of his sisters. It is not clear how or from whom the taxpayer obtained the additional XXXXXXXXXX acres that brings his current total to the XXXXXXXXXX acres he says he now owns (XXXXXXXXXX). He indicates that XXXXXXXXXX acre forms part of his principal residence. It is the remaining XXXXXXXXXX acres that is the subject of your request regarding whether or not the property would be considered by Canada Revenue Agency to be Qualified Farm Property for the purposes of the Capital Gains Exemption.

8. Since the XXXXXXXXXX the taxpayer has rented the lands out to various unrelated sharecroppers.

9. It is our understanding that the taxpayer himself has never been actively engaged in the business of farming.

Our Comments:

Generally speaking, subsection 110.6(2) of the Act permits a capital gains deduction of $500,000 for an individual who is resident in Canada throughout the year and disposed of Qualified Farm Property (QFP) in the year. One of the conditions that must be met for real property of an individual to be considered a QFP as defined in subsection 110.6(1) of the Act is that the property must have been used in the course of carrying on the business of farming in Canada by, among others, the individual or a spouse, child or parent of the individual. Further, the definition of QFP provides that a property will not be considered to have been used in the course of carrying on the business of farming in Canada unless (for the purpose of paragraph 110.6(1)(a)) it meets the conditions set out in either subparagraph (a)(vi) or subparagraph (a)(vii) of the definition.

The requirements in subparagraph (a)(vi) of the definition of QFP are met if:

• the property was owned by a person who was, among others, the individual or a spouse, child, or parent of the individual, throughout the 24 months preceding the disposition of the property ("continuous ownership test"), and,
• in at least 2 years while the property was so owned, the gross revenue of such a person from the farming business carried on in Canada in which the property was principally used, and in which such person was actively engaged on a regular and continuous basis exceeded the person's income from all other sources for the year ("2-year gross-revenue test").

In our view, the person meeting the 2-year gross-revenue test in subparagraph (a)(vi) need not be the individual who owns the property and may, for instance, be the spouse, child or parent of such individual. If a parent has met the 2-year gross-revenue test while the parent owned the property, and the parent later transfers the property to a child, the child is regarded as having met the 2-year gross-revenue test requirement of the definition of QFP, even though the child may have never farmed the property.

In the case of this individual taxpayer, if each of the properties summing to XXXXXXXXXX acres were disposed of today, the 2-year gross-revenue test would not be met under 110.6(1)(a)(vi) for any of the properties. In the alternative, we turn to subparagraph (a)(vii).

There are indications in the information provided with your query, which suggest that the farmland may at one time, have been owned by an uncle and some land may have been owned by cousins of the taxpayer. The information provided is sketchy and we are unable to ascertain whether this land forms part of the properties now owned by the taxpayer. It is also not clear to us from whom the inherited portion of the taxpayer's real property was actually inherited, be it from his uncle or his father's estate. Moreover, it is unclear how many distinct legal properties the taxpayer actually owns. We are told that the sum of all the lands is approximately XXXXXXXXXX acres and that each of these properties formed part of the original XXXXXXXXXX acres once farmed and owned by the taxpayer's father back in the XXXXXXXXXX. We should point out that where more than one legal property has been disposed, the determination of whether the property may be considered "qualified farm property" for the purposes of the Income Tax Act must be applied to each legal property. As a precaution, we will assume that for each of the properties, there was a break in their respective ownership (possibly by an uncle and/or cousins and/or a sibling of the taxpayer) following the parent's death in XXXXXXXXXX and before the time ownership in the properties was last acquired by the taxpayer.

Subparagraph 110.6(1)(a)(vii) of the definition of QFP applies only to property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date). Under this subparagraph of the definition, property must have been used by, among others, the individual or a spouse, child or parent of the individual principally in the course of carrying on the business of farming in Canada, either:

• in the year the property is disposed of, or
• in at least 5 of the years during which the property was owned by, among others, the individual or the spouse, child or parent of the individual ("5-year use test").

In this particular case, the taxpayer acquired all the properties (that sum to XXXXXXXXXX acres) before June 18, 1987. Although it remains a question of fact, for the purpose of addressing your query we assume that each of the taxpayer's properties forms part of the original XXXXXXXXXX acres once owned and farmed by his parent in the years from XXXXXXXXXX to XXXXXXXXXX. Under that assumption, the 5-year use test at subparagraph 110.6(1)(a)(vii) is met and each property would be considered "qualified farm property". The apparent break in the continuous ownership of the property between the parent and the taxpayer would not alter the outcome under subparagraph (a)(vii). Therefore, subject to the conditions and limits set out in subsection 110.6(2), if each of the properties were disposed of today, the taxpayer would be permitted a capital gains deduction under Subsection 110.6(2) for each such disposition.

We trust these comments are helpful. If you have any questions regarding this interpretation, please contact Tim Fitzgerald at (519) 973-7999 at extension 6509.

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch

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