9 August 2005 External T.I. 2005-0115811E5 - Transfer of 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: i) Whether a property may be transferred tax free from parent to children under subsection 73(3)

ii) Whether a capital gains deduction may be claimed for qualified farm property under subsection 110.6(2).

Position: i) No.

ii) Likely yes.

Reasons: i) The taxpayer did not use the property in the business of farming as required under 73(3).

ii) Provided the parent (parent-in-law), meets the gross revenue test in clause (a)(vi)(A) of the definition of qualified farm property.

2005-011581
XXXXXXXXXX Rob Ferrari
(613) 957-2138
August 9, 2005

Dear XXXXXXXXXX:

Re: Transfer of Farm Property

This is in reply to your letter of August 17, 2004, in respect of the above noted issue. We apologize for the delay in our reply. Our understanding of the facts is as follows:

Mr. B's parents owned a XXXXXXXXXX acre property, of which XXXXXXXXXX acres was farmed on a full time basis for approximately XXXXXXXXXX years. The parents' farming income exceeded their income from all other sources.

Around XXXXXXXXXX, Mr. B's parents ceased their farming activities and began leasing the XXXXXXXXXX acres to an unrelated farmer, who farmed the property. Another XXXXXXXXXX acres of land was leased to unrelated persons who have constructed their own cottages on the property. The remainder of the property was unused woodland.

Mr. B married Mrs. B in the XXXXXXXXXX. In the XXXXXXXXXX, on the death of Mr. B's mother, he and his two siblings each inherited an undivided one-third interest in the property and continued leasing the land to the farmer and cottagers.

In XXXXXXXXXX, Mr. B died and Mrs. B inherited Mr. B's one-third ownership interest in the property.

Mrs. B now wishes to transfer the property for no proceeds to her children. You indicate that it is your understanding the Canada Customs and Revenue Agency can rule that a gift from a mother to a child can be made on a tax-free basis and have requested we review the facts you have provided.

Our Comments:

If you wish to obtain a binding advanced income tax ruling, we have enclosed Information Circular 70-6R5, which explains the processes of an advanced income tax ruling and the fees charged for such services. However, we provide the following comments for your information.

Except as expressly provided for by the Act, when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, under paragraph 69(1)(b) of the Income Tax Act (the "Act"), the taxpayer is deemed to have received proceeds of disposition equal to its fair market value. An exception to this rule is provided for under subsection 73(3) of the Act, which essentially provides for the deferral of the tax consequences on the transfer of farm property from a parent to a child. However, in order to be eligible for that provision to apply, the property must have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse (or common-law partner) or any of the taxpayer's children, was actively engaged on a regular and continuous basis. The Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child, states in paragraph 25, "A lessor of farm property is not considered to be using the property in the business of farming." Since the property was not used in the business of farming by the taxpayer, her spouse or any of her children, the property would not eligible for the transfer under subsections 73(3) of the Act.

However, subsection 110.6(2) of the Act provides for a capital gains exemption for up to $500,000 in respect of "qualified farm property". Because only one-half of a capital gain is included in taxable income, the maximum capital gains deduction is $250,000 (1/2 of $500,000). One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada.

Whether a property is considered to have been used in the course of carrying on the business of farming is dependent on when the property was last acquired by the individual. Mrs. B acquired her portion of the property upon Mr. B's death in XXXXXXXXXX. Consequently, the farm land which Mrs. B owns can be considered to have been used in the course of carrying on the business of farming if the requirements of subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act are met.

Pursuant to subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, real property may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned, by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, throughout the 24 months preceding the sale. In addition, the real property must meet the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Clause (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership and does not appear to apply in your situation.

Under clause (a)(vi)(A) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual's income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be the parent, spouse, grandparent or great-grandparent of the individual

For the purpose of the definition of qualified farm property, a reference to a parent or a child includes a reference to a grandparent or a grandchild, respectively, by virtue of the definition of "child" in subsection 110.6(1) [which has the meaning assigned by subsection 70(10)] and its interaction with subparagraph 252(2)(a)(i). In addition, pursuant to paragraph 252(1)(e) of the Act, a child of a taxpayer includes a spouse or common-law partner of a child of the taxpayer (e.g., son-in-law or daughter-in-law) and, by virtue of subparagraph 252(2)(a)(iii), a parent of a taxpayer includes a person who is a parent of the taxpayer's spouse or common-law partner (e.g., father-in-law or mother-in-law). A grandparent-in-law would also be considered a parent for purposes of the definition of qualified farm property due to the interaction of the definition of "child" in subsection 110.6(1) with paragraph 252(1)(e) and subparagraph 252(2)(a)(i) of the Act. Accordingly, Mr. B's parents are considered Mrs. B's parents for the purposes of the definition of qualified farm property.

The determination of whether real property is used principally by a taxpayer in carrying on a farming business is also a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. As XXXXXXXXXX of the XXXXXXXXXX acres (54.7%) of land had been used by Mrs. B's parents (parents-in-law) in the business of farming, the property would likely be considered a qualified farm property as it also appears to have met the test of having been used "principally" in the business of farming.

It would appear that at the time of disposition, the property owned by Mrs. B would likely meet the gross revenue test in clause (vi)(A) of the definition of "qualified farm property", as you have indicated Mrs. B's parents (parents-in-law), in at least two years while the property was owned, had gross revenue from the farming business carried on in Canada in which the property was principally used and in which the parents were actively engaged on a regular and continuous basis.

We hope the above will be of assistance to you.

Yours truly,

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