16 March 2006 External T.I. 2005-0144881E5 - Qualified Farm Property 110.6(1)

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: The individual's father owned land that he farmed on a full-time basis for approximately XXXXXXXXXX years until he ceased farming operations in XXXXXXXXXX. The land has been rented out on a crop share basis ever since. Upon her father's death in XXXXXXXXXX, the individual's mother inherited the land but she did not farm the land. Upon her mother's death in XXXXXXXXXX, the individual inherited the land but she also, has not farmed the land. Issue is whether in this situation, the person who meets the gross revenue test contained in paragraph 110.6(1)(vi) of the definition of "qualified farm property" can be the father of the individual.

Position: Yes.

Reasons: There has been no break in the continuous ownership of the property among qualified persons. If the father has met the gross revenue test in at least two years and the property is transferred to the mother, who later transfers the property to the child, the requirements of clause (a)(vi)(A) of the definition of qualified farm property in subsection 110.6(1) of the Income Tax Act may be met for the child, even though the mother never farmed the property, and the child has not farmed the property. In respect of the individual taxpayer's father, whether the real property was used principally by him in carrying on a farming business, whether he was actively engaged in the farming business on a regular and continuous basis, and whether his particular operation would constitute a farming business at any particular time are all questions of fact that would have to be determined.

							Tim Fitzgerald, CGA
XXXXXXXXXX						(519) 973-7999 ext. 6509
							2005-014488
March 16, 2006

Dear XXXXXXXXXX:

Re: Qualified Farm Property

This is in reply to your letter of July 28, 2005 wherein you requested our views regarding farmland inherited by a taxpayer. We understand the facts to be as follows:

1. The taxpayer's (Ms. X's) father owned farmland in Canada, which he farmed from approximately XXXXXXXXXX to XXXXXXXXXX, during which time farming was his sole source of income.

2. Ms. X's father rented the land to sharecroppers from XXXXXXXXXX up until the time of his death in XXXXXXXXXX.

3. Ms. X's mother inherited the land in XXXXXXXXXX and she rented the land on a crop share basis until she passed away in XXXXXXXXXX.

4. Upon the death of her mother, Ms. X inherited the land and Ms. X continues to rent the land on a crop share basis to this day.

Your Question:

In order to determine whether the farmland is considered "qualified farm property" in the hands of Ms. X, you ask whether the person who meets the gross revenue test contained in subparagraph (a)(vi) of the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act ("the Act") must be Ms. X or whether, it can be, among others, a parent of Ms. X; such as Ms. X's father in this case.

Our Comments:

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. If the situation involves specific taxpayers and completed transactions, all relevant facts and documentation should be submitted to the appropriate tax services office for their views. You have asked for our views on the subject of your question. While not binding on the Canada Revenue Agency, we offer the following general comments, which may be of assistance.

Subsection 110.6(2) of the Act permits a capital gains deduction of up to $500,000 for an individual resident in Canada throughout the year who disposed of QFP. The definition of "qualified farm property" in subsection 110.6(1) of the Act includes real property such as farmland. The definition requires that the property must have been used in the course of carrying on the business of farming in Canada. Further, the definition provides that property will not be considered to have been used in the course of carrying on the business of farming unless it meets the conditions in either subparagraph (a)(vi) or (a)(vii) of the definition of QFP. You correctly note in your letter that subparagraph (a)(vii) only applies to property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date) and Ms. X in this case, acquired the property after June 17, 1987.

The requirement in subparagraph (a)(vi) of the definition of QFP may be met if the property was owned by, among others, the taxpayer or a spouse, child, or parent of the taxpayer, throughout the 24 months preceding the disposition of the property and, in at least 2 years while the property was so owned (ownership test), the gross revenue of such 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. Therefore, in the situation you have described, for the purpose of determining if the farmland is QFP in the hands of Ms. X, her father may satisfy the 2-year gross revenue test in subparagraph (a)(vi).

Whether a real property was used principally by an individual in carrying on a farming business, whether an individual was actively engaged in the farming business on a regular and continuous basis, and whether a particular operation constitutes a farming business at any particular time are all questions of fact, which in respect of the father in this instance, would have to be determined. The subject of farming is discussed in Interpretation Bulletins IT-322R and IT-433 and the T4003 Farming Income Guide.

We trust these general comments are of assistance.

Yours truly,

Bob Skulski,
Section Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch