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: If grandparent transfers vacant/idle land once used in farming business to the grandson, and the grandson does not farm the land, will the grandson still be entitled to claim a capital gains exemption under subsection 110.6(2) when he disposes of the property?
Position: Yes.
Reasons: The period of ownership by the grandson, and his grandparents exceeds the test's 24-month de minimis period and the gross revenue test is met by the grandparent
Tim Fitzgerald, CGA
XXXXXXXXXX (519) 973-7999 ext. 6509
2005-015107
October 3, 2005
Dear XXXXXXXXXX:
Re: Qualified Farm Property and the Capital Gains Exemption
This is further to your letter of September 15, 2005 wherein you requested our comments regarding Qualified Farm Property for the purposes of the Capital Gains Exemption.
We understand the facts to be as follows:
1. The taxpayer is over the age of 18, has no spouse, and lives in Canada. Grandparents of the taxpayer owned a farm property for many years. Farming was their principal source of income on that property for over 5 years.
2. Some time around the year 1970, a dam was constructed which caused part of their land to be lost to flooding. They surrendered their interest in the lost portion of the land in exchange for compensation. They continued to own the remaining lands upon which they had once farmed, but all activity ceased. That land has remained vacant and idle ever since. The taxpayer's grandparents moved away and established a new farm elsewhere.
3. The grandfather later passed away and the grandmother still owns the vacant land from the original farm.
4. From the time it is to be transferred by the grandparent, and at all times until it is ultimately disposed of by the grandson, the land is to remain idle/vacant.
The question you have raised is as follows:
1. If the grandmother transfers the property to the grandson (the taxpayer), and the taxpayer subsequently disposes of it, would the property be considered qualified farm property as defined under subsection 110.6(1)(a) of the Income Tax Act for the purposes of claiming the capital gains deduction under subsection 110.6(2)?
Information Circular 70-6R5 explains the processes of an advanced income tax ruling and the fees charged for such services should you require binding assurance from the Canada Revenue Agency. While the following comments are not binding on the Agency, we trust they will clarify our views on matters raised in your e-mail correspondence of September 15, 2005 and our recent telephone discussions related thereto.
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 in the year. One of the conditions that must be met for real property of an individual to be considered a qualified farm property 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 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 qualified farm property will be 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 period of at least 24 months immediately preceding the disposition of the property ("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 he or she 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 qualified farm property, even though the child may have never farmed the property. It is also our view that the 2-year gross-revenue test must be satisfied during a period that is included in the ownership test ("while the property was so owned").
Subparagraph (a)(vii) of the definition of qualified farm property 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). This subparagraph has no application in the situation you describe because the grandson will have acquired the property post 1987.
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).
Based on the facts described, the grandson would meet the ownership test in subparagraph 110.6(1)(a)(vi) because the combined and uninterrupted period of ownership by the grandson and his grandparents exceeds the test's 24-month de minimis period. Furthermore, the grandson would meet the 2-year gross-revenue test in subparagraph (vi) because in at least 2 years while his grandparents owned the land, the gross revenue of one of the grandparents from the farming business carried on in Canada in which the property was principally used, and in which the grandparent was actively engaged on a regular and continuous basis, exceeded his or her income from all other sources for the year. Therefore, we would consider the definition of qualified farm property to have been met and the taxpayer (the grandson) would be entitled to claim the capital gains deduction in connection with the disposition of the property subject to the limitations set out in subsection 110.6(2) of the Act.
We trust these comments are helpful. If you require further assistance please contact the Client Assistance Division of your local Tax Services Office.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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