14 February 2006 External T.I. 2005-0154271E5 - Intervivos 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) Does subsection 73(3) require the taxpayer to be the individual undertaking the business of farming? (ii) Does subsection 69(11) apply?

Position: (i) No. Subsection 73(3) of the Act permits the transfer of property to a child of the taxpayer who was resident in Canada immediately before the transfer, and the property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis (ii) Question of fact.

Reasons: (i) Literal interpretation of subsection 73(3) does not require the taxpayer to be the individual undertaking the business of farming. (ii) Where the "one of the main purposes" test has been met, subsection 69(11) will apply because parents and children are not affiliated under subsection 251.1 of the Act.

							2005-015427
XXXXXXXXXX 						Rob Ferrari
(613) 957-2138
February 14, 2006

Dear XXXXXXXXXX:

Re: Transfer of property pursuant to subsection 73(3)

This is in response to your e-mail to us on October 12, 2005. Our understanding of the facts is as follows:

Mr. and Mrs. A are Canadian residents who have jointly owned two tracts of land for less than three years. Mr. A and his two adult sons each own a one-third interest in a corporation. Mr. and Mrs. A's two properties are used principally in the business of farming by the corporation in which Mr. A and the two sons are actively engaged on a regular and continuous basis. You ask whether Mr. and Mrs. A may transfer the two properties to their sons under subsection 73(3) of the Income Tax Act (the "Act").

Our Comments:

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, 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. However, we are prepared to offer the following comments which may be of some assistance to you.

Subsection 73(3) of the Act reads in part as follows:

Inter vivos transfer of farm property to child. For the purposes of this Part, where at any time any land in Canada ...of a taxpayer...is transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer, and the property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis...

Subject to the application of subsection 69(11), the rollover provisions in subsection 73(3) would permit Mr. and Mrs. A to transfer the farm property to their sons if in fact, the children are residents of Canada, the property was, before the transfer, used principally in the business of farming in which Mr. A, Mrs. A or any of their children were actively engaged on a regular and continuous basis.

For dispositions made after December 20, 2002, paragraph 73(3)(c) was amended to clarify that subsection 73(3) does not apply if the anti-avoidance rule in subsection 69(11) of the Act applies. When applicable, subsection 69(11) denies the benefit of the rollover by treating the vendor's proceeds of disposition to be equal to the fair market value of the transferred property notwithstanding any other provision of the Act. The purpose of subsection 69(11) is to deny a tax deferred rollover to a taxpayer where the taxpayer, at any particular time as part of a series of transactions or events, disposes of property to a recipient for proceeds of disposition that are less than its fair market value and one of the main purposes of the series can reasonably be considered to obtain the benefit of, inter alia, any deduction in computing taxable income available to a person who would not be affiliated with the taxpayer immediately before the series commenced, where the recipient subsequently disposes of the property within 3 years from the date of the first disposition. As a result of the definition of "affiliated persons" in section 251.1 of the Act, children and their parents are not affiliated. In other words, if the sons sell the property, the parents may be denied the rollover.

It is a question of fact whether the purpose test in subsection 69(11) has been met. Accordingly, we are unable to comment on whether transactions which may be undertaken to facilitate estate planning, but which also result in the obtaining of a benefit specified in subsection 69(11), will result in a finding that the purpose test in subsection 69(11) has been met. The test in subsection 69(11) is whether one of the main purposes of the series is to obtain a benefit described in paragraph (a) or (b). Thus it is our view that subsection 69(11) may apply even though there may be non-tax purposes for the transfer of property.

We hope the above will be of assistance to you.

Yours truly,

Rob Ferrari
Business and Individual Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch