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: Whether property used in a family farm partnership is qualified farm property to taxpayer and the taxpayer's children.
Position: Yes
Reasons: The property was owned by the taxpayer, the taxpayer's spouse or children and principally used in at least 5 years in a farming business in Canada by a partnership, an interest in which was an interest in a family farm partnership of the taxpayer or the taxpayer's spouse.
XXXXXXXXXX 2005-015444
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, and acknowledges the subsequent conversations with yourself and XXXXXXXXXX, concerning your request for an advance income tax ruling on behalf of XXXXXXXXXX ("Taxpayer A"), XXXXXXXXXX ("Taxpayer B") and XXXXXXXXXX ("Taxpayer C")(collectively the "Applicants").
We understand that, to the best of your knowledge and that of the Applicants involved, none of the issues involved in the ruling request is:
(a) dealt with in an earlier tax return of either Applicant or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed return of either Applicant or a related person;
(c) under objection by either Applicant or a related person;
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(e) subject of a ruling previously issued by the Income Tax Rulings Directorate.
Overview
The subject matter of the ruling request is in respect of farm land located XXXXXXXXXX ("Farm Land") inherited by the Applicants as a consequence of the death of XXXXXXXXXX ("Mr. A") on XXXXXXXXXX. Up to the time of his death, Mr. A was married to Taxpayer A and together they are the natural parents of Taxpayer B and Taxpayer C.
Commencing around XXXXXXXXXX through to XXXXXXXXXX, Mr. A and his brother XXXXXXXXXX ("Mr. X") owned the Farm Land equally in co-tenancy and as equal partners in a partnership ("Partnership"). The Partnership used the Farm Land in the business of farming in Canada (as well as another section of land, also owned equally by each of Mr. A and Mr. X in co-tenancy ("Mr. X's Land")).
Upon Mr. A's death, ownership in Mr. A's 50% interest in the Farm Land (as well as 50% of Mr. X's Land) was beneficially transferred to Taxpayer A, Taxpayer B and Taxpayer C in equal parts. Commencing on XXXXXXXXXX through to sometime in XXXXXXXXXX, the Farm Land and Mr. X's Land was continually farmed by Taxpayer A and Mr. X as equal partners in partnership.
Sometime between XXXXXXXXXX and XXXXXXXXXX, the 50% of Mr. X's Land held beneficially by Taxpayer A, Taxpayer B and Taxpayer C was transferred to Mr. X in exchange for Mr. X's 50% interest in the Farm Land such that Taxpayer A, Taxpayer B and Taxpayer C each had 33 1/3% beneficial ownership of the whole of the Farm Land. From XXXXXXXXXX to the current year, the Farm Land has been rented to a series of non-related farmers.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Taxpayer A, Taxpayer B and Taxpayer C are each individuals resident only in Canada. Taxpayer B and Taxpayer C are sisters. Taxpayer A is their mother.
2. Mr. A and Mr. X owned farm land including land with the following legal description (the "Farm Land") each as 50% co-tenants commencing in or about XXXXXXXXXX through to XXXXXXXXXX:
XXXXXXXXXX.
3. Mr. A and his brother Mr. X also owned other farm land each as 50% co-tenants commencing in or about XXXXXXXXXX through to XXXXXXXXXX ("Mr. X's Land").
4. Commencing in or about XXXXXXXXXX through to XXXXXXXXXX, the Farm Land and Mr. X's Land were used by a partnership ("Partnership") principally in the course of carrying on the business of farming in Canada. Mr. A and Mr. X were the only partners of the Partnership each having a 50% interest.
5. The Partnership is a partnership at law.
6. Commencing in or about XXXXXXXXXX through to XXXXXXXXXX:
(a) there was a 24 month period where more than 50% of the fair market value of the property of the Partnership was attributable to property used by the Partnership principally in the course of carrying on the business of farming in Canada in which Mr. A was engaged on a regular and continuing basis; and which
(b) is part of a five year period where all or substantially all of the fair market value of the property of the Partnership was attributable to property used principally in the course of carrying on the business of farming in Canada by the Partnership.
Commencing in or about XXXXXXXXXX through to XXXXXXXXXX, the Farm Land was used by the Partnership principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time Mr. A was actively engaged on a regular and continuous basis in the farming business in which the Farm Land was used.
7. Mr. A died, intestate, on XXXXXXXXXX. Subsequent to Mr. A's death, Mr. A's 50% interests in the Farm Land and Mr. X's Land were beneficially transferred to Taxpayer A, Taxpayer B and Taxpayer C in equal parts (i.e., 33 1/3%).
8. For the period of XXXXXXXXXX until XXXXXXXXXX, Taxpayer B's portion of the Farm Land and Mr. X's Land, as the case may be, was held by the Public Trustee in trust for Taxpayer B until she attained the age of majority. For the period of XXXXXXXXXX until on or about XXXXXXXXXX, Taxpayer C's portion of the Farm Land and Mr. X's Land, as the case may be, was held by the Public Trustee in trust for Taxpayer C until she attained the age of majority.
9. Commencing on XXXXXXXXXX through to late XXXXXXXXXX, the Farm Land and Mr. X's Land was used by a partnership formed by Mr. X and Taxpayer A principally in the course of carrying on the business of farming in Canada (the "New Partnership"). Mr. X and Taxpayer A were the only partners of the New Partnership each having a 50% interest.
10. The New Partnership is considered at partnership at law.
11. Commencing on XXXXXXXXXX through late XXXXXXXXXX:
(a) there was a 24 month period where more than 50% of the fair market value of the property of the New Partnership was attributable to property used by the New Partnership principally in the course of carrying on the business of farming in Canada in which Mr. A was engaged on a regular and continuing basis; and which
(b) is part of a five year period where all or substantially all of the fair market value of the property of the New Partnership was attributable to property used principally in the course of carrying on the business of farming in Canada by the New Partnership.
Commencing XXXXXXXXXX through to late XXXXXXXXXX, the Farm Land was used by the New Partnership principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time Taxpayer A was actively engaged on a regular and continuous basis in the farming business in which the Farm Land was used.
12. Sometime between XXXXXXXXXX and XXXXXXXXXX, 50% of Mr. X's Land held beneficially by Taxpayer A, Taxpayer B and Taxpayer C was transferred to Mr. X in exchange for Mr. X's 50% interest in the Farm Land such that Taxpayer A, Taxpayer B and Taxpayer C each had 33 1/3% beneficial interest of the whole of the Farm Land.
13. From XXXXXXXXXX to the current year, the Farm Land has been rented to a series of non-related farmers.
14. The Certificates of Title of the Farm Land have been registered in the names Taxpayer A, Taxpayer B and Taxpayer C since XXXXXXXXXX, the year Taxpayer B attained the age of majority. They held, and continue to hold, the Farm Land in fee simple each with an undivided interest as "tenants in common".
15. The fair market value (the "FMV") of the Farm Land is $XXXXXXXXXX.
16. Taxpayer B is under the age of XXXXXXXXXX.
Proposed Transactions
17. Taxpayer A will dispose of a portion of her beneficial interest in the Farm Land for proceeds of disposition equal to the FMV of that portion to Taxpayer B and XXXXXXXXXX ("Couple B"). The size of the portion disposed of will be such that its FMV will be equal to the sum of the Taxpayer A's remaining capital gains exemption (the "Capital Gains Exemption") and the adjusted cost base ("ACB"), as defined in section 54 of the Income Tax Act (the "Act"), of that portion. The Capital Gains Exemption is the maximum amount of capital gains in respect of which a deduction may be claimed by a taxpayer under section 110.6 of the Act. In consideration for the transfer of the beneficial interest of the portion of the Farm Land, Couple B will provide Taxpayer A with an interest bearing promissory note payable in XXXXXXXXXX equal instalments over a XXXXXXXXXX-year period, commencing in the year of the transfer.
18. Taxpayer C will dispose of a portion of her beneficial interest in the Farm Land for proceeds of disposition equal to the FMV of that portion to Couple B. The size of the portion disposed of will be such that its FMV will be equal to the sum of Taxpayer C's remaining Capital Gains Exemption and the ACB of that portion. In consideration for the transfer of the beneficial interest of the portion of the Farm Land, Couple B will provide Taxpayer C with an interest bearing promissory note payable in XXXXXXXXXX equal instalments over a XXXXXXXXXX-year period, commencing in the year of transfer.
19. Taxpayer B will create a new inter vivos trust (the "Trust"). Couple B will be the trustees of the Trust. Taxpayer B will be entitled to receive all the income of the Trust that arises before Taxpayer B's death and no person except Taxpayer B may, before Taxpayer B's death, receive or otherwise obtain the use of any income or capital of the Trust. There will be no other beneficiary designated in the Trust. Taxpayer B will dispose of a portion of her beneficial interest in the Farm Land to the Trust for no consideration. The portion of Taxpayer B's interest in the Farm Land that is transferred to the Trust will have a FMV equal to the sum of Taxpayer B's remaining Capital Gains Exemption and the ACB of that portion. The transfer to the Trust will be a transfer in respect of which the conditions in subsection 73(1.02) of the Act are satisfied. Taxpayer B will elect for subsection 73(1) of the Act not to apply to this disposition.
20. A caveat will be filed at the XXXXXXXXXX in respect of each transfer of the Farm Land referred to in paragraphs 17, 18 and 19 above.
Purpose of Proposed Transactions
The purpose of the proposed transactions of Taxpayer A, Taxpayer B and Taxpayer C is to facilitate estate planning and to crystallize each individual's remaining Capital Gains Exemption. In addition, Taxpayer B desires to increase her economic interest in the Farm Land.
Rulings Given
Provided that:
(a) the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and the purpose of the proposed transactions;
(b) the proposed transactions are completed in the manner described above; and
(c) there are no other transactions, which may be relevant to the ruling requested,
our rulings are as follows:
(A) We confirm that the fact that each of Taxpayer B and Taxpayer C has not personally used the Farm Land in the business of farming prior to the dispositions referred to in paragraph 18 and 19 above will not, in and by itself, prevent each of their interests in the Farm Land from being considered "qualified farm property", as this expression is defined in subsection 110.6(1) of the Act;
(B) We confirm that the fact that for the period of XXXXXXXXXX until XXXXXXXXXX, Taxpayer B's portion of the Farm Land and Mr. X's Land was held by the Public Trustee in trust for Taxpayer B until she attained the age of majority, as described in paragraph 8 above, will not, in and by itself, prevent the portion of the Farm Land disposed of by Taxpayer B, as described in paragraph 18 above, from being considered "qualified farm property", as this expression is defined in subsection 110.6(1) of the Act;
(C) We confirm that the fact that for the period of XXXXXXXXXX until on or about XXXXXXXXXX, Taxpayer C's portion of the Farm Land and Mr. X's Land was held by the Public Trustee in trust for Taxpayer C until she attained the age of majority, as described in paragraph 8 above, will not in and by itself, prevent the portion of the Farm Land disposed of by Taxpayer C as described in paragraph 19 above from being considered "qualified farm property", as this expression is defined in subsection 110.6(1) of the Act;
(D) The portions of the Farm Land transferred by the Taxpayer A, Taxpayer B, and Taxpayer C, as described in paragraphs 17, 18 and 19 above, will constitute "qualified farm property" as this expression is defined in subsection 110.6(1) of the Act; and
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 by the Canada Customs and Revenue Agency, now the Canada Revenue Agency (the "CRA"), and are binding on the CRA provided that the proposed transactions are implemented on or before XXXXXXXXXX.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to or accepted:
1. that the Partnership or the New Partnership is a partnership at law;
2. that Mr. A or Taxpayer A carried on a business of farming in Canada at any particular time or were engaged on a regular and continuous basis in such business;
3. the amount claimed to be the FMV of any portion of the Farm Land is in fact the FMV of that portion;
4. that the Farm Land and Mr. X's Land were used by the Partnership and the New Partnership principally in a business of farming during any period of time; and
5. that Mr. A's interest in the Partnership or Taxpayer A's interest in the New Partnership is an "interest in a family partnership" as defined in subsection 110.6(1) of the Act.
Our rulings are given on the assumption that all the facts provided are correct.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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