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 the $500,000 capital gains exemption would be available to a beneficiary of the estate of a deceased taxpayer in respect of the disposition of property held by the estate which was farmed by the deceased taxpayer where: 1) the beneficiary, "the widow", inherited part of her interest in the estate from her husband, who was a son of the deceased taxpayer and 2) another part of her interest in the estate is her interest in her brother-in-law's estate, which was first inherited by her husband, and then inherited by the widow after her husband's death.
Position: Yes to both questions.
Reasons: The property constituted "qualified farm property" of the estate under the requirements of subsection 110.6(1) and a designation was made in respect of the property so that the beneficiary referred to in paragraph 104(21.2)(b)(i) of the Act could qualify for the $500,000 capital gains exemption upon disposition of the property by the estate. The widow meets all of the requirements of section 110.6 in order to claim a capital gains deduction in respect of qualified farm property because the property was farmed by the deceased taxpayer, who was the father of her deceased husband, is considered to be a parent of hers by virtue of subparagraph 252(2)(a)(iii).
2005-015586
XXXXXXXXXX Charles Rafuse
613-957-8967
August 28, 2006
Dear XXXXXXXXXX:
Re: Capital Gains Exemption
This is in reply to your letter of October 24, 2005, concerning the capital gains exemption under section 110.6 of the Income Tax Act (the "Act") in respect of farmland owned by a personal trust.
You described a situation where an estate was created after the death of Mr. X, the father, and has not been wound-up. The estate has four initial beneficiaries who are all children of Mr. X. Real property held by the estate meets the conditions of both subparagraphs (vi) and (vii) of paragraph (a) of the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Act due to the farming use by Mr. X. The estate sells the farm property and allocates the capital gain to the beneficiaries. One beneficiary, "the widow", inherited part of her interest in the estate from her husband, who was a son of Mr. X. Another part of her interest in the estate is her interest in her brother-in-law's estate, which was first inherited by her husband, and then inherited by the widow after her husband's death.
Your question is whether the net taxable capital gains allocated by the trust to the widow can be considered, pursuant to a designation under subsection 104(21.2) of the Act, to be from a disposition of QFP eligible for the capital gains exemption in the hands of the widow. Your concern seems to relate to whether the farming use by Mr. X satisfies the farming use test in the definition of QFP, considering that the widow inherited her interest in the trust from her deceased spouse and the fact that part of her inherited interest was originally inherited by her brother-in-law, directly from his father Mr. X.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.
Where farm property that is real property is owned by a personal trust, the property must have been used in the business of farming by a designated beneficiary, the spouse or common-law partner, child or parent of the designated beneficiary, by a family farm partnership in which any of the above persons have an interest, or by a family farm corporation in which any of the above persons own shares, in order for it to meet the definition of QFP. If the property constitutes QFP of the estate and the estate makes a designation of the eligible taxable capital gains in respect of the property, each beneficiary referred to in paragraph 104(21.2)(b)(i) of the Act would be considered to have a taxable capital gain from the disposition of QFP that could qualify for the $500,000 capital gains exemption.
In our view, the widow in the situation you described may be considered a designated beneficiary and Mr. X's farming use would satisfy the farming use test in the definition of QFP. It is also our view, the fact that the widow inherited her interest from her deceased spouse and that part of her inherited interest was originally inherited by her brother-in-law from his father, in and by themselves, would not prevent the widow from treating the taxable capital gains designated to her by the trust as being from the disposition of QFP in accordance with the provisions of subsection 104(21.2) of the Act.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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