8 August 2006 External T.I. 2005-0165321E5 - Transfer of family 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: Whether a transfer of farm property can be cancelled. What are the tax consequences of disposing of farm property acquired before June 18,1987

Position: If beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the property. General comments provided regarding the capital gains deduction for qualified farm property.

Reasons: By virtue of paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act, a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property.

								2005-016532
XXXXXXXXXX 							Charles Rafuse
								613-957-8967
August 8, 2006

Dear XXXXXXXXXX:

Re: Capital Gains Regarding Farm Property

This is in reply to your email of December 23, 2005, concerning the application of the Income Tax Act (the "Act").

You asked if a transfer of farmland from a parent to a child, that is found not to qualify for a farm rollover that defers the reporting of capital gains could be cancelled without capital gains being realized by the parent. It would appear that you are referring to the provisions of subsection 73(3) of the Act. You have also asked about the tax consequence of disposing of farm property purchased before June 18, 1987.

Our Comments

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.

Except as expressly provided for by the Act, when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, under paragraph 69(1)(b) of the Act, the taxpayer is deemed to have received proceeds of disposition equal to its fair market value. An exception to this rule is provided for under subsection 73(3) of the Act, which essentially provides for the deferral of the tax consequences on the transfer of farm property that is land, depreciable property of a prescribed class or eligible capital property from a parent to a child. However, in order to be eligible for that provision to apply, the property must have been used principally in the business of farming in which the taxpayer (transferor), the taxpayer's spouse (or common-law partner) or any of the taxpayer's children, was actively engaged on a regular and continuous basis. The Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child, , provides more information on this subject.

By virtue of paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act, a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property. It is always a question of fact whether there has been a change in the beneficial ownership. In this regard, reference may be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R "Ownership of Property (Principal Residence)" which generally discusses beneficial ownership.

If beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the property. Therefore, in such circumstances, a capital gain would not have to be reported by the transferor. However, if beneficial ownership has passed from the transferor to the transferee, a disposition generally occurs for tax purposes. In such case, the transferor has to include in income and pay income tax on any taxable capital gain resulting from the disposition of the property to the extent that a tax provision, such as a rollover under subsection 73(3) or an exemption under section 110.6 of the Act, does not act to reduce or eliminate the amount subject to tax.

For income tax purposes, a disposition of property such as farmland from a person to a second person is considered one transaction with its own particular tax consequences, and a subsequent disposition from the second person back to the first person would be treated as a separate transaction also with its own particular tax consequences.

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 "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 (hereinafter referred to simply as the "definition"), 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 or common-law partner, child or parent of the individual.

Whether a property is considered to have been used in the course of carrying on the business of farming depends on whether the property was last acquired, or deemed acquired, on or before June 17, 1987 or after that date. In the situation you describe, it appears that you acquired the property before June 17, 1987. Consequently, the property can be considered to have been used in the course of carrying on the business of farming if the requirements of either subparagraph (a)(vi) or (a)(vii) of the definition are met.

The requirement in subparagraph (a)(vi) of the definition will be met if the property was owned by, among others, the individual or a spouse or common-law partner, child, or parent of the individual, throughout the 24 months preceding the disposition of the property 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 a person was actively engaged on a regular and continuous basis exceeded the person's income from all other sources for the year. In our view, the person meeting the gross-revenue test in subparagraph (a)(vi) need not be individual who owns the property and may, for instance, be the spouse or common-law partner, child or parent of such a person.

Under subparagraph (a)(vii) of the definition, the property must have been used by, among others, the individual, a spouse or common-law partner, child or parent of the individual principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by any such person.

The determination of whether real property is used principally by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Such a determination must be made on a property-by-property basis. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the CRA's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin

IT-433R and paragraph 7 of Interpretation Bulletin IT-145R.

It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Paragraph 27 of Interpretation Bulletin IT-268R4, reflects the CRA's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates the requirement is considered to have been met when the person is actively engaged in the management and/or day-to-day activities of the farming business. Ordinarily, the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operations of the business. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.

Based on the facts presented to us, we are unable to determine if the property in the situation you described would meet the definition of qualified farm property and therefore whether it would be eligible for the capital gains exemption.

We trust this information is helpful.

Yours truly,

S. Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch