26 April 2006 Internal T.I. 2006-0167011I7 - 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: Whether the transfer of farm property from father to a corporation as bare trustee for his children qualifies for a transfer of farm property pursuant to subsection 73(3) of the Income Tax Act

Position: Yes

Reasons: Meets the requirements of that provision

								April 26, 2006

	Regina TSO						HEADQUARTERS
	Audit Division					G. Moore
	Attention:  Jim Walker				(613) 957-9232

								2006-016701

Subsection 73(3) Transfer of Farm Property

This is in response to your memorandum of January 16, 2006, regarding whether a transfer of farm property from a parent to a corporation as bare trustee for his children qualifies for rollover treatment under subsection 73(3) of the Income Tax Act (the "Act").

A review of the Restated Trust Declaration (the "Trust Declaration") dated XXXXXXXXXX, between the taxpayer's XXXXXXXXXX children and XXXXXXXXXX. (the "Trustee") shows that the children, each as beneficial owners, acquired, from their father, an equal undivided interest in the farm. The children incorporated the Trustee to hold bare legal title to all of their interests in the farm and to act as their trustee pursuant to a Joint Venture Farming Agreement (the "JV Agreement") between the children dated XXXXXXXXXX. The Trust Declaration also provides that each of the children shall report their XXXXXXXXXX share of all farming income and capital gains from the farming operation on each of their respective income tax returns each year. The Restated Purchase and Sale Agreement (the "P&S Agreement") dated XXXXXXXXXX, indicates that the taxpayer wished to sell his farm to his children for an amount equal to the adjusted cost base of his farm plus the amount of his unused capital gains exemption. The P&S Agreement indicates that the taxpayer incorporated XXXXXXXXXX to act as bare trustee for each of the children pursuant to the Trust Declaration to hold the title to the farming business.

Our 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.

Since the taxpayer transferred the farm property to a corporation and not to his children, the question is whether the provisions of subsection 73(3) of the Act would still be applicable to the transfer in view of the statement in paragraph 12 of IT-268R4 that a transfer to a corporation is ineligible even if all shareholders are the taxpayer's children. In our view, the answer would be positive if the trust is found to be a bare trust and we could "look through" the corporation in its capacity as agent for the adult children who are the beneficial owners of the property. In this regard, we would note that subsection 104(1) of the Act states:

"In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property, but, except for the purposes of this subsection, subsection (1.1), subparagraph (b)(v) of the definition of "disposition" in subsection 248(1) and paragraph (k) of that definition, a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property unless the trust is described in any of paragraphs (a) to( e.1) of the definition "trust" in subsection 108(1)."

Consequently, if in a particular situation, the trustee of a trust can reasonably be considered to act as agent for the beneficiaries with respect to all dealings with regard to the trust property, the trust would not be considered to be a trust for purposes of the Act, except for the specific provisions enumerated in subsection 104(1).

In the situation you have described, the role of the corporate trustee is set out in the Trust Declaration, and effectively the Trustee has no authority to manage, administer, invest or dispose of the trust property without the instructions of the beneficiaries. The Trustee's primary role is to serve as agent for the beneficiaries since the Trustee is required to follow the instructions of the beneficiaries to enter into any transactions or to do any acts in the administration or the investment and management or the disposition of the farm property. Although the Trust Declaration gives to the Trustee the legal title to the trust property, all of the management and control over the trust property will be done through the directions of the beneficiaries. In our view, this type of arrangement would fall within the exception found in subsection 104(1) of the Act in that the trust "can reasonably be considered to act as agent for all beneficiaries under the trust with respect to all dealings with all of the trust's property". The agency relationship would take precedence over the trust relationship.

It is our view that the trust in the situation you have described does appear to be a bare trust as the trustee is an agent that holds property merely as a depository or nominee. Consequently, subsection 73(3) of the Act would apply to the taxpayer's transfer of the farm property that is land, depreciable property of a prescribed class or eligible capital property, provided the other conditions of that subsection are met.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

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