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 particular farm property qualifies as "qualified farm property" as defined in subsection 110.6(1) of the Income Tax Act
Position: General comments given.
Reasons: The law. Also position taken in paragraph 27 if IT-268R4.
XXXXXXXXXX 2006-017943
G. Moore
(613) 957-9232
August 8, 2006
Dear XXXXXXXXXX:
Re: Qualified Farm Property
This is in response to your recent letter inquiring about the capital gains exemption in respect of a disposition of qualified farm property. Further to the telephone conversation (Moore/XXXXXXXXXX) of July 14, 2006, you requested an explanation of the rules related to the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act") which is provided below.
As we understand it, you and your wife are joint owners of a farm, which was purchased in XXXXXXXXXX. In XXXXXXXXXX and XXXXXXXXXX, you and your wife's combined income from other sources was less than your gross farming income. In all other years, your combined income from other sources exceeded your gross income from farming. From XXXXXXXXXX to the present, you and your wife have been operating the farm as a family farm partnership.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
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. Generally, when spouses own a property jointly and the attribution rules of subsection 74.2(1) of the Act do not apply, each spouse should report a share of the capital gain or loss on the basis of his or her respective legal ownership interest. Where the property meets the definition of "qualified farm property", both spouses may then be entitled to claim the capital gains deduction pursuant to subsection 110.6(2) of the Act provided all requirements of that subsection have been met.
One of the conditions that must be met for real property to be considered a "qualified farm property" as defined in subsection 110.6(1) of the Act 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, 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 is dependent on when the property was last acquired by the individual. You acquired the property in question in XXXXXXXXXX. Consequently, the farm land which you own can be considered to have been used in the course of carrying on the business of farming if the requirements of subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act are met.
Pursuant to subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, real property of an individual may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned, by a person who was the individual, a spouse, common-law partner, child or parent of such individual, by a family farm partnership in which any of the above persons has an interest or by a personal trust from which the individual acquired the property, throughout the 24 months preceding the sale. In addition, the real property must meet the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Clause (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership.
Under clause (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, where a partnership, an interest in which is an interest in a family farm partnership of an individual, spouse, common-law partner, child, or parent of such individual, uses the real property in the course of carrying on the business of farming in Canada, such real property may be considered qualified farm property of the individual if certain conditions are met. The property must be used by the partnership principally in the course of carrying on the business of farming in Canada for a period of at least 24 months during which time the individual, spouse, common-law partner, child or parent of the individual, or beneficiary of a personal trust, was actively engaged on a regular and continuous basis in the farming business in which the property was used.
The definition in subsection 110.6(1) of the Act of an "interest in a family farm partnership" of an individual at any particular time requires, in paragraph (a) thereof, that throughout any 24-month period ending before that time, more than 50% of the fair market value of the property of the partnership was attributable to certain properties, including property that was used inter alia by the partnership, the individual, or a spouse, common-law partner, child or parent of the individual, principally in the course of carrying on the business of farming in Canada, in which inter alia the individual or a spouse, common-law partner, child or parent of the individual was actively engaged on a regular and continuous basis. In addition, paragraph (b) of the definition of "interest in a family farm partnership" requires that, at that particular time, all or substantially all of the fair market value of the property of the partnership must be attributable inter alia to property that was used principally in the course of carrying on the business of farming in Canada by the partnership or a person referred to above.
Under clause (a)(vi)(A) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual is actively engaged on a regular and continuous basis, must have exceeded the individual's income from all other sources for the year.
Paragraph 27 of Interpretation Bulletin IT-268R4, reflects the CRA's interpretation of "actively engaged on a regular and continuous basis". Paragraph 27 indicates that whether a particular person is actively engaged on a regular and continuous basis in the business of farming must be determined based on the facts of each case. 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. Whether an activity is engaged on a regular and continuous basis is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement. 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.
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.
In the particular case you described, we cannot definitely determine whether the tests set out in the definition of "qualified farm property" in subsection 110.6(1) of the Act are met. In particular, it is not clear, based on the information provided, whether the activity of farming was engaged in on a regular and continuous basis as there were years during which limited farming activity occurred or farming activity occurred on an infrequent or irregular basis. It is also not clear whether the time, labour and attention to the farming business are to a sufficient extent such that such contributions are determinant in the successful operations of the business, considering the amount of income from non-farming sources (employment income) and the time, labour and attention devoted in respect thereof. You have indicated that in two years, XXXXXXXXXX and XXXXXXXXXX, you would meet the gross revenue test in clause (vi)(A) of the definition of "qualified farm property". However, we would point out that you must also demonstrate that you and your wife were actively engaged in farming on a regular and continuous basis, as discussed above.
We trust that these comments will be of assistance.
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
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