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 farm property
Position: Question of fact but it appears that property may qualify, based on information provided.
Reasons: Conditions of paragraphs (a)(vi) and (vii) of the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act appear to be met.
2006-018177
XXXXXXXXXX G. Moore
(613) 957-9232
September 28, 2006
Dear XXXXXXXXXX:
Re: Qualified Farm Property
This is in response to your letter of April 3, 2006, inquiring about whether property qualifies as "qualified farm property" for purposes of the capital gains deduction.
As we understand it, the farm property consists of two parcels of land and a farmhouse. The farm property was owned and farmed by your grandparents in the XXXXXXXXXX and up to the XXXXXXXXXX. Farming was your grandparents' chief source of income. After your grandfather died in XXXXXXXXXX, the farm property was put into joint ownership of your grandmother and father. Up to XXXXXXXXXX, your grandmother lived in the farmhouse and her neighbours rented the land and used it for farming. In XXXXXXXXXX your grandmother transferred her half of the farm property to her son. The land has not been farmed by neighbouring farmers since the XXXXXXXXXX year. In XXXXXXXXXX, your father transferred one parcel of land to his son and the other parcel of land to you and your sister. You are asking how to calculate the capital gain on the disposition of farm property by your father and the application of Income Tax Application Rule ("ITAR") 26(5).
During the telephone conversation (Moore/XXXXXXXXXX ) of September 19, 2006, you indicated that your grandmother may not have reported a capital gain on the disposition of her half of the property to your father in XXXXXXXXXX. In addition, you confirmed that your grandmother did not make any election to select between the median rule contemplated by ITAR 26(3) or the Valuation Day rule authorized by ITAR 26(7) for the purpose of determining the cost to her of property owned on December 31, 1971. During our conversation, the provisions of ITAR 26(5) were also discussed; they are explained in Interpretation Bulletin IT-132R2, Capital property owned on December 31, 1972, - Non-arm's length transactions. It was also explained how ITAR 26(5) would apply to the determination of the ACB of the property transferred from your grandmother to your father. Thus, in the present circumstances, your father would add to the cost to him of property acquired from his mother any capital gain realized by her on the disposition of the property. The "cost to the subsequent owner" (i.e., in the present situation this is the cost to your father) referred to in ITAR 26(5)(c) is determined by ITAR 26(3), and for purposes of ITAR 26(3), ITAR 26(5)(b) deems his "actual cost" to be the "actual cost" of his mother. We cannot offer any comment on the valuation of the parcels of land either on valuation day or at the time of disposition in XXXXXXXXXX to you and your siblings.
You are also asking whether your father is entitled to claim the capital gains exemption in respect of the disposition of farm property to you and your siblings in XXXXXXXXXX. Subsection 110.6(2) of the Income Tax Act (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 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 whether the property was last acquired (or deemed acquired) by the individual, on or before June 17, 1987 or after that date. In the situation you describe, it appears that your father acquired half the property before June 17, 1987, and half after June 18, 1987. The farm land which your father acquired before June 17, 1987, can be considered to have been used in the course of carrying on the business of farming if the requirements of either subparagraph (a)(vii) or subparagraph (a)(vi) of the definition of "qualified farm property" in subsection 110.6(1) of the Act are met. The farm land which your father acquired in XXXXXXXXXX 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 a period of at least 24 months immediately preceding the disposition. 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.
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.
In our view, the person meeting the 2-year gross-revenue test in subparagraph (a)(vi) need not be the individual who disposes of the property and may, for instance, be the spouse, child or parent of such individual. If a parent has met the 2-year gross-revenue test while he or she owned the property, and the parent later transfers the property to a child, the child is regarded as having met the 2-year gross-revenue test requirement of the definition of qualified farm property, even though the child may have never farmed the property. It is also our view that the 2-year gross-revenue test must be satisfied during a period that is included in the ownership test ("while the property was so owned").
Based on the facts described, your father would meet the ownership test in subparagraph 110.6(1)(a)(vi). Furthermore, your father would meet the 2-year gross-revenue test in subparagraph (vi) because in at least 2 years while your grandparents owned the land, the gross revenue of one of the grandparents from the farming business carried on in Canada in which the property was principally used, and in which your grandparent was actively engaged on a regular and continuous basis, exceeded his or her income from all other sources for the year. Therefore, with respect to the property acquired by your father from your grandmother after June 17, 1987, and the property acquired before June 18, 1987, we would consider the definition of qualified farm property to have been met because the conditions in subparagraph 110.6(1)(a)(vi) are satisfied. Thus, it appears that your father would be entitled to claim the capital gains deduction in connection with the disposition of the property subject to the limitations set out in subsection 110.6(2) of the Act.
We observe that the property acquired by your father before June 18, 1987, also appears to meet the conditions of subparagraph (a)(vii) of the definition of qualified property in subsection 110.6(1). Under this subparagraph, 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.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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