9 October 2007 External T.I. 2007-0240321E5 - 70(9), 73(3) Transfer farm property to child

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: 1. Whether farmland must immediately prior to its transfer (or death of the taxpayer) be used in the business of farming by the taxpayer, the taxpayer's spouse or any of the taxpayer's children in order for subsections 73(3) or 70(9) to apply. 2. What is the meaning of the phrase "used principally in a fishing or farming business" as that is used in Subsections 70(9) and 73(3).

Position: 1. No. 2. 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.

Reasons: 1. Current wording of the Act. 2. Principally is generally interpreted to mean more than 50%.

										2007-024032
XXXXXXXXXX									Charles Rafuse
										613-247-9237
October 9, 2007

Dear XXXXXXXXXX:

Re: Subsection 70(9) and 73(3) - Transfer of farm property to child

This is in reply to letter of June 12, 2007, concerning the interpretation of subsections 70(9) and 73(3) of the Income Tax Act (the "Act").

You have questioned whether a taxpayer's farmland must, immediately prior to its transfer to a child by the taxpayer or on the death of the taxpayer, be used in the business of farming by the taxpayer, the taxpayer's spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer in order for subsections 73(3) or 70(9) to apply. Given the current wording of subsections 70(9) and 73(3), it is your belief that this is not a requirement; however, you have noted that paragraph 25 of Interpretation Bulletin IT-268R4 - Inter Vivos Transfer of Farm Property to Child, seems to suggest otherwise.

You have also requested our opinion as to whether the phrase "used principally in a fishing or farming business" used in subsections 70(9) and 73(3) has been met in a number of situations. These situations involve a total period of 20 years during which the farmland was first used in a farming business by the taxpayer for a number of years and then was rented out to arm's length parties for the balance of the period. In these situations it is assumed that the farmland is fully open without any non-arable areas, that the land has not been used for anything other than farming operations (including when rented out), and that the taxpayer "was actively engaged on a regular and continuous basis" in the business of farming in the years during which the land was used in farming by the taxpayer and was not rented out.

You have also asked some further questions based on the above situations:

• Whether our opinion would be any different if in some (or all) of the earlier years the land was owned and farmed by the taxpayer's parent;
• Whether our opinion would change if the order of the farming and rental years were reversed but the total percentages remained unchanged;
• Whether our opinion would change if there were interspersing of rental with personal farming, but the total percentages remained unchanged; and
• Whether our opinion would change if the total years were larger or smaller, but the ratios remained the same.

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.

Subsection 73(3) of the Act essentially provides for the deferral of the tax consequences on the transfer of certain properties, including farmland, used in fishing or farming from a parent to a child during the parent's lifetime. In general terms, in order for land to be eligible for the subsection 73(3) rollover, the following conditions, among others, must be met:

• the farmland must be in Canada;
• the farmland must be transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer; and
• before the transfer, the farmland must have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse (or common-law partner), any of the taxpayer's children or a parent of the taxpayer, was actively engaged on a regular and continuous basis.

Your question concerns whether subsection 73(3) requires that the farmland be used in farming immediately before a taxpayer's transfer to a child. The answer is "no," as confirmed in paragraph 24 of IT-268R4, which states, in part:

Subsection 73(3) states, in part, that "... the property was, before the transfer, used principally in the business of farming ...." There is no requirement that the property be used immediately before the transfer in the business of farming. However, if the property is used for some purpose other than farming for some period of time, a question may arise as to whether the property was used primarily for that other purpose rather than in the business of farming.

Subsection 70(9) of the Act provides for the deferral of the tax consequences on the transfer of certain properties, including farmland, used in fishing or farming from a parent to a child as a consequence of the death of the parent. In order for farmland to be eligible for the subsection 70(9) rollover, essentially the same conditions as the above must be met. In both cases, there is no requirement that the farmland be used immediately before the transfer in the business of farming.

Paragraph 25 of IT-268R4, to which you made reference, deals with a leasing arrangement in connection with a transfer under subsection 73(3). As you indicated, the legislation has been amended since the statement was originally made in paragraph 25 of IT-268R4. In our view, subsection 73(3), as it now reads, does not require that the farmland be used by the taxpayer, the taxpayer's spouse or common-law partner; a child of the taxpayer or a parent of the taxpayer. Rather subsection 73(3) requires that the farmland was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer's spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer was actively engaged on a regular and continuous basis. It is not required that the taxpayer be the individual undertaking the business of farming. An analogous comment would apply with respect to paragraph 14 of IT-349R3, which deals with a leasing arrangement in connection with a transfer under subsection 70(9). Paragraphs 25 of IT-268R4 and 14 of IT-349R3 have been tabbed for reconsideration in the next revision of the two bulletins.

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 generally 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. Accordingly, in the situations you described, the "principally" test would generally be met where the farming use is more than 50% of the years while the test would generally not be met where the farming use is less than 50% of the years.

Our opinion would not change if the land was farmed for some of the years or all years by a parent of the taxpayer rather than the taxpayer because the conditions of subsections 70(9) and 73(3) can be met based on a parent's use in the business of farming as mentioned above. In addition, our opinion would not change where the order of the farming and rental years were reversed; there were interspersing of rental with personal farming, but the total percentages remained unchanged; or the total years were larger or smaller, but the ratios remained the same. We would note that we have assumed that the taxpayer "was actively engaged on a regular and continuous basis" in the business of farming in the years indicated as you requested in reaching our conclusions. However, when there were interspersing of rental with personal farming and the total numbers of years were reduced it is possible that this is no longer the case.

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