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: Can a capital gains exemption be claimed pursuant to subsection 110.6(2) in respect the "notional" gain on farmland that is qualified farm property, subsequently converted to inventory as a consequence of development, in the ultimate year the property is disposed?
Position: Yes.
Reasons: Consistent with previous positions.
2007-024839
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
September 17, 2007
Dear XXXXXXXXXX:
Re: Conversion of Real Estate and Subsection 110.6(2) of the Income Tax Act
This is in response to your letter of August 1, 2007 inquiring about the application of subsection 110.6(2) of the Income Tax Act ("Act") as it relates to the disposition of qualified farm property ("QFP"), as defined in subsection 110.6(1), that is converted to inventory prior to its disposition.
In your correspondence, you describe a hypothetical situation where an application has been made to subdivide land that is currently being farmed, in order to allow for the future creation of a real estate development. You have cited an example where a property, having an adjusted cost base ("ACB") of $100,000 and fair market value ("FMV") of $600,000 the time of conversion, is ultimately sold for $1,000,000.
Your question concerns the income tax consequences where such land is ultimately sold and, in particular, whether a capital gains deduction under subsection 110.6(2) of the Act may be claimed in respect of the gain attributable to the period when the property was owned as QFP.
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, "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.
The Agency's positions with respect to the issues raised in your enquiry are set out largely in Interpretation Bulletin IT-218R. Paragraph 24 of IT-218R refers in particular to the subdivision of farmland. In essence, it states that all of the gain on the sale of subdivided lots will remain a capital gain if an examination of all the other facts, both before and after subdivision, establishes this to be so. Where, however, the farmer goes beyond mere subdivision of the land into lots he will be considered to have converted the land from a capital property into a trading property and paragraph 15 of the Bulletin has application.
Where land is converted from capital property into a trading property, the taxpayer will have a notional capital gain on the date of conversion. However, this notional capital gain will not be considered to give rise to taxable capital gains until the taxation year during which the ultimate sale of the property occurs. Such capital gains must be reported in the year of sale. Where the property is a QFP, which is a question of fact to be determined from an examination of all the facts, the taxpayer is entitled to claim the QFP capital gains deduction (e.g., $600,000 - $100,000 = $500,000 in the example you described) in the year in which the capital gains are reported. The increase in value of the property between the date of conversion and the date of sale (e.g., $1,000,000 - $600,000 = $400,000 in the example described) will be reported as an inventory gain.
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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