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 it is possible for a husband and wife as co-owners to meet subparagraph 110.6(1.3)(b)(i) if the husband is the only individual who meets the actively engaged test while the wife is the only individual who meets the gross revenue test. 2. Whether the word "principally" in paragraph (a) of the definition of QFP in subsection 110.6(1) and in clause 110.6(1.3)(b)(i)(B) impose two separate use tests.
Position: 1. The gross revenue test and the actively engaged test do not need to be met by the same individual. 2 No.
Reasons: 1. Based on the wording used in clauses 110.6(1.3)(b)(i)(A) and (B). 2. Finance is prepared to recommend to the Minister that paragraph (a) of the definition of "qualified farm property" in subsection 110.6(1) of the Act be amended to remove the word "principally." Meanwhile, the CRA will not make any reassessments based on the current wording of this subparagraph before the changes in question are published and adopted except in situations of abuse.
XXXXXXXXXX André Gallant
May 1, 2008
Dear XXXXXXXXXX :
Re: Definition of "Qualified Farm Property"
This is in response to your letter of October 25, 2007, concerning the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act (the "Act") and the application of the farming-use test in subsection 110.6(1.3) of the Act.
Our understanding of the hypothetical situation is as follows:
1. A husband and wife purchased a farm by agreement entered into after June 17, 1987, and have been carrying on a farming business in Canada for several years on all of the farmland as co-owners but not as a farm partnership.
2. Based on their respective contributions of time and labour to the farming business, the husband reports 80% of the farming revenue and the wife reports 20% of the revenue.
3. The husband is actively engaged on a regular and continuous basis in the farming business and therefore meets the test referred to in clause 110.6(1.3)(b)(i)(B) (the "actively engaged" test). The husband's gross revenue from the farming business never exceeded the husband's income from all other sources and therefore he does not meet the test referred to in clause 110.6(1.3)(b)(i)(A) (the "gross revenue" test).
4. In contrast, the wife does not meet the actively engaged test, but does meet the gross revenue test. You asked whether the actively engaged test in clause 110.6(1.3)(b)(i)(B) and the gross revenue test in clause 110.6(1.3)(b)(i)(A) could be met by different individuals. In other words, you asked whether in the above situation the two-year farming-use test in subparagraph 110.6(1.3)(b)(i) is satisfied if the husband is the only individual who meets the actively engaged test while the wife is the only individual who meets the gross revenue test.
You also noted that paragraph (a) of the definition of QFP in subsection 110.6(1) requires the property to be "used principally" in a farming business carried on in Canada and that clause (B) of the two-year farming-use test in paragraph 110.6(1.3)(b)(i) also requires the property to be "used principally" in a farming business carried on in Canada. You asked our views as to whether the two mentioned expressions require meeting two separate usage tests. The first usage test would be determined with reference to the number of years the property is used in farming relative to the number or years it was owned. The second usage test would apply only with reference to two years of the period of ownership.
The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. 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 specific taxpayers 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.
Whether or not the husband and wife referred to in the hypothetical situation carry on business as a partnership is a question of fact. The Act does not define what constitutes a "partnership" and it is a question of fact whether or not a partnership exists (see Interpretation Bulletin IT-90). Generally speaking, a partnership is described as the relation that subsists between persons carrying on business in common with a view to profit. Reference should also be made to the applicable provincial law. The formal registration of a partnership would generally not in itself be a decisive factor because a declaration of this type would not be expected to prevail in partnership law over the actual facts of a situation (IT-90, paragraph 7).
The definition of QFP in subsection 110.6(1) of the Act provides, inter alia, that QFP includes "real or immovable property that was used principally in the course of carrying on the business of farming in Canada" by certain qualifying users, who may include an individual and the individual's spouse or common-law partner. Subsection 110.6(1.3) provides that a property will not be considered to have been used in the course of carrying on the business of farming in Canada unless the ownership test in paragraph (a) thereof is satisfied and, in addition, one of the farming-use tests in paragraph (b) or (c) thereof is met. Which farming-use test is applicable depends on when the taxpayer last acquired the property. In the case described, the ownership test in paragraph 110.6(1.3)(a) is met because eligible owners, who may include an individual and the individual's spouse or common-law partner, co-owned the property throughout a period exceeding 24 months; however, since the property was acquired by agreement entered into after June 17, 1987, the farming-use test referred to in paragraph 110.6(1.3)(b)(i) must also be satisfied.
The farming-use test in subparagraph 110.6(1.3)(b)(i) will be met if, according to the statutory wording,
"(i) in at least two years while the property was owned by one or more persons referred to in paragraph (a),
(A) the gross revenue of a person (in this clause referred to as the "operator") referred to in paragraph (a) from the farming business referred to in clause (B) for the period during which the property was owned by a person described in paragraph (a) exceeded the income of the operator from all other sources for that period, and
(B) the property was used principally in a farming business carried on in Canada in which an individual referred to in paragraph (a), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis" [Emphasis added]
Based on the wording used in clauses 110.6(1.3)(b)(i)(A) and (B), we are of the view that the person meeting the gross revenue test need not be the same individual who meets the actively engaged test. This is so because clause 110.6(1.3)(b)(i)(B) requires the actively engaged test to be satisfied by an individual referred to in paragraph 110.6(1.3)(a) and not necessarily the operator mentioned in clause 110.6(1.3)(b)(i)(A).
Regarding your question as to whether the expressions "used principally" in paragraph (a) of the definition of QFP in subsection 110.6(1) and in the clause 110.6(1.3)(b)(i)(B) impose two different usage tests, officials of the Department of Finance have informed us that they intend to recommend to their Minister that the word "principally" be removed from paragraph (a) of the definition of QFP in subsection 110.6(1) because it imposes an overly restrictive interpretation of the definition of QFP.
In view of this, the Canada Revenue Agency will not make reassessments to give effect to the word "principally" in paragraph (a) of the definition of QFP in subsection 110.6(1) before the change in question is published and adopted. We trust that these comments will be of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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