10 November 2008 Internal T.I. 2008-0294051I7 - Transfer of farm property to child- 73(3)

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) Does subsection 73(3) require the taxpayer's spouse who has done the farming still be living when the transfer is made? 2) Does subsection 69(11) apply?

Position: 1) No. The fact that a taxpayer's former spouse is deceased does not mean that the deceased's use of the farmland should not be considered in applying subsection 73(3). 2) Yes.

Reasons: 1) The requirement to be met is that during the time that the farmland has been owned, the taxpayer's spouse used the farmland principally in the business of farming on a regular and continuous basis. 2) Subsection 69(11) could be applied because one of the main purposes of the series of transaction is to obtain the benefit of multiple capital gains deductions for qualified farm property.

XXXXXXXXXX
Technical Applications
XXXXXXXXXX  Tax Service Office				2008-029405
XXXXXXXXXX 								Charles Rafuse
									613-247-9237
November 10, 2008

Dear XXXXXXXXXX :

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

This is in reply to your emails of September 18 and 24, 2008, wherein you requested our views on whether subsection 73(3) of the Income Tax Act (the "Act") would apply to the following situation, which was presented to your office by a tax representative.

1. A taxpayer (X), a full-time farmer, acquired farmland many years ago and used it in the business of farming until retirement.

2. Upon retirement, X leased the farmland to third parties for a number of years.

3. When X died the farmland passed to X's spouse (Y) under X's will.

4. Y continued to lease the farmland to arm's length third parties.

5. The number of years that the farmland was used in the business of farming by X greatly exceeds the number of years that it was leased to third parties.

6. The farmland is close to a city and has a high value such that it would not be possible for someone to purchase it and run it as a viable farm.

7. There is an arm's length party who would like to purchase the farmland for $XXXXXXXXXX . This purchaser (builder) is interested in building a subdivision.

8. Instead of Y selling the farmland directly to the builder and having to report the entire capital gain accrued on the farmland, it is proposed that the transfer occur in two steps. In the first step, Y would transfer the farmland to children from the marriage of X and Y under the provisions of subsections 73(3) and (3.1) of the Act, by choosing as proceeds of disposition an amount between the adjusted cost base (acb) and the fair market value of the farmland. In the second step, the children would, shortly after acquiring the farmland from Y, re-sell the farmland to the builder for $XXXXXXXXXX . The purpose of the two-step transaction is to apportion the capital gain accrued on the farmland in the hands of Y and the children so that they can each claim the capital gains exemption under subsection 110.6(2) of the Act. Your first question is whether the conditions of subsection 73(3), in particular the condition in paragraph (c) thereof, are met so that Y can transfer the farmland to the children pursuant to the provisions of subsection 73(3.1) of the Act. If subsection 73(3) is found to be applicable, your second question is whether subsection 69(11) could be used to deny the benefits of the provisions of subsection 73(3.1).

TSO Position

You are of the opinion that subsection 73(3) is inapplicable because the land was not used in a farming business by Y or another eligible user. As indicated in paragraph 73(3)(c), an eligible user would be the taxpayer, the taxpayer's spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer. In your view, subsection 252(3) does not extend the meaning of spouse to subsection 73(3) and therefore there is no spouse of Y (since X died) for purposes of paragraph 73(3)(c) that has farmed the farmland.

Our Comments

Subsections 73(3) and (3.1) of the Act essentially provides for the deferral of the tax consequences (rollover) 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 rollover under subsection 73(3.1), subsection 73(3) requires that 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
• the farmland has 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.

It is our view that the requirement in the third condition noted above has been met where, during the time that the farmland has been owned, the taxpayer's spouse used the farmland principally in the business of farming on a regular and continuous basis. Accordingly, even though a taxpayer's spouse is deceased does not mean that this person's use of the farmland should not be considered in applying subsection 73(3).

Therefore, it is our opinion that in the situation that you have been provided the third condition noted above has been met and as long as the other conditions under subsection 73(3) have also been met, subject to the application of subsection 69(11), the taxpayer (Y) can use subsection 73(3.1) to transfer the farmland to her children.

When applicable, subsection 69(11) generally denies a taxpayer's benefit of a rollover, which normally would permit a disposition of property to occur for proceeds of disposition less than fair market value, by deeming the taxpayer's proceeds of disposition to be equal to the fair market value of the transferred property notwithstanding any other provision of the Act. Generally, subsection 69(11) denies a tax deferred rollover to a taxpayer where the taxpayer, at any particular time as part of a series of transactions or events, disposes of property to a recipient for proceeds of disposition that are less than its fair market value and can reasonably be considered that one of the main purposes of the series is to obtain the benefit of, inter alia, any deduction in computing taxable income (e.g., a deduction under subsection 110.6(2)) available to a person who would not be affiliated with the taxpayer immediately before the series commenced, where the recipient subsequently disposes of the property, or arrangements for the disposition are made, within 3 years from the date of the first disposition.

As a result of the definition of "affiliated persons" in section 251.1 of the Act, children and their parents are not affiliated. In other words, where a parent uses a tax rollover to transfer property to the children at less than fair market value (e.g., subsection 73(3.1)), if the children subsequently sell the property or make arrangements to sell the properly within 3 years after the parent's transfer, the parent may be denied the benefit of the tax rollover under the provisions of subsection 69(11).

It is a question of fact whether the purpose test in subsection 69(11) has been met. Based on the information that you have provided, it our opinion that subsection 69(11) could be applied because you have indicated that the main purpose of the series of transaction is to obtain a benefit by way of multiple capital gains deductions under subsection 110.6(2) for qualified farm property.

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