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 the corporate partners of a farm partnership can be considered to use the partnership farmland principally in the business of farming.
Position: Yes.
Reasons: The partners of a partnership are considered to carry on the business of the partnership, and the principally use test applies to the partners' interest in the farmland.
March 16, 2009
London Tax Services Office HEADQUARTERS
Specialist - Agriculture, Aquaculture André M. Gallant
and Fisheries (613) 957-8961
Technical Applications and Valuations Division
Audit Professional Services Directorate
Attention : Mr. William MacGregor
2008-029974
Qualified Farm Property - Family Farm Corporation
This is in response to your email of November 6, 2008, regarding the definition of "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Income Tax Act (Canada) (the "Act") for the purpose of the capital gains exemption.
You described the following hypothetical situation:
Two brothers (A and B) hold 100% of the shares of their own corporation (Aco and Bco). Aco and Bco formed a partnership (P) and each owns a 50% interest in the partnership that operates a farming business in Canada on farmland. A and B are both actively engaged on a regular and continuous basis in the farming business. It is assumed that the only property of Aco and Bco is their partnership interest in P; all or substantially all (at least 90%) of the fair market value ("FMV") of P is attributable to the farmland; and the farming business has been carried on throughout a period greater than 24 months.
Your question concerns whether a share of the Aco and Bco (the "Subject Share") would constitute a "share of the capital stock of a family farm corporation" as this expression is defined in subsection 110.6(1).
In our view, the Subject Shares qualify as shares of the capital stock of a family farm corporation for the reasons evident below.
In order for a share to be considered a "share of the capital stock of a family farm corporation" of an individual at a particular time under the definition in subsection 110.6(1) (the "Definition"), two main requirements set out in paragraphs (a) and (b) of the Definition must be met.
Under the first requirement set out in paragraph (a) of the Definition, more than 50% of the FMV of the corporation's property must be attributable, throughout any 24-month period ending before the particular time, to one or more of the properties listed in subparagraphs (a)(i) to (iv) of the Definition (the "eligible properties"). Such eligible properties generally include:
- property used principally in the business of farming in which the individual or a relation (spouse or common-law partner, child or parent of the individual or of the beneficiary if the individual is a personal trust) (subpara. (a)(i)),
- shares or debt of a corporation involved in the business of farming (subpara. (a)(ii)),
- a partnership interest in or indebtedness of a partnership involved in the business of farming (subpara. (a)(iii)), or
- a combination of the above eligible properties (subpara. (a)(iv)).
Under the second requirement set out in paragraph (b) of the Definition, at the particular time, all or substantially all (at least 90%) of the FMV of the corporation's property must be attributable to one or more of the eligible properties.
In your scenario, all of the FMV of Aco and Bco's shares (i.e., the Subject Shares) is attributable to Aco and Bco's respective partnership interest in P. Thus, if the partnership interest in P is recognized as being an interest in a type of partnership that meets the conditions in subparagraph (a)(iii) of the Definition, the Subject Shares would satisfy the above-mentioned requirements set out in paragraphs (a) and (b) of the Definition.
The be a partnership referred to in subparagraph (a)(iii) of the Definition, all or substantially all of the FMV of the property of the partnership must be attributable to any of the eligible properties mentioned above. In the case at hand, at least 90% of the FMV of P is attributable to the farmland. Therefore, it must be determined if the farmland is an eligible property. As explained below, in our view, the farmland qualifies as an eligible property.
The farmland would be an eligible property of P if it meets the two conditions set out in subparagraph (a)(i) of the Definition. The two conditions are that:
- the farmland must be property used principally in the course of carrying on the business of farming in Canada by an eligible user referred to in clauses (a)(i)(A) to (F) of the Definition, and
- the individual who is the owner of the shares (or a relation - see above) is actively engaged on a regular and continuous basis in the mentioned farming business.
In the case at hand, the second condition above is met because A and B are actively engaged on a regular and continuous basis in P's farming business.
As regards the first condition, P is not an eligible user, referred to in clause (a)(i)(F) of the Definition, of P's property because an interest in P does not qualify as an interest in a family farm partnership of the individual who is the owner of the Subject Shares or a relation (see above). In fact, the interests in P are not held by individuals but are held by corporations Aco and Bco. Nevertheless, in our view, the first condition is satisfied for the reasons indicated below.
In our view, P's property was used in a farming business by an eligible user (corporation) referred to in clause (a)(i)(A) of the Definition, namely Aco and Bco. In fact, Aco and Bco as partners of a partnership (P) are considered to carry on the farming business of the partnership (Robinson, 98 DTC 6065) and in so doing are using P's property (farmland) in such business.
Although P's farmland is equally (50%) co-owned by its partners Aco and Bco, in our view, each corporate partner is considered to be using the farmland "principally" (more than 50%) in the course of carrying on the business of farming in Canada. Based on the broad definition of "property" in subsection 248(1) and the concept of co-ownership in common law and civil law, the undivided interest held by Aco and Bco in the farmland constitutes "property" for the purpose of subparagraph (a)(i) of the Definition.
Since the farmland, which represents at least 90% of the value of all of P's property, is an eligible property, an interest in P is also an eligible property because it qualifies as a partnership interest described in subparagraph (a)(iii) of the Definition. Since 100% of the value of the shares of Aco and Bco is attributable to their respective partnership interest in P, which is an eligible property, the Subject Shares meet the requirements in both paragraphs (a) and (b) of the Definition and therefore qualify as shares of the capital stock of a family farm corporation (and as such as qualified farm property) for purposes of the capital gains exemption.
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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