27 June 2012 External T.I. 2012-0435361E5 - Subsection 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: Whether it is possible not to have subsection 73(3) of the Income Tax Act apply to an inter vivos transfer of farmland to children?

XXXXXXXXXX
								2012-043536
								John Parker CMA

June 27, 2012

Attention: XXXXXXXXXX

Dear XXXXXXXXXX:

RE: Subsection 73(3) of the Income Tax Act (the “Act”)

We are writing in response to your email query of February 2, 2012 wherein you asked our opinion on whether it is possible not to have subsection 73(3) of the Act apply to a disposition of farm property to children. In your hypothetical situation, a farm client is in the process of dividing his remaining farmland amongst his children and that the consideration was to be partially in the form of cash and the balance in a promissory note or mortgage. The parent would subsequently make gifts to the children to forgive the balances owing.

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. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.

Except as expressly provided for by the Act, when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm’s length, for example children, for no proceeds or for proceeds less than fair market value, the taxpayer is deemed to have received proceeds of disposition equal to its fair market value under paragraph 69(1)(b) of the Act.

However, there are special tax rules contained in subsections 73(3) and 73(3.1) of the Act that essentially provide for the deferral of the tax consequences on the transfer of property, including land, used in fishing or farming from a parent to a child during the parent’s lifetime. If the property to be transferred is land and the actual proceeds of disposition is any amount between the fair market value of the property and its adjusted cost base, then that amount is the parent’s proceeds of disposition and the cost of acquisition of that property to the child.

In general terms, in order to be eligible for the rollover, the following conditions, amongst others, must be met:

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

Subsection 69(11) of the Act, entitled “Deemed proceeds of disposition” may apply where, as part of a series of transactions or events, a taxpayer disposes of property to a recipient for proceeds of disposition that are less than the fair market value of that property (rollover) and the recipient subsequently disposes of that property or substituted property), or makes arrangements for the disposition of that property, within 3 years from the date of the disposition of the property by the taxpayer.

However, subsection 69(11) of the Act would only apply where it also can reasonably be considered that one of the main purposes of the series of transactions or events is to obtain the benefit of, inter alia, any deduction in computing taxable income (e.g., such as a capital gains deduction under subsection 110.6(2) of the Act in respect of a "qualified farm property") available to the recipient in respect of the subsequent disposition of that property. If subsection 69(11) of the Act is found to apply, the parent would be deemed to have disposed of the farm property at FMV at the time of the original disposition, which could result in a capital gain.

In regard to the forgiveness of debt, in your hypothetical situation, the provisions of section 80 of the Act may be applicable. See subsection 80(9) of the Act entitled “Reductions of adjusted cost bases of capital properties”. Another consideration would be the potential application of the attribution rules in Section 75.1 of the Act if the children are minors. See Interpretation Bulletin No: IT-268R4 entitled “Inter Vivos Transfer of Farm Property to Child” which can be found on the CRA website: www.cra-arc.gc.ca .

We trust our comments will be of assistance to you.

Yours truly,

Doug Watson
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch