29 October 2012 External T.I. 2012-0440061E5 - Family Farm Corporation

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 the shares of a grazing cooperative corporation are shares of capital stock of a family farm corporation.
2. Whether shares of a grazing cooperative can qualify as property used by a corporation, the shares of which are shares of the family-owned corporation.

Position: 1.No. 2. No.

Reasons: See response.

XXXXXXXXXX
2012-044006
Lata Agarwal
October 29, 2012

Dear XXXXXXXXXX:

Re: Family Farm Corporations

This is in response to your letter dated March 16, 2012, wherein you requested our views on whether a share of a corporation that is a grazing co-operative corporation (“Grazing Co-op”) owned by an individual or the individual’s family farm corporation could be considered as being a “share of the capital stock of a family farm corporation” as that term is defined in subsections 70(10) and 110.6(1) of the Income Tax Act (“Act”).

Briefly, in your letter, you indicate that an individual, along with numerous other unrelated parties, owns shares of the Grazing Co-op. The individual carries on a cattle farming business. As a shareholder/member of the Grazing Co-op, the individual’s cattle are allowed to graze on the Grazing Co-op’s land without restriction. The Grazing Co-op’s land represents more than 90% of the fair market value of the assets owned by the Grazing Co-op.

Alternatively, if the individual’s family farm corporation owns the shares of the Grazing Co-op and such shares represent more than 10% of the fair market value of all the assets of the individual’s family farm corporation, you want to know if the shares of the individual’s family farm corporation would still qualify as a “share of the capital stock of a family farm corporation”.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, “Advance Income Tax Ruling”, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at
http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

It appears that the situation described in your letter involves a completed transaction and the determination of the issue you have raised would require a careful review of all relevant facts of the specific case. Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.

Subsection 70(10) of the Act defines a “share of the capital stock of a family farm corporation” (“the subsection 70(10) definition”) of a person at a particular time to mean a share of the capital stock of a corporation owned by the person at that time where, at that time, all or substantially all (i.e., generally 90% or more) of the fair market value of the property owned by the corporation was attributable to":

(a) property that has been used by

(i) the corporation or any other corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation of the person or of a spouse, common-law partner, child or parent of the person,

(i.1) a corporation controlled by a corporation referred to in subparagraph (i),

(ii) the person,

(iii) the spouse, common law partner, child or parent of the person,

…

principally in the course of carrying on a farming business in Canada in which the person or a spouse, common-law partner, child or parent of the person was actively engaged on a regular and continuous basis (or, in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect of that woodlot),

(b) shares of the capital stock or indebtedness of one or more corporations all or substantially all of the fair market value of the property of which was attributable to property described in paragraph (c), or

(c) properties described in paragraph (a) or (b).”

The definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act (“the subsection 110.6(1) definition”) is somewhat similar to the subsection 70(10) definition except that in addition to the all or substantially all asset use test that must be met at the particular determination time, it also requires that more than 50% of its property be attributable to property that was used principally in that farming business throughout any 24 month period ending before that determination time.

It does not appear that the use of grazing lands owned by a co-operative corporation by some or all of its shareholders/members in their respective farming businesses would result in that co-operative corporation being considered to be carrying on a farming business. While a question of fact, if a co-operative corporation’s principal source of income is primarily from fees or rent it charges its shareholders/members for the use of land, such income would not be considered as farming income (refer to our comments in paragraph 25 of Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child and paragraph 14 of Interpretation Bulletin IT-349R3, Intergenerational Transfers of Farm Property on Death). Moreover, it does not appear that the deeming rules in subsection 70(9.8) of the Act (which if applicable, would deem leased land to be used in a farming business in certain situations) would apply in such a situation since the land is not owned by an individual.

As such, a share of the capital stock of a co-operative corporation owning grazing lands that are used by its shareholders/members would not qualify as “share of the capital stock of a family farm corporation” under the respective definitions of that term in subsections 70(10) and 110.6(1) of the Act. In addition, it is not possible to conclude that a particular shareholder/member (corporate or otherwise) would be considered to be using all or substantially all of the property owned by a co-operative corporation principally in the course of carrying on that particular shareholder/member’s farming business in Canada where such property is also being used by numerous other persons who are not persons otherwise described in those definitions (i.e., generally, inter alia, a spouse, common-law partner, child or parent of that person or by a corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation owned by such a person or persons).

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch