17 January 2013 External T.I. 2012-0468321E5 - Capital gain on sale of land

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: What are the tax implications of sale of two parcels of land?

Position: Question of fact. General comments only.

Reasons: Specific fact situation.

XXXXXXXXXX N. Pulandiran
2012-046832

January 17, 2013

Dear XXXXXXXXXX:

Re: Proposed sale of property

This is in response to your email of November 2, 2012, wherein you request our comments on the tax implication under the Income Tax Act (the "Act") pertaining to a proposed sale of certain land which includes your principal residence.

Briefly, we understand that you own two parcels of land, referred to as "Parcel A" and "Parcel B", respectively. You mentioned that you purchased Parcel A in XXXXXXXXXX and have performed some farming activities on it from XXXXXXXXXX to the early part of XXXXXXXXXX. However, you also indicated that at no time did your income from farming exceed your other income. Since XXXXXXXXXX, Parcel A has been rented to a neighboring farmer, who is not related to you, in return for a share of the crop. You also indicated that in 1994 you filed an election and reported a deemed capital gain on Parcel A.

Parcel B includes land where your current principal residence is situated. Most of Parcel B was farmed by your father from XXXXXXXXXX until he died in XXXXXXXXXX, and then by your mother and two siblings until the end of XXXXXXXXXX. You mentioned that you had some involvement in those farming operations as a child/teenager. Since XXXXXXXXXX, you indicated that Parcel B has also been rented to a neighboring farmer in return for a share of the crop.

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. This Information Circular and other Canada Revenue Agency ("CRA") publications mentioned below can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html.

Since the situation described in your correspondence involves proposed transactions that are not the subject matter of an advance income tax ruling request and appears to be more in the nature of general tax planning advice, for which we are unable to provide, we are only prepared to provide the following general comments.

The CRA's general views related to the capital gains matters are largely discussed in Chapter 7 of Guide T4003 – Farming Income, Chapter 1 of the Guide T4037 - Capital Gains, and paragraphs 20 to 24 of Interpretation Bulletin IT-120R6, Principal Residence. As explained in Chapter 7 of the T4003, if you have a taxable capital gain from the sale of qualified farm property ("QFP") you may be able to claim a capital gains deduction. QFP for the purposes of the deduction would generally include, real or immovable property, such as land, owned by you (or any one of the persons listed below) throughout the 24 month period immediately before the sale and only if it was used to carry on a farming business in Canada ("farming-use test") by you or any one of the following:

• your spouse or common-law partner, or any of your parents or children;
• the beneficiary of a personal trust, or the spouse or common-law partner, parent, or child of such a beneficiary;
• a family-farm partnership where you, your spouse or common-law partner owns an interest; or
• a personal trust from which you, your child or parent acquired the property.

Generally, a real or immovable property is considered to be used principally in a farming business by an individual if its primary use (that is, more than 50% of its use) is in the operation of a farming business. It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria to be considered in making this determination are set out in paragraph 4 of Interpretation Bulletin IT-322, Farm Losses. However, as indicated in paragraph 9 of Interpretation Bulletin IT-433R, Farming or Fishing - Use of Cash Method, the crop share received by a landlord in a sharecropping arrangement is generally considered to be rental income and not income from farming.

There are different sets of rules under the Act that are applicable in respect of the farming-use test noted-above and the determination of the application of such rules will depend on when the particular property was last acquired. It is the CRA's view that the filing of a valid capital gains election in 1994 in respect of a property that was originally acquired before June 17, 1987, would trigger the reacquisition of the property by the elector immediately after February 22, 1994, with the effect that such property will be considered to have been "last acquired" after June 17, 1987.

Generally speaking, in respect of property last acquired after June 17, 1987 (except property acquired after June 17, 1987, under an agreement in writing entered into before that date), the property will only be considered to be used in carrying on a farming business in Canada if one of the following two farming-use tests is met:

• in at least two years while the property or the property it replaced was owned by one or more persons referred to above, the property was used principally in a farming business in Canada in which any of the persons referred to above was actively engaged on a regular and ongoing basis. Also, in that same two year period, the person's gross revenue from the farming business must exceed the person's income from all other sources for that period; or
• a family-farm partnership or a family farm corporation used the property for at least 24 months to carry on a farming business in Canada, during such time, you, your spouse or common-law partner, any of your children, or your parents must have been actively engaged on a regular and ongoing basis in the farming business.

Generally speaking, in respect of property last acquired before June 18, 1987 (or after June 17, 1987 under an agreement in writing entered into before that date), the property will only be considered to be used in carrying on a farming business in Canada if one of the following two farming-use tests is met:

• in the year you disposed of the property, or the property it replaced, the property was used principally in a farming business in Canada by any of the persons referred to above or a family farm corporation; or
• the property or the property it replaced was used in a farming business in Canada for at least five years by any of the persons referred to above, and during this time, the property was owned by any of these persons or a family farm corporation).

Given all the inherent complexities of applying these rules to a particular fact situation you may wish to seek independent professional tax advice.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch