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 certain land that is disposed of by the taxpayer would qualify as QFP?
Position: Question of fact.
Reasons: See response
January 28, 2014
Re: Qualified Farm Property
This is in response to your correspondence of January 15, 2014 and our telephone conversation (D'Angelo/XXXXXXXXXX) of January 21, 2014 concerning the availability of the capital gains exemption under subsection 110.6(2) of the Income Tax Act (the "Act") in respect of a disposition of land.
You have indicated that your father acquired a parcel of land in the late XXXXXXXXXX's that he actively farmed from that time until XXXXXXXXXX. You also indicated that farming was his principal and only source of income throughout that time period. In XXXXXXXXXX, your father rented the land to your brother who used it in his farming business. When your father died in XXXXXXXXXX you and your XXXXXXXXXX sisters each inherited an equal portion of the land under the terms of your father's will. You, and each of your sisters, continued to rent the inherited land to your brother until XXXXXXXXXX, when this land was sold to your brother.
You want to know whether this land would be qualified farm property that would be eligible for the capital gains exemption at the time of the sale.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Generally speaking, subsection 110.6(2) of the Act permits an individual (other than a trust) who is resident in Canada throughout the taxation year to claim a capital gains exemption of up to $750,000 (footnote 1) where that individual has disposed of property that is "qualified farm property" ("QFP") as that term is defined in the Act. QFP includes, inter alia, property that is real or immovable property that was used by certain "qualifying persons" in a farming business in Canada. To be a QFP, the property must meet certain conditions as set out in subsection 110.6(1.3) the Act. These rules are fairly complicated and we caution that you should consult with your own tax advisor before acting on the information contained in this letter.
Notwithstanding the above, we will attempt to summarize the rules as they may pertain to your particular fact situation on the assumption that the land was last acquired by you in XXXXXXXXXX from your father's estate.
Very generally speaking, where property, such as land, is last acquired after June 17, 1987, the first condition that must be met is that the land must have been owned by you or one or more qualifying persons (which include, inter alia, your spouse, common-law partner, child or parent or certain personal trusts), throughout a period of at least 24 months immediately preceding the disposition. The second condition that must be met is that in at least 2 years during the period the land was owned by you or one or more qualifying person, the gross revenue of a qualifying person (referred to as the "operator") from the farming business carried on in Canada exceeded the income of the operator from all other sources for that period, and the land was used principally (i.e., more than 50%) in the farming business in which the operator was actively engaged on a regular and continuous basis.
While a question of fact, the first condition described above (i.e., the 24 month ownership by you or by a qualifying person) does not appear to be an issue. However, in order for your land to be QFP, the second condition must be met which also remains a question of fact. However, if in at least 2 years during the period the land was owned by your father, his gross revenue from the farming business he carried on in Canada exceeded his income from all other sources for that period, and such land was used principally by him in that farming business in which he was actively engaged on a regular and continuous basis, the land would be QFP.
We trust our comments will be of assistance.
Michael Cooke, C.P.A., C.A.
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 For the 2014 and subsequent taxation years the lifetime capital gains exemption has been increased by $50,000 so that it will apply on up to $800,000 of capital gains realized by an individual on, inter alia, QFP. In addition the lifetime capital gains exemption will be indexed to inflation for taxation years after 2014.
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