27 September 2022 External T.I. 2021-0903731E5 - Qualified Farm or Fishing Property

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 a capital gains deduction under subsections 110.6(2) and (2.2) of the Income Tax Act would be available in the following situation described.

Position: Question of fact. In the situation described, likely yes.

Reasons: See below.

XXXXXXXXXX							2021-090373
								Chris Brennan, CPA, CA

September 27, 2022

Dear XXXXXXXXXX:

Re: Qualified Farm or Fishing Property

This is in reply to your letter of June 6, 2021, in which you asked whether the capital gains deduction under subsections 110.6(2) and (2.2) of the Income Tax Act (the “Act”) would be available in the following situation described.

An individual’s (the “Taxpayer”) grandparent’s owned a parcel of land (the “Land”) which they acquired in 1901 and actively farmed until 1940, when the Land was transferred to the Taxpayer’s parents. The Taxpayer’s parents actively farmed the Land until it was transferred to the Taxpayer in the early 1970s. The Taxpayer continued to actively farm the Land until 2014. The Taxpayer purchased an additional parcel of land (the “Additional land”) in 1980. The Additional land was actively farmed, by the Taxpayer, until 2014. The Taxpayer plans to sell the Land to a non-family buyer in the near future, and then sell the Additional land at a later date.

Our Comments

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The availability of the capital gains exemption for qualified farm or fishing property (“QFFP”) is primarily a question of fact, which cannot be determined without a complete understanding of all the relevant facts. Nevertheless, we are prepared to offer the following general comments. Generally, subsections 110.6(2) and 110.6(2.2) of the Act permit a capital gains deduction of up to $500,000 for an individual who is resident in Canada throughout the year and disposed of QFFP after April 20, 2015.

In respect of an individual (other than a trust that is not a personal trust), the definition of QFFP in subsection 110.6(1) of the Act includes “real or immovable property… that was used in the course of carrying on a farming… business in Canada” by certain qualifying users including, among others, the individual, spouse, common-law partner, child, parent or grandparent of the individual.

Subsection 110.6(1.3) of the Act contains additional conditions that must be met in order for property, such as land, to be considered to have been “used in the course of carrying on a farming… business in Canada.” The specific conditions that need to be satisfied depend on when the particular property was last acquired:

• For properties last acquired before June 18, 1987, or after June 17, 1987, under an agreement in writing entered into before that date, the applicable test is described in paragraph 110.6(1.3)(c) of the Act.
• For all other properties, the applicable test is described in paragraph 110.6(1.3)(a) of the Act.

In the above-described situation, since it appears that the Taxpayer acquired the Land and Additional land (collectively referred herein as the “properties”) before June 18, 1987, we will limit our discussion to the conditions set out in paragraph 110.6(1.3)(c) of the Act.

In general terms, paragraph 110.6(1.3)(c) of the Act is satisfied if one of the following two farming-use tests is met:

• in the year the taxpayer disposed of the property, or the property it replaced, the property was used principally in a farming business in Canada by a person described in clauses 110.6(1.3)(c)(i)(A)-(E) of the Act (which includes, among others, the individual, spouse, common-law partner, child, parent or grandparent of the individual);

or

• the property, or the property it replaced, was used principally 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.

Generally, a property is considered to be used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation. 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 Income Tax Folio S4-F11-C1, Meaning of Farming and Farming Business. While it is a question of fact, if the Taxpayer, the Taxpayer’s parents or grandparents used the properties principally in a farming business carried on in Canada for at least five years, then the applicable test described paragraph 110.6(1.3)(c) of the Act would likely be satisfied. Therefore, a capital gains deduction may be available, on the sale of the properties, subject to the limits within subsections 110.6(2) and 110.6(2.2) of the Act.

Yours truly,

Amanda Couvrette, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate