15 April 1988 Income Tax Severed Letter 5-5792 - [Definition of Qualified Farm 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.

APR 15 1988

Small Business and General Division R. Langevin (613) 957-2138

Dear Sirs:

Re: Definition of Qualified Farm Property

This is in reply to your letter dated March 17, 1988, requesting our opinion whether or not the share capital of a corporation operating under various scenarios would qualify as a "share of the capital stock of a family farm corporation" within the meaning ascribed by paragraph 70(10)(b) of the Income Tax Act (the "Act") for the purposes of the definition of "qualified farm property" pursuant to subsection 110.6(1) of the Act.

Scenario 1

The first hypothetical situation that you have asked us to consider is one in which an individual carries on a farming business as a sole proprietor. This business is a full-time farming operation that has been carried on for many years and is the sole occupation of the proprietor. The sole proprietorship owns livestock, equipment and other items essential to carrying on a farming business, however, it owns neither land nor buildings. The proprietor owns all of the issued shares of a Canadian controlled private corporation and the latter has as its only assets, farm land and a building. The corporation leases the farm land and building to the sole proprietor. You have asked whether or not the corporation is carrying on the business of farming. It is our view that in the circumstances described above whereby a corporation leases property to a proprietor and the latter uses that property in the business of farming, the corporation would not be carrying on the business of farming inasmuch as a corporation is an entity separate and distinct from its shareholders. Accordingly, because the shares of the corporation would not qualify as a share of the capital of a family farm corporation, they would not constitute qualified farm property within the meaning ascribed by the Act.

Scenario 2

In the event that our reply to the first scenario is not affirmative, you have requested that we consider the case in which a proprietor transfers the entirety of his farming operation to the corporation referred to above. You have asked whether the shares of the corporation would then constitute qualified farm property and, if so, would our reply be similar in the event that only a portion of the proprietor's farm business is transferred to the corporation.

In either of the latter two cases, the corporation would qualify as a family farm corporation to the extent that it used all or substantially all of its property in the business of farming. It is our view that the words "all or substantially all of its property" as they apply in paragraph 70(10)(b) of the Act are to be interpreted to require that 90% or more of the total asset value of the corporation is used in the business of farming. It is a question of fact in each case whether the asset test has been met and the valuation method would be based upon the cost of total assets as explained at paragraph 29 of Interpretation Bulletin IT-268R3 . If only a portion of the farm operations are transferred to the corporation, it is important to note that 90% or more of the corporation's assets must be used in the portion of the farm operations so transferred to it.

Scenario 3

The third scenario you have asked us to consider is one in which the corporation and the proprietorship form a partnership such that the land and building of the corporation and the inventory and other assets of the proprietorship are used by the partnership in its business of farming. You have asked whether or not the shares of the corporation would constitute qualified farm property. For the purposes of our reply we will assume that the legal structure established by the above contribution of property is a partnership, although we note that it is a question of fact in each case whether a partnership exists. We will assume further that ownership of the assets will not vest in the partnership.

It is our view that the assets owned by the corporation will be used by the partnership in the partnership's farming business and will not be used directly by the corporation. However, insofar as the corporation and its sole shareholder are the only partners in the partnership being considered, it is our opinion that the farming assets contributed by the corporation to the partnership could be considered to be used by the corporation in carrying on the business of farming for the purposes of paragraph 70(10)(b) of the Act. It proceeds from this that the shares of such a corporation would constitute qualified farm property provided that all other requirements of the relevant provisions of the Act are met.

These opinions are our best understanding of the law as it applies generally and may not be applicable to the facts of a particular case and, accordingly, are not binding upon the Department.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch