25 January 1989 Income Tax Severed Letter 5-7199 - Income tax consequences of financial arrangements designed to facilitate family farm purchase and sale transaction

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.

Dear Sirs:

This is in reply to your letter of December 5, 1988, concerning the income tax consequences of financial arrangements designed primarily to facilitate family farm purchase and sale transaction's.

As we understand it, under the financial arrangement described in your letter, if the seller agrees to deposit all or a part of the sale proceeds in a term deposit at a reduced interest rate, the bank will reduce the buyer's mortgage loan rate by the same percentage reduction accepted by the seller on the term deposit. The mortgage loan rate reduction would only be extended to the portion of the mortgage loan equal to the amount the seller agrees to place in the term deposit. The term deposit would be locked in during the period of the agreement.

While you envision this arrangement occurring primarily in father-son transfers, you also recognize that it may have appeal in other purchase and sale transactions in which the seller would provide a concessional interest rate to the buyer in exchange for a higher sales price.

In our opinion, based on the arrangement described above and assuming that the father transferred the family farm to his son at a price not in excess of the fair market value of the farm, there would be no "deemed interest benefit" to the father.

However, in any purchase and sale transaction in which the seller has converted interest income into a capital gain, the provisions of subsection 16(1) or possibly subsection 245(2) of the Income Tax Act would apply to effectively include the amount received in lieu of interest in the seller's income. Interpretation Bulletin IT-265R2 and Information Circular 88-2, copies of which are enclosed, should be referred to for further information.

The comments set out in this letter are of a general nature and do not take into account the numerous additional considerations that might arise in the context of specific factual situations. The opinions expressed in this letter do not constitute an advance tax ruling and, in accordance with paragraph 24 of Information Circular 70-6R, are not binding on the Department.