12 July 1989 Income Tax Severed Letter 5-8089 - [Capital Gains Deduction from Gains Arising on Death]

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.

Revenue Canada Taxation Head Office

XXX

C. Tremblay (613) 957-2095

JUL 12 1988

Dear Sirs,

Re: Capital Gains Deduction from Gains Arising on Death

This is in reply to your letter of May 11,1989, requesting our comments to your interpretation of subsection 70(5.1) and whether any administrative policies or relief is available in the situation you describe.

In the situation you describe, a farmer who is single and has no immediate family dies leaving quota. His will stated that in the event that his nephews did not wish to acquire the farm, the property was to be sold and the proceeds passed on to his beneficiaries. Since the estate or the beneficiaries do not carry on the business of farming, they will acquire a capital property, thus the enhanced capital gain deduction is not available on the eventual sale. You reason that if the farmer had been able to dispose of the quota before his death, the gain would have been eligible for the enhanced deduction and you feel the result is an unintended consequence of the revision of the Act.

Our Comments

In our opinion, the enhanced capital gain exemption in respect of qualified farm property is not available in respect of property which does not meet all the relevant tests. Unless the conditions set out in subparagraphs (a)(vi) or (vii) of the definition of "qualified farm property" in subsection 110.6(1) are met, the property will not be considered to have been used in the course of carrying on the business of farming in Canada. In your hypothetical example, unless the beneficiaries are the children rather than the nephews of the deceased, the enhanced capital gain exemption is not available to them in any case.

As you noted, there is an additional difficulty. If the farmer had disposed of the quota before his death, the gain would have been eligible for the enhanced deduction in his hands. However in your situation, the quota has been acquired as a consequence of death. Paragraph 70(5.1)(b) which is not an elective provision, applies on death; the quota is deemed to be disposed of for 4/3 of the Cumulative Eligible Capital in respect of the business, and is deemed to be acquired at a cost equal to the deemed proceeds of disposition by the person who has so acquired the property. Since it is disposed of immediately before death, it is qualified farm property at that time, however unless the business of farming is carried on by the estate or the beneficiaries, the quota does not meet the definition of "qualified farm property" in their hands. Consequently, any subsequent sale is not eligible for the enhanced capital gain exemption.

In regard to administrative relief, the Department is obliged to administer the tax laws as legislated by Parliament and does not have the discretion to deviate from clear statutory language.

We trust our comments will be of assistance.

Yours truly,

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