18 January 1990 Administrative Letter 59146 F - Definition of "Farming" and "Replacement 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.

January 18, 1990

Dear Sirs:

Re:  Sections 248(1) and 44(5) of the Income Tax Act (the "Act")

This is in reply to your letter of November 17, 1989 requesting the Department's views on the definition of "farming" and "replacement property" in the above captioned provisions.

The facts regarding your enquiry as described in your letter are as follows:

1.     An individual resident in Canada proposes to sell 100 acres of farm property which is used in the business of peat farming for a substantial gain.  He then proposes, within the time requirements of Section 44(1)(d), to purchase a substantially larger farm which may be used in peat farming, another farming activity, or a combination of both.

2.     The peat farming business requires the following steps:

-     the scooping of the earth out of bogs,

-      the drying of the earth, and

-      the screening of the earth.

After the screening process, the peat is then sold to nurseries who look after packaging and selling to the end users.

Based on the above facts you have asked us to comment on the following:

1.     Whether a peat business would be considered farming under subsection 248(1) of the Act.

2.     Would the new property acquired after the sale of the first property and which may be used in a peat operation, another farming activity, or a combination of both be considered a replacement property of a "former business property" within the meaning of that term as defined in subsection 248(1) of the Act.

3.     Can the replacement property or properties be substantially larger in acreage than the original property.  In this respect you have referred us to paragraph 10 of IT-259R2.

Our Comments

It would appear that the information submitted in your letter relates to a fact situation involving a specific taxpayer which according to the Department's Information Circular 70-6R would more appropriately be the subject of an Advance Income Tax Ruling.  Paragraph 23 of that circular also indicates that written opinions concerning such proposed transactions generally will not be given.  Thus we are unable to advise further with respect to the specific facts of your enquiry.  We are however, prepared to set out some general comments.

In answer to your first question we should point out that whether a particular business operation is considered to be the carrying on of a farming business is a question of fact that can only be determined after a review of all of the related facts at a particular time.  It would however appear, based on the limited information you have provided in your letter, that the peat operation would not qualify as farming under subsection 248(1) of the Act.

Generally, the harvesting of peat is considered to be more in the nature of mining than of farming.  For example, see paragraph 4 of Interpretation Bulletin IT-492 where it is noted that a peat bog or peat deposit is given the same treatment as an "industrial mineral mine" under the Income Tax Regulations.

Should the situation be such that the peat operation is very small in relation to a normal farm operation then the Department may consider such a non-farming activity as being part of a taxpayer's bona fide farming operation.  This is on the understanding that such an activity is carried out along with other farming activities and is undertaken on a relatively small scale, with the income generated being incidental to the taxpayer's other farming revenue. For further elaboration of this point please refer to Interpretation Bulletins, IT-206R and IT-433. 

With respect to your second question, in order for the replacement property to qualify for the subsection 44(1) rollover the property acquired must be capital property acquired for the same or a similar use as that of the former property.  If the former property was used in earning income from a business, the replacement must be acquired for earning income from "that business" or a similar business.  For further information on this point please refer to the comments in Interpretation Bulletin IT-259R2 and in particular paragraphs 16 to 20.  In addition certain comments in IT-491 may be of assistance.

As indicated to you in our recent telephone conversation whether a particular operation is considered to be the carrying on of a similar business and whether a replacement property is being used in earning income from that business or a similar one are questions of fact that can only be determined upon a review of all facts in retrospect.

It would however appear from the facts presented and our analysis of the situation that if an ordinary farm property is acquired to replace the peat bog the provisions of subsection 44(5) would not be applicable.

Regarding your other two alternative proposals suggested for replacement of the peat bog we must advise that the Department does not normally express opinions on alternative proposals such as described in your letter.  However you may wish to discuss this matter further with Kitchener District Office officials once you have firmed up your plans. They may be able to assist you in this regard provided full details are provided regarding the current operations and the details of a firm proposal with respect to any replacement property.

In reply to your third question we agree with your interpretation that the issue of whether a particular property meets the definition of a  "replacement property" is not affected by its size in relation to the original property.  Where the cost of the replacement property equals or exceeds the proceeds of disposition of the original property, the full capital gain would be deferred.

We trust our comments will be of some assistance.

We should point but that these comments represent an expression of opinion only and as such are not binding upon the Department.

Yours truly,

E.M. Wheeler for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch