23 January 1990 Ministerial Correspondence 59164 F - Capital Gains Exemption - 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.

January 23, 1990

19(1)

We are writing in reply to your letter of November 17, 1989, wherein you requested our views regarding the interpretation of "qualified farm property" as defined in subsection 110.6(1) of the Income Tax Act in the following two scenarios.

1.     Gain Realized by Child

     A Canadian resident individual (taxpayer) has farmed a property continuously since 1977.  His gross revenue throughout this period has exceeded his income from all other sources.  The taxpayer wishes to transfer an interest in this property to his adult children under subsection 73(3) at cost, resulting in a transfer of the accrued gain to each child.  The taxpayer and his children will then sell the property within the two year period to a third party.  During the period between the transfer to the children and the ultimate sale, the taxpayer will continue to farm the property.  The proceeds received from the sale will be allocated to the taxpayer and his children in proportion to ownership.

It is your interpretation that the sale of the property by the children would be considered a sale of qualified farm property. Subparagraph (vii) of the definition of qualified farm property includes property acquired by a child subsequent to June 17, 1987, if the property was owned by the taxpayer or the child throughout the 24 months preceding the sale.  Furthermore, throughout the 2 years while the property was so owned (by the taxpayer or the child), gross revenue from the farming business carried on by the taxpayer must have exceeded his income from all other sources for the year.  Consequently, you believe the property would be qualified farm property.

2.     Capital Gain

     A Canadian resident individual (taxpayer) has farmed a property continuously since 1977. His gross revenue throughout the period has exceeded his income from all other sources.  The taxpayer has entered into an agreement with a land development consultant to obtain the necessary approvals to subdivide the farm property into lots, at which time the property would be sold to a developer. Prior to the sale to the developer and during the time in which the approvals are being obtained; the taxpayer will transfer an interest in this property to his adult children under subsection 73(3) at cost, resulting in a transfer of the accrued gain to each child.  The property will then be disposed of by the taxpayer and his children within a 2 year period to a developer who will subdivide and sell the lots.  During the period between the transfer-to the children and the sale of the property, the taxpayer will continue to farm the property.  The proceeds received from the sale will be allocated to the taxpayer and his children in proportion to ownership.

It is your view that the sale by the children, subsequent to obtaining approvals to subdivide the property will be considered to be the disposed of capital property.  Interpretation Bulletin IT-218R paragraph 24 states that farm property which is subdivided into lots and then subsequently sold will maintain its capital nature to the taxpayer as long as the farm land is regularly used by the taxpayer for the purpose of gaining or producing income from a farming business carried on by him.  In addition, the land must also have been acquired for the purpose of farming and not resale.

Our Comments

It is our opinion that, in both scenarios described above, the property in question would be qualified farm property and both the taxpayer and his adult children would be entitled to claim the enhanced capital gains deduction under subsection 110.6(2). The period of ownership by the taxpayer would qualify both the taxpayer and the adult children for subparagraph (a)(vii), with respect to both the 24 month period and the gross revenue requirement in clause (a)(vii)(A) of the definition of qualified farm property in subsection 110.6(1).

These comments are made on the assumption that the neither the taxpayer nor the adult children have a history of real estate transactions that could taint the transactions in either scenario as being an "adventure in the nature of trade" that would bring the realized gains into income.

Should either of the above scenarios involve actual taxpayers and proposed transactions, you may wish to re-submit this request for a binding advance income tax ruling.  Should either scenario involve actual taxpayers and completed transactions, you may wish to submit all facts and relevant documentation to the appropriate District Taxation Office for their comments.

We further caution that the above comments represent an expression of opinion only, and as such, are not binding upon the Department.

Yours truly,

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