9 April 1990 Ministerial Letter 59418 F - 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.

April 9, 1990

Dear Sirs:

This is in reply to your letter of January 5, 1990 concerning whether the business of farming is carried on in certain situations for the purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act").

The situations are set out below:

1.     Another party plants and harvests the crops and gives the taxpayer land owner a share of the crop instead of a fixed rent.

2.     The land owner decides on crop details and pays all inputs. Instead of paying the custom operator a fixed fee, the custom operator receives a percentage of crop.

3.     Taxpayer A is a land owner and provides the use of this land. Taxpayer B is a machinery operator who provides the use of his machinery.  Each taxpayer pays for 1/2 of the inputs and receives 1/2 of the crop.

4.     A farm owner provides the use of his barn to his sons in exchange for 10% of the milk sales.  He also continues to be involved in management to maximize milk sales.

In the case of your first situation, paragraph 8(a) of IT-433 states that "The crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming".  That paragraph also indicates that the reference to a "sharecropping arrangement" means an arrangement where a taxpayer or landlord receives from his tenant a share of crop in lieu of rent.  As a result of these comments, we agree that the taxpayer land owner in situation (1) is not using land in the business of farming.

In the second case, it is our understanding that the land owner determines the type of crop to be planted and the times at which activities (e.g. spraying and harvesting) will be carried out. In addition, the land owner pays the direct costs (costs such as seed, fertilizer and spray).  In such circumstances, it is our general view that the land owner would be engaged in a farming business. These comments are consistent with those in paragraph 15 of IT-268R3.  It is also our view that the custom operator would not be regarded as carrying on a farming business by virtue of receiving a percentage of the crop. Rather, he is providing services with his fee being a share of the crop.

In the third situation, you have suggested that both parties are carrying on the business of farming because the arrangement is similar to that which would exist in respect of a partnership.  In our view, it is not possible to determine whether both parties are engaged in a farming business on the basis, of the limited information you have provided.  Before meaningful comments could be provided, it would be necessary to have information concerning the management and control of the operation.  However, we agree that, if a farming partnership does exist, all the partners would be considered to be carrying on the business of farming.

In the last situation, there is insufficient detail to determine whether or not the father is carrying on the business of farming. However, it appears to us that the father may be providing consulting services and the rental of a barn to his sons who control the farm operation.  In these circumstances, the father would not be carrying on a farming business.

As a final comment, we note that the determination of whether real property is used by a taxpayer in carrying on a farming business is a question of fact and that, in an actual situation where more than one party is involved, it is necessary to review the relevant agreements. It may also be necessary to obtain an understanding of how the terms of those agreements were carried out.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and, accordingly, it is  not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch