19 June 1989 Ruling 73863 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.

June 19, 1989

Dear Sirs:

Re:  Subsection 110.6(1) of the Income Tax Act (the "Act")

This is in reply to your letter of March 15, 1989, and further to our telephone conversation (Thornley 19(1).1   on June 1, 1989, concerning your request for clarification of the application of subsection 110.6(1) of the Act with respect to qualified farm property acquired before June 17, 1987.

Your enquiry relates to the following hypothetical fact situation:

1)     A taxpayer has farmed his property for over 20 years, the farm being his only source of income.

2)     On January 1, 1990, the taxpayer registers a plan of subdivision on the farm land with the intention of servicing the subdivided lots, constructing houses on them, and selling them.

3)     On December 31, 1992 the taxpayer sells all the lots and houses. 

It is your view that:

1)     On January 1, 1990, the taxpayer would have a notional capital gain on the farm property upon the conversion of the property from farming to development use.  Section 45 of the Act would no apply to deem a disposition at this time.

2)     The taxpayer will be entitled to the $500,000 capital gain deduction in 1992 for "qualified farm property" as that term is defined in subsection 110.6(1) of the Act with respect to the increase in the value of the property up to January 1,1990 assuming the property otherwise satisfied the required condition as at that date.

3)     The increase in value of the property between January 1,1990 and December 31, 1992 would be taxable as an inventory gain.

Our Comments

As discussed with you on June 1, 1989, the Department's position with respect to the issues raised in your enquiry are set out largely in Interpretation Bulletin IT-218R.  Paragraph 24 of IT-218R refers in particular to the subdivision of farmland.  In essence it states that all of the gain on the sale of subdivided lots will remain a capital gain if an examination of all the other facts, both before and after subdivision, establishes this to be so.  Where, however, as in your hypothetical example, the farmer goes beyond mere subdivision of the land into lots he will be considered to have converted the land from a capital property into a trading property and paragraph 15 of the Bulletin has application.

As you suggest, the taxpayer will have a notional capital gain on the date of conversion.  However, this notional capital gain will not be considered to give rise to taxable capital gains until the taxation year during which the actual sale of the lots with houses occurs.  Such capital gains must be reported in the year of sale.  Where the property is a qualified farm property as defined in subsection 110.6(1), and this is a question of fact to be determined from an examination of all the facts, the taxpayer is entitled to claim the qualified farm property capital gains deduction in the year in which the capital gains are reported (1992 in your example).

Also as suggested by you and confirmed by paragraph 15 of IT-218R, the increase in value of the property between the date of conversion and the date of sale will be reported as an inventory gain.

We trust our comments will prove helpful.

Yours truly,

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.  Phil Jolie