28 June 1990 External T.I. 9010145 F - Election to Transfer Capital Property from One Class to Another

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.

We are writing in reply to your letter of Hay 30, 1990, wherein you requested that we confirm your interpretation of the definition of an "interest in a family farm partnership", as defined in subsection 110.6(1) of the Income Tax Act, as.it-relates to the two following situations:

1.     A partnership carrying on a farming business owns real property on which there is situated the personal residences of the individual partners.  If the cost of    these residences accounts for more than 10% of the cost   of all of the partnership's assets, the question arises   as to whether or not an interest in that partnership will be an interest in a family farm partnership as that  term is defined in section 110.6.  It is your understanding that in this situation, the Department looks to the primary or principal use of each of the assets owned by the partnership and if that primary use   is in the business of farming the property will be treated as a farming asset.

        It is also your understanding that as far as residences   are concerned, the property will be considered as being   used primarily in the business of farming if more than  50% of its use is as accommodation for partners or persons related thereto who are actively employed in the  business on a regular and continuous basis.  This  interpretation appears reasonable in the circumstances    and is consistent with the position that the Department   has taken in interpretation Bulletin IT-268R3 dealing with the rollover of an interest in a family farm partnership.

2.     A partnership carrying on a farming business owns  livestock that accounts for more than 10% of the cost or  value of the partnership's assets and has not been owned  throughout a period of at least 24 months before the time at which the partnership interest is disposed of.

This may occur for instance, in a feed lot operation and in certain chicken farms.  If the definition of an interest in a family farm partnership in section 110.6 is read literally, it can be interpreted as requiring all or substantially all (at least 90%) of the property at the particular time being used by the partnership or certain other persons throughout a period of at least 24 months before that time in the course of carrying on the business of farming in Canada.  This would disqualify certain farming partnerships from the enhanced capital gains deduction simply because the life-cycle of the livestock is less than 24 months.  It is your understanding that because of the inequity that would be created by this interpretation, the Department administers the Act on the basis that an interest in a partnership will qualify provided that throughout the 24 months preceding the date of sale at least 90% of the partnership's assets are used in the business of farming.  Under this interpretation, it is not required that the property owned throughout the 24 month period be on hand at the particular time. In other words, the Partnership's assets can turn over during this 24 month period and the partnership will still meet the definition in section 110.6, provided that at all times during this period the non-farming assets do not exceed more than 10% of the partnership's total assets.

Our Comments

With respect to your first question, we agree that the position set out in paragraph 29 of IT-268R3 would apply in the determination of the primary use of a farm residence for purposes of the definition of an "interest in a family farm partnership", as defined in subsection 110.6(l).  Further support for this position is set out in paragraph 5 of IT-486R.

In response to your second question, it is our opinion that the turnover of assets during the 24 month holding period, such as livestock in a feedlot operation would not, in and by itself, disqualify the partnership for the enhanced capital gains exemption provided for under subsection 110.6(2).

We would caution that the above comments represent an expression of opinion only, based on the limited information set out in your letter and as such are not binding upon the Department.

We trust these comments are of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch