1 October 1990 Ministerial Letter 902298 F - Capital Gains Exemption on Qualified Farm Property - Meaning of "Parent"

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.

19(1)

October 1, 1990

Dear Sirs:

Re:  "Parent"

This is in reply to your letter of August 24, 1990, requesting a technical interpretation of the word "parent" as the word is used in the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act").

In the situation you describe, the grandfather of an individual adult wishes to gift inter-vivos, property used in a farming business carried on by the grandfather. The grandson's parent is the child of the grandfather. The individual (the grandson) may subsequently dispose of the property in an arm's length transaction and realize a capital gain upon disposition. You ask if the word "parent" used in the definition of "qualified farm property" in subsection 110.6(1) of the Act may extend to a grandparent thus allowing the individual to claim a capital gain exemption. You suggest that if the word "parent" does not extend to grandparent in the definition, then the deduction under subsection 110.6(2) of the Act should be obtained by the grandson on a disposition for proceeds, where the farm was ultimately received by him by way of gift inter-vivos from his parent after his parent received the farm property by way of gift inter-vivos from the grandfather.

Our Comments

Subsection 70(10) of the Act defines a child for the purposes of sections 40, 44, 70, 73, and subsections 146(5.3), (5.4) of the Act and includes (ii) a child of his child's child. Paragraph 2 of Interpretation Bulletin IT-268R3, and paragraph 9 of IT-349R also confirm this position. Thus, the property can be transferred on a roll-over basis from the grandparent to the grandson, however, when the grandson sells it to an arm's length buyer, he must meet the definition found in subsection 110.6(1) "qualified farm property" of an individual, in order to claim the capital gain exemption.

To meet the definition of "qualified farm property", where the property is acquired after June 17, 1987, it must have been owned by the individual, a spouse, child, or parent, by a personal trust or by a family farm partnership throughout the period of at least 24 months immediately preceding the relevant time and in at least 2 years while the property was so owned, the gross revenue from the farming business of the individual or one of the other qualified users, who was actively engaged on a regular and continuous basis, exceeded their income from all other sources. Accordingly as you suggested, if the individual's grandparent is a "parent" for purposes of this definition, the grandson could claim the capital gain exemption. However, the extended definitions of parent and child found in subsections 252(1) and 252(2) of the Act would generally not refer to an adult grandchild and the definition of child in paragraph 70(10)(a) of the Act does not extend to section 110.6 of the Act.

In the situation at hand, the property was not owned by either the individual or his parent for a period of 24 months. The grandfather owned it during the period. Thus, in our opinion, the grandson would have to own the property and carry on the business of farming or have his father carry on the business of farming for a period of 24 months to be eligible for the exemption.

It is worth noting that the father of the individual, if he acquired the farm from his father on a roll-over basis, could sell the property to the individual or to an arm's length party and claim a capital gains exemption on the disposal because his parent (the grandfather) is a qualified user, regardless of whether the individual's father did any farming in his lifetime. However, once the individual grandson receives the property, he must satisfy the definition of qualified farm property found in subsection 110.6(1) of the Act to claim the capital gains exemption on any subsequent disposal. In the situations described, he is unable to satisfy the ownership and revenue tests in clause (vii)(A) of the definition of "qualified farm property".

In our opinion, regardless of whether he receives the farm from his father or his grandfather, the grandson cannot claim an exemption for the capital gain realized unless he or his father or a combination of the two own the property and carry on the business of farming on a regular and continuous basis throughout a period of 24 months and the farming income exceeds all other income for 2 years while so owned.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch