28 May 1991 Ministerial Correspondence 911064 F - Death of a Taxpayer and Disposition of Capital 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.

Dear Sirs:

Re: 19(1)

This is in reply to your undated letter concerning the tax treatment of 24(1).

As stated in Information Circular 70-6R2 "An advance ruling is a written statement given by the taxpayer stating how it will interpret specific provisions of existing Canadian income tax law in its application to a definite transaction or transactions which the taxpayer is contemplating."  As your request did not address any specific proposed transactions, we can not provide you with an advance income tax ruling.  Your $400 deposit will be returned to you under separate cover.

We do however offer you the following general comments which may help you in resolving your questions.

Death of a Taxpayer and Disposition of Capital Property

In general, a taxpayer is deemed to have disposed of all his assets at their fair market value as at the date of his death.  Capital gains due to appreciation in asset value from the date of acquisition to the date of death will be realized.  The amount at which the property is deemed disposed of will become the acquiror's cost of the property so that any future disposition will not result in a tax being imposed with respect to the increase in value that was already taxed on the final income tax return of the deceased.  In the case of farm property, if bequeathed to a Canadian resident child of the deceased, the property will be deemed to be disposed of at it's cost amount, hence no capital gain will be triggered (unless an election is made to have this provision apply to only part of the property in which case a capital gain may be triggered if so desired).  If on the other hand the taxpayer bequeaths farm property to a non-resident child the general rules will apply thereby triggering any gain inherent in the property on the portion received by the non-resident.

There is a general lifetime exemption of $100,000 of capital gains and an additional $400,000 capital gains exemption for qualified farm property.  This exemption may be claimed against capital gains realized on the terminal return to the extent the taxpayer has not previously used these available exemptions.

Meaning of "Farming"

Under the provisions of the Income Tax Act the term "farming" is given a broad definition.  It includes "livestock raising or exhibition and maintaining of horses for racing".  It is always a question of fact whether a particular property is used in a farming business and whether a particular operation constitutes a farming business at any particular time.  It is also a question of fact whether the taxpayer is carrying on that particular farming business.  If an operation results in income being earned exclusively from looking after horses for a fee, it would not be a farming business.  On the other hand, a taxpayer may be considered to be in the business of farming if a profit can reasonably be expected from the raising and exhibiting of horses.  Whether or not your sister is in the business of farming is a question of fact. This question can best be answered from a review of the matter by audit personnel at your local District Office.

Intergenerational transfers of farm property

Subsection 70(9) of the Income Tax Act (ITA) provides special rules under which a family farm may be passed from one generation to the next without immediate tax liability for accrued gains in value.  This rollover to a child on the taxpayer's death applies if:

(a)     the deceased taxpayer owned land in Canada or depreciable property of a prescribed class in Canada (i.e. buildings situated on the property);

(b)     immediately before the taxpayer's death the property in question was used by the taxpayer or any of his children in the business of farming;

(c)     on or after death the taxpayer's property was transferred or distributed to a child of the taxpayer as a consequence of his death;

(d)     the particular child was resident in Canada immediately before the taxpayer's death; and

(e)     within 36 months of death the property becomes indefeasibly vested in the child.

If these criteria are met subsection 70(9) will automatically apply to allow a tax-free rollover of farmland and depreciable farm property to a deceased taxpayer's Canadian resident child unless an election is made to obtain a partial rollover.  This rollover provision can only apply to farm business property transferred and not to non-farm property.  For example, in a situation where part of the land and some of the buildings are used in a farming business but part of the property is not used in the farming business or is used in some other business, only the farm property will qualify for rollover treatment.  The non-farm non-depreciable assets will be deemed to be disposed of at fair-market value upon the taxpayers death;whereas depreciable non-farm property will be deemed to be disposed of at an amount midway between undepreciated capital cost and fair market value.

Qualified Farm Property and the Capital Gains Deduction

As noted above, a taxpayer may claim an enhanced capital gains exemption for capital gains realized on the disposition or deemed disposition of qualified farm property.

Qualified farm property is defined as real property owned by an individual or his spouse or a family farm partnership, which is used by the taxpayer, his spouse or any of his children in the course of carrying on the business of farming in Canada.  If the property was acquired before June 18, 1987, the property must have been used in a farming business in the year of disposition (or deemed disposition) or in at least five years during which time it was used by any of the related users in order for it to qualify.

We have included copies of the following Revenue Canada Publications which may be of assistance to you when preparing your mother's return:

Farming Income Tax Guide  (see pages 31 to 33)

Deceased Persons Income Tax Guide  (see pages 14 and 15)

Capital Gains Tax Guide   (see pages 9 and 10 and 35 to 37)

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and GeneralLegislative and Intergovernmental Affairs Branch