8 January 1993 Income Tax Severed Letter 9233567 - 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.

January 8, 1993

EDMONTON DISTRICT OFFICE HEAD OFFICE
E.J. Schermann Rulings Directorate
Chief of Audit J.D. Brooks
957-2103
Attention: Renee Johnson

923356

Qualified Farm Property

We are writing to you in reply to your memorandum of November 9, 1992 in which you requested our opinion as to whether certain part dispositions of qualified farm property would be eligible for the enhanced capital gains deduction in subsection 110.6(2) of the Income Tax Act.

You referred to the situation where farmers enter into surface lease agreements with oil & gas companies and receive a lump sum payment in the first year for land damage. You noted that, as provided for by IT-200 and IT-264R and its Special Release, we generally allow the farmer to claim an adjusted cost base equal to the amount received for land damage. The effect of this is that the farmer would recognize no capital gain in the present year, deferring the capital gain by reducing the adjusted cost base of his remaining land.

In the case where a farmer has reduced the adjusted cost base of his remaining land to nil, you queried whether a lump sum payment in the current year will result in a capital gain which is eligible for the enhanced capital gains deduction in respect of qualified farm property. Where the adjusted cost base of the remaining land is not nil, you queried whether the farmer could choose to allocate a nil amount with respect to the land damage payment so as to maximize his capital gains deduction.

Our View

As stated in IT-200, where a land owner provides a lease covering certain surface rights, to persons exploring or drilling for oil or gas, he may receive a lump sum payment in the first year. The portion of the lump sum payment which exceeds subsequent periodic payments is considered to be a receipt of capital which constitutes proceeds of disposition with respect to a disposition of a part of the farmer's property. Administratively the Department generally allows the farmer to claim that the adjusted cost base of the part disposed of equals the capital portion of the lump sum payment (see IT-200 paragraph 2, and IT-264R paragraph 3). On this basis, there is frequently no capital gain in the current year. If a farmer's adjusted cost base of his whole property has been reduced to nil, then the full amount of the capital portion of a lump sum payment will be a gain to the farmer. Provided that the whole property qualifies as qualified farm property, a disposition of a part of that property will qualify as a disposition of qualified farm property.

With respect to your second query, there is no requirement that a farmer fully offset his proceeds of disposition. Pursuant to section 43 of the Income Tax Act, the adjusted cost base of the part disposed of is such portion of the adjusted cost base of the whole property as may reasonably be regarded as attributable to that part. Where the fair market value of the whole property exceeds the farmer's adjusted cost base of the whole property, a disposition of a part of the property should yield a gain. There is no basis for a farmer allocating no part of the adjusted cost base to the portion disposed of. The portion of the adjusted cost base that would be reasonable to allocate in a particular case would depend on the facts of the case.

We trust these comments are of assistance. E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch