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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Various Agricultural Programs
This is in reply to your letter of July 7, 1993 wherein you requested our views as to whether payments under certain programs of the Province of Saskatchewan (the "Province") will constitute farm support payments ("FSP") for which an information return (a "T-slip") must be prepared in accordance with information previously provided by Revenue Canada - Customs, Excise and Taxation. The programs in question are the following five programs administered by Saskatchewan Agriculture and Food:
1. The Interim Red Meat Production Equalization Program
2. The Feed Grain Adjustment Program
3. The Production Associations Loan Guarantee Program
4. The Farm Land Leaseback Program
5. The Farm Purchase Program
We will comment upon these programs in the order in which they appear above. In each case a brief description of the program, based upon the information you have provided, will be followed by our comments. We will provide our opinion as to how the payments being made under each particular program would generally be treated under the Income Tax Act (the "Act") as well as our opinion on whether or not such payments would constitute FSP.
The Interim Red Meat Production Equalization Program
Under this program producers who raise eligible livestock in the Province for slaughter receive a non-repayable grant from the Province based upon the number of such livestock marketed.
Our Comments:
Based upon the above information, the amount of any grant paid to a livestock producer would generally represent a supplement to business income. In our view, these amounts would constitute "assistance" and would be taken into account in determining a taxpayer's income from business for the purposes of subsection 9(1) of the Act, i.e., under generally accepted accounting principles ("GAAP") such assistance would be included in the determination of net income for the period. In the absence of specific provisions of the Income Tax Act (the "Act") to the contrary, this "net income" would constitute the taxpayer's "profit" from the business for the purposes of subsection 9(1) of the Act.
Note, however, that to the extent such assistance was for any reason not otherwise included in computing a taxpayer's income, the provisions of paragraph 12(1)(x) of the Act would include in this computation such amounts received by the taxpayer in the course of earning income from a business or property.
In our view, grants paid under this program would represent FSP.
The Feed Grain Adjustment Program
As with the previous program, under this program producers who raise eligible livestock in the Province for slaughter receive a non- repayable grant from the Province based upon the number of such livestock marketed.
Our Comments:
The comments given with respect to the previous program would also be applicable with respect to this program, i.e., grants paid under this program to livestock producers would generally be included in determining their income from business under subsection 9(1) or paragraph 12(1)(x) of the Act and would constitute FSP.
The Production Associations Loan Guarantee Program
Pursuant to this program a producer association may apply for a guarantee with respect to a loan for the purchase of commodities to be grown, used, finished or produced by its member producers, e.g., for the purchase of feeder cattle or female breeding stock on behalf of producer association members. The Province guarantees 25% of the amount borrowed from financial institutions by a producer association.
Where a producer association defaults in repaying an amount due under a loan so guaranteed and the Province makes payment to the lender under the guarantee, the Province is subrogated with respect to that loan:
- to all rights of the lender under any security or negotiable instrument given to the lender by the producer association;
- to any action the lender may have against the producer association;
- to all rights of the producer association under any security or negotiable instrument given to the producer association by its member producers; and
- to any action that the producer association may have against its member producers.
Therefore, depending upon the circumstances under which the Province is required to honour such a guarantee, the Province may attempt to recover the amounts from producer association member(s) which it paid under its guarantee.
Our Comments:
The determination of the consequences which would arise under the Act to a particular borrower as a result of the granting or honouring of a guarantee under this program would have to be made at the time of such action based upon the facts of that particular borrower's situation at that time.
However, in our opinion, provided that these are bona fide loans (being loans which are not forgivable loans and which would have been granted by a financial institution only after satisfaction of appropriate requirements concerning ability to repay, security, etc.) and that upon the honouring of a guarantee the amount paid by the Province becomes unconditionally repayable to the Province, the granting or the honouring of a guarantee under this program would generally not, in and by themselves, give rise to an amount which would constitute a FSP. For these purposes, a loan would generally be a forgivable loan to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower.
Where at any time a debt or other obligation of a borrower is settled or extinguished without any payment or by the payment of an amount less than the principal amount of such debt, the provisions of subsection 80(1) of the Act may apply to reduce certain deductions or costs otherwise available under the Act to such borrower.
The Farm Land Leaseback Program
Pursuant to The Saskatchewan Farm Security Act (the "SFSA"), where the title to farm land has been transferred to a lender by a mortgagor, the lender is generally required to offer to lease such land to the mortgagor (for a period which you have indicated to be six years). You have also indicated that under this program lenders are compensated beginning in the third year of the lease in situations where, basically, industry rental rates are less than the cost of holding the land. A "lender" for these purposes must be a mortgagee and includes, basically, recognized financial institutions as well as Her Majesty the Queen in right of Canada and of Saskatchewan.
Generally, where the mortgagor is a farmer the lender will be required to provide a notice offering to lease the land to the mortgagor and indicating the rent and terms and conditions on which such offer is being made. If such farmer wishes to lease the land but does not accept the offer as made, an application may be made by the farmer to the Farm Tenure Arbitration Board (the "Board") established under the SFSA for a determination. After considering such application the Board will direct that the farmer and the lender execute a lease on any commercially reasonable rent, terms and conditions (other than the length of the lease) that it considers appropriate. In making this determination the Board is required to have regard to factors such as the rent, terms and conditions contained in arms' length commercial leases used in the relevant local market and entered into without its intervention. It is not, however, to consider any financial assistance which may be provided to the lender under this program with respect to the parcel of farm land, computed without reference to any improvements on such land, in making such determination, i.e., such financial assistance would not be an alleviating factor in the Board's determination of the "commercially reasonable" rent to be paid by the farmer.
Pursuant to subsection 27.71(1) of the SFSA, the Minister of Agriculture and Food of the Province is to provide financial assistance in accordance with The Farm Land Lease-back Regulations (the "L-B Regulations"). Such assistance arises under the provisions of sections 7 and 15 of the L-B Regulations both of which sections provide for the calculation of an "...amount of financial assistance that is to be provided annually to an eligible lender..." with respect to a parcel of farm land so leased. In the former case the financial assistance is calculated without reference to any improvements on the farm land while in the latter case such calculation is solely with respect to improvements to the parcel of farm land (a lender may apply for financial assistance with respect to improvements to farm land only where the rent payable under the lease was set by the Board at an amount less than that which had been offered by the lender).
The financial assistance provided to a lender pursuant to section 7 of the L-B Regulations is determined by deducting from the "lender cost" of the parcel of farm land the "net lease revenue" in respect thereof. The lender cost is determined, basically, by multiplying the "market value" assigned the parcel of farm land (as agreed to by the Province and the lender or as determined based upon independent appraisal) by the annual average chartered bank prime rate for the relevant calendar year (as determined under the L-B Regulations). The net lease revenue with respect to a particular parcel of farm land is determined for a particular calendar year, basically, by deducting from the "deemed lease revenue" with respect thereto the aggregate of the property taxes and the water taxes paid by the lender with respect to such land for the calendar year in question. The deemed lease revenue is calculated, basically, utilizing certain average yield and price figures for wheat in the case of cultivated land or average commercial lease rates established for the particular calendar year in question in the case of grazing land.
The financial assistance provided to a lender pursuant to section 15 of the L-B Regulations is determined by deducting from the cost to the lender of the improvements to the parcel of farm land (determined in a manner identical to that utilized to determine the "lender cost" referred to in the previous paragraph) the amount of the rent for the improvements that is stated in the lease.
Financial assistance arising to a lender under the L-B Regulations in respect of a particular calendar year is paid to that lender in one instalment and not later than January 31 of the following year, i.e., one payment is made covering all parcels of farm land leased by a lender as required by the SFSA.
Our Comments:
Based upon the provisions of the SFSA and the L-B Regulations you have provided, the financial assistance which may arise under this program is being provided to lenders. You have also indicated that this financial assistance is not assistance to a farmer being paid to the lender for the account of that farmer, i.e., such assistance does not result in the reduction of any amount which is, or would otherwise become, owing by a farmer. It is also our understanding that the rent and the other terms and conditions of any particular lease of land between a farmer and a lender would generally be determined on an arm's length basis by those parties. However, should a lease be referred to the Board, its decision would have to be based upon the "commercially reasonable" test referred to above.
Based upon the above information and understandings, it would appear that such assistance would generally constitute a form of compensation for business revenues which may be foregone as a result of the lender being required to offer to lease certain farm land which has been transferred to it. In our opinion, such assistance would generally be included in computing the relevant lender's income from a business for the purposes of subsection 9(1) of the Act in accordance with GAAP. However, if for any reason such assistance was not so included in computing a lender's income, it is also our view that such an amount received by a lender in the course of earning income from a business or property would be included in the determination of that lender's income from such sources pursuant to the provisions of paragraph 12(1)(x) of the Act (subject to the specific exclusions contained in subparagraphs 12(1)(x)(v) through 12(1)(x)(viii) thereof). It is also our opinion that the provision of such assistance to a lender in the manner described above would not, in and by itself, result in an amount being required under the Act to be in included in computing the income of a particular farmer.
In our opinion, based upon the above information and understandings, the financial assistance provided to a lender under this program would not constitute FSP.
The Farm Purchase Program
Under this program eligible farmers are entitled to receive "interest rebate payments" from the Province with respect to certain loans they obtain for the purchase of farm land.
In particular, a participating farmer is entitled to receive interest rebate payments that result in receipt of an amount equal to the difference between, basically, the principal and interest component of the amount required by the lender to be paid with respect to an eligible loan and the amount which such component would have been if it had been calculated at an annual interest rate equal to the "guaranteed rate". This guaranteed rate is 8% for the first five years and 12% for the second five years after the date the loan was obtained.
Our Comments:
Based upon the above information, such interest rebate payments would generally represent an amount received by a participant, in the course of earning income from a farming business, as a rebate or assistance in respect of interest expense for a particular period. In our view, in accordance with GAAP such assistance would generally be taken into account in computing the relevant farmer's income for that period from a business for the purposes of subsection 9(1) of the Act. However, if for any reason such assistance was not so included in computing a farmer's income, it is also our view that such an amount received by a farmer in the course of earning income from a business or property would be included in the determination of that farmer's income from such sources pursuant to the provisions of paragraph 12(1)(x) of the Act (subject to the specific exclusions contained in subparagraphs 12(1)(x)(v) through 12(1)(x)(viii) thereof).
In our opinion, such interest rebate payments would constitute FSP.
Concluding Comments
The foregoing comments concerning the treatment for purposes of the Act of payments under the above programs and their status as FSP are an expression of opinion based upon the limited information available.
It is our understanding that where payments under a particular program are considered as FSP, a T-slip will be required to be issued unless the total amount paid to the recipient in the year in respect of that program is less than $100. Further information concerning the completion of the T-slips may be obtained by contacting Jean-Claude Laporte of the Client Assistance Directorate at (613) 954-5377.
If we can be of further assistance in this matter, please do not hesitate to contact the writer.
Yours truly,
for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. Jean-Claude Laporte Client Assistance Directorate
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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