14 February 1994 External T.I. 9330405 F - Capital Gains Exemption

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.

PRINCIPAL ISSUES:

Whether a farm house can be considered a business asset for the purposes of the definition of a "qualified small business corporation share" in subsection 110.6(1) of the Act, if the house was used as a home for the person operating the farm business and their family.

POSITION TAKEN:

Yes.

REASONS FOR POSITION TAKEN:

Primary use should be in respect of farming business. House must be part of the business operation. Size and type of the operation are factors to be considered.

LEGAL:

n/a

FINANCE OPINION:

n/a

JURISPRUDENCE:

n/a

RCT PUBLICATIONS:

IT-268R3

HAA NUMBER:

HAA 5102-9-2

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Capital Gains Exemption

Qualified Small Business Corporation Shares("QSBCS") Subsection 110.6(1) of the Income Tax Act (the "Act")

This is in reply to your letter of October 18, 1993 concerning the above-mentioned subject. We apologize for the delay in replying to your letter.

You enquire as to whether a farm house would be considered a business asset for the purposes of the definition of a "qualified small business corporation share", in subsection 110.6(1) of the Act, if the house was used as a home for the person operating the farm business and their family.

As mentioned in the definition of QSBCS at subsection 110.6)(1) of the Act, throughout the 24 months prior to the sale of the corporation's shares, more than 50% of the fair market value of its assets must be used principally in an active business.

It is our view that the phrase "used in an active business" should be interpreted in the same manner as the phrase "used in the course of carrying on a farming business" with respect to a residence and related land.

Whether or not particular assets of a corporation are used principally in the business of farming is a question of fact which can only be determined after an examination of all the relevant facts. Generally, the Department considers that an asset is used in a farming business if its primary use (more than 50% of its use) is in respect of a farming business operation. As outlined in paragraph 29 of IT-268R3, "a residence owned by a corporation will be regarded as used in the business of farming if more than 50% of its use is as accommodation for persons who are actively employed in the farming business or their dependants".

Furthermore the following conditions must be met:

(i)     the residence must be provided to the individual in his capacity as an employee and not as a shareholder, and

(ii)     the residence must be part of the business operation.

Factors that are relevant in making such a determination would include the type and size of the operation and the extent of involvement of the employee in the day-to-day management of the operation. The position outlined in IT- 268R3 which is quoted above assumes that the nature of farming operations is such that it may demand an employee's attention at virtually any time.

If all the foregoing conditions are met, it is our opinion that a farm house would be considered a qualifying asset for the purposes of the definition of a QSBCS as found in subsection 110.6(1) of the Act.

The above comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. Furthermore, in accordance with paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate