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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Shares of a family farm corporation transferred by mother to daughter. Whether: (a) mother could claim capital gain exemption, (b) subsection 73(4) applies to determine daughter's cost and, (c) mother could claim a reserve under subsections 40(1) & 40(1.1)?
2. Whether a Patronage Refund Reserve Account ("PRRA") considered an eligible asset for purposes of the "all or substantially all " test in the definition of "a share of the capital stock of a family farm corporation"?
3. Whether "used principally in a farming business" is met, where a house (which has been expanded and renovated at a cost that equals or exceeds the original cost) was used in the farming business and continues to be occupied by the individual after the farming business ceased?
Position TAKEN:
1. (a) Yes, (b) Yes, (c) Yes.
2. Yes, if it is a requirement to sell grain to the wheat Pool. However, only considered an asset used in the course of carrying on a business until the earlier of such time as it is repaid, becomes due or the farming business ceases.
3. Question of fact. However, each year's renovations & additions are considered a separate property.
Reasons FOR POSITION TAKEN:
Department's positions taken in related correspondence.
942085
XXXXXXXXXX Wm. P. Guglich
May 25, 1995
Dear Sir:
Re: Qualified Farm Property
This is in reply to your letter of August 15, 1994 respecting qualified farm property. We apologize for the delay in responding to your inquiry.
You described the following hypothetical situations:
Transfer of Shares
A mother transfers all of the shares of a family farm corporation to her daughter. The shares have a value of $700,000. The daughter pays $500,000 for the shares with a debt note payable.
Your concerns are whether the mother could claim the capital gains exemption of $375,000 under subsection 110.6(2) of the Income Tax Act (the "Act") and whether the daughter would be deemed under subsection 73(4) of the Act to have acquired the shares for $500,000. You also inquired whether the mother could claim a reserve in respect of the gain under subsections 40(1.1) and 40(1) of the Act?
If the shares qualify as "a share of the capital stock of a family farm corporation" as defined in subsection 70(10) of the Act, subsection 73(4) would apply to determine the mother's proceeds of disposition and the daughter's cost of the shares acquired.
If the shares also qualify as "a share of the capital stock of a family farm corporation" as defined in subsection 110.6(1) the mother would be eligible to claim the capital gains exemption to the extent permitted by subsection 110.6(2). The definitions of "share of the capital stock of a family farm corporation" in subsection 70(10) and subsection 110.6(1) are not identical. The definition in subsection 110.6(1) of the Act applies for purposes of section 110.6 and pursuant to subsection 73(6) the definition in subsection 70(10) applies for purposes section 73.
Pursuant to subsection 40(8) of the Act the definitions in subsection 70(10) apply for purposes of section 40. Accordingly, provided the shares qualify as "a share of the capital stock of a family farm corporation" as defined in subsection 70(10) of the Act, the mother could claim a reserve in respect of the gain to the extent permitted by subsections 40(1) and 40(1.1).
Patronage Refund Reserve Account ("PRRA")
One of the assets of a family farm corporation is a PRRA from a Wheat Pool or other cooperative. This PRRA is built up over the years of farming and is based on a percentage of the patronage refund that is not paid to the member but is retained by the Wheat Pool as an account payable to the member. It generally cannot be repaid unless the member is no longer actively farming, and then the repayment terms are over many years at the discretion of the members of the Wheat Pool. This asset is fairly illiquid.
Your concern is whether the PRRA would be considered an eligible asset for purposes of the "all or substantially all" test in the definition of "a share of the capital stock of a family farm corporation" in subsections 70(10) and 110.6(1) of the Act. You refer to Question 53 of the Revenue Canada Round Table at the 1992 Canadian Tax Foundation Conference.
Question 53 referred to above sets out the Department's position as to whether during the period of ownership a property would be considered to have been used principally in a farming business in a situation where the property is used for a period in the farming business and then for a period it is used in a non-farming business.
Whether during a specific period a property is used in the farming business or a non-farming business is a question of fact to be determined on the basis of the specific facts and details in each case. The Supreme Court in the case of Ensite v. The Queen, 86 DTC 6521 considered the issue of "... whether property used or held in the course of carrying on business..." and decided that the proper test was whether the property was employed and risked in the business. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the operations themselves. The test is whether the property was used to fulfil a requirement which had to be met in order to do business.
The issue was also considered in the case of Marsh and MacLennan v. The Queen, 83 DTC 5180. It was suggested that in determining whether the property was risked and employed in the business that there is "an interconnection, an interlacing, an interdependence, a unity embracing" the mortgages and the business. It was concluded that an investment business was not being carried on but that the transactions were incidental to the main business of the taxpayer. "Indeed they were shown to be used and held for that purpose only".
Provided the PRRA in your situation is a requirement for a member to sell grain to the Wheat Pool, the PRRA would be considered to be an asset used in the course of carrying on the farming business until the earlier of such time as it is either repaid, becomes due or the farming business ceases. If a share of the family farm corporation is sold, the comments in Question 53 referred to above would be applicable in determining whether the PRRA qualifies as an eligible property for purposes of the definition of "a share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Act.
Family Farm Residence
A Farm Corporation owns a house that has been used as a residence by a person actively engaged in the business of farming over a number of years. The house has been renovated or expanded a number of times at a cost that equals or exceeds the original cost of construction. The residence continues to be occupied after the active farming business has ceased.
You refer to the comments in paragraph 29 of IT-268R3 respecting the determination of whether for purposes of paragraphs 70(10)(b) and 70(10)(c) of the Act an asset is used in a farming business.
The comments in paragraph 29 of IT-268R3 refer to a situation where a property is concurrently used in a farming business and in a non-farming business. The comments in Question 53 of the Revenue Canada Round Table at the 1992 Canadian Tax Foundation Conference would be relevant where a property is used for a period in the farming business and then for a period is used in a non-farming business.
In a situation where the farm house is used for a period in a farming business and then for a period it is used in a non-farming business, the "property that has been used .... principally in the course of carrying on the business of farming..." test in subsection 70(10) and the "property that was used principally in the course of carrying on the business of farming..." test in subsection 110.6(1) of the Act would be met where the period during which the property was used or has been used in the farming business exceeded the period during which it was used in a non-farming business. However, in your hypothetical situation, it is our view that, each year's additions and renovations should be considered a separate property. Consequently, any separate properties which are not used in the farming business more than 50% of the time would not qualify as eligible property for the purpose of the "all or substantially all" test in paragraph (a) of the definition in subsection 70(10) and paragraph (b) of the definition in subsection 110.6(1) of the Act.
In our view, in a situation where renovations are made after a farming business has ceased to a house which has been used in a farming business, the renovations would not be considered to have been property used in a farming business.
We trust our comments will be of assistance to you.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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