9 November 1994 External T.I. 9425515 - 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.

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:

	Whether the capital gains exemption for farm properties 	applies to a forest land that the taxpayer own?

Position TAKEN:

	Question of fact.  Description of the rules for farm 	property.

Reasons FOR POSITION TAKEN:

N/A

			5-942551
XXXXXXXXXX	Robert Gagnon

November 9, 1994

Dear Sir:

Re: Qualified Farm Property

This is in reply to your letter of September 27, 1994 wherein you requested whether the $500,000 capital gains exemption for farm properties applies to a forest land that you own.

The situation outlined in your letter appears to involve an actual proposed transaction. As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. Moreover, the Department does not give rulings where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for an advance ruling. While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, the following general comments may be of assistance to you.

An individual may be able to benefit from the $500,000 capital gains exemption in respect of the disposition of a property if the property is a qualified farm property pursuant the Income Tax Act («Act»).

A qualified property includes a real property owned by an individual which has been used by the individual, his spouse or any of his children («user»), in the course of carrying on the business of farming in Canada. There are two separate rules for determining whether a property is considered under the Act to be used in the course of carrying on the business of farming in Canada.

The general rule (applicable regardless of when the property was acquired) is that a two part test must be met to determine if the property is considered to be used in the course of carrying on the business of farming in Canada at any particular time. First, the property must have been owned for at least 24 months by the individual prior to the disposition. Second, in at least two years while the property was owned by the individual, the gross revenue of any user from the farming business carried on in Canada in which the property was principally used and in which such person was actively engaged on a regular and continuous basis exceeded the income of the person from all other sources for the year.

For property acquired before June 18, 1987, a vendor who fails to meet the above test may nevertheless qualify if the property has been used principally in the course of carrying on the business of farming in Canada in the year of its disposition or in at least five years during which it was owned by the individual.

Whether a particular taxpayer's operation is considered to be the carrying on a business of farming is a question of fact that can only be determined after a review of all the facts at a particular time. It is also a question of fact whether a taxpayer is actively engaged on a regular and continuous basis in the operation of a farm business. Questions of fact of this nature are usually resolved by officials of the local district office who are generally in a better position to appreciate all the circumstances of a particular case.

The Department's general position concerning the issue of whether a tree growing operation is farming is outlined in Interpretation Bulletin IT-373R. We are enclosing a copy of IT-373R.

Moreover, a farm operation must be a business. Whether a farming operation is a business depends on whether it was undertaken with a reasonable expectation of profit.

Due to the technical complexity of the provisions of the Act, the preceding comments are meant only to provide an overview of the capital gains exemption rules attributable to farm properties and under no circumstances are they to be considered to be either comprehensive or all inclusive. We also wish to advise that the preceding comments should not be considered as an expression of opinion that your property constitutes a qualified farm property.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch