2 February 1995 External T.I. 9429835 - QUALIFIED FARM PROPERTY & CAPITAL GAINS ELECTION

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:

General comments on qualified farm property and the capital gains exemption.

Position TAKEN:

Not applicable.

Reasons FOR POSITION TAKEN:

Not applicable.

				5-942983
XXXXXXXXXX			C. Chouinard

Attention: XXXXXXXXXX

February 2, 1995

Dear Sir:

Re: Qualified Farm Property

We are writing in response to your letter of November 17, 1994, wherein you requested our opinion on the tax consequences flowing from a proposed transaction involving a rollover of property to a corporation under subsection 85(1) of the Income Tax Act (the "Act").

Our Comments

The Rulings Directorate of Revenue Canada provides advance income tax rulings to taxpayers where proposed transactions are involved and gives technical interpretations of the various provisions of the Income Tax Act and the Income Tax Regulations. The Department does not, however, provide tax planning advice.

The facts outlined in your letter appear to relate to actual proposed transactions involving particular taxpayers and therefore a binding determination from Revenue Canada regarding the applicability or inapplicability of any provision of the Act can only be obtained by way of an advance tax ruling request following the procedures outlined in Information Circular 70-6R2. We are, however, prepared to offer the following general comments.

One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will qualify as "qualified farm property" provided it is used principally in carrying on the business of farming in Canada in the year the property is disposed of, or for at least five years prior to disposal, provided the other conditions of the definition are complied with.

It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.

As indicated in subparagraph 1(b) of Interpretation Bulletin IT-322R, a taxpayer whose chief source of income is not farming or a combination of farming and some other source of income may still carry on a farming business. Accordingly, the fact that the restricted farm loss provisions of section 31 of the Act applied to a taxpayer does not necessarily prevent the farm property owned by such a taxpayer from meeting the definition of "qualified farm property" in subsection 110.6(1) of the Act. However, the fact that the taxpayer has reported farming income or losses and that his returns have been accepted as filed does not prove that a particular property was used in the business of farming.

Although the $100,000 capital gains exemption was eliminated in the February 22, 1994 budget, the $500,000 capital gains exemption is still available for the disposition of qualified small business corporation shares and qualified farm property after February 22, 1994. Therefore, since the $500,000 capital gains exemption has not been eliminated, there is no need to file the election introduced in the last budget to take advantage of this exemption. However, an election can be filed in respect of qualified small business corporation shares and qualified farm property, if they constitute capital property or eligible capital property, to take advantage of any unused portion of the $100,000 capital gains exemption. If such an election is filed, the shares or the farm property, as the case may be, will continue to be eligible for the $500,000 capital gains exemption, to the extent of the unused portion of the exemption, if they meet the definitions of "qualified small business corporation share" and "qualified farm property" in subsection 110.6(1) of the Act.

With respect to your principal residence query, whether or not a particular property, housing unit, etc., qualifies as a principal residence is a question of fact which can only be determined after a review of all pertinent information. The Department's position with respect to matters concerning principal residences is set out in Interpretation Bulletin IT-120R4. You will note that paragraphs 26 to 30 of that Bulletin contain information regarding principal residences situated on land used in a farming business.

As regards alternative minimum tax, generally speaking, the alternative minimum tax (AMT) requires a revised computation of income (the "adjusted taxable income"), which basically adds back certain deductions allowed to an individual under the Act, such as, for example, deductions for RRSP contributions, as well as the non-taxable portion of a capital gain. The taxpayer is required to compute his AMT liability, compare this with his regular tax liability and pay the higher of the two amounts. Provisions are made under the Act to allow for a seven-year carry-forward of AMT in excess of regular tax which may be recovered to the extent that the regular tax liability is in excess of the AMT liability in a future year.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch