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 various properties (farm land, woodlot, housing units) qualify as "qualified farm property" and are eligible for the subsection 73(3) rollover.
Position TAKEN:
The farm land would qualify as qualified farm property and would be eligible for the subsection 73(3) rollover.
The woodlot would probably not qualify as such nor be eligible for the subsection 73(3) transfer.
The housing units may qualify as qualified farm property and be eligible for the subsection 73(3) rollover, only if they do not qualify as a principal residence.
Reasons FOR POSITION TAKEN:
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. Subsection 73(3) of the Act requires, inter alia, that, prior to the transfer, the property be "used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis". Therefore, unless property was used in the business of farming, it will not qualify under either subsection 110.6(1) or 73(3).
Where a taxpayer disposes of land used in a farming business and such land includes property that was at any time the taxpayer's principal residence, paragraph 40(2)(c) of the Act provides that any gain on the disposition of the land may be calculated using either one of two methods described in paragraphs 27, 28 and 29 of Interpretation Bulletin IT-120R4.
5-950884
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
June 29, 1995
Dear Sir:
Re: Qualified Farm Property
We are writing in reply to your letter of December 21, 1994, which we received on March 31, 1995, wherein you requested our comments on the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act") and the application of subsection 73(3) of the Act.
In the situation you describe, a father acquired a 100 acre farm property, including a housing unit, (the "home farm") in 1972. In 1973, the father acquired an additional 100 acre parcel, including a housing unit (the "second farm"). The father lived in the housing unit on the home farm and rented out the housing unit situated on the second farm to a farm employee. The father used the two farms in carrying on a full time farming operation. In 1985, in anticipation of his retirement, the father severed a one acre lot (the "retirement lot") from the home farm. In 1990, the father retired from farming and moved to a house in the city. His son then moved into the house on the home farm and began to farm the property which he is leasing from his father. The farm employee continued to occupy the house on the second farm and paid rent to the son. The father wishes to transfer the farm properties to his son. You have requested our comments on the application of subsections 110.6(1) and 73(3) of the Act in the situation described above. Your specific queries in this respect are set out below.
We remind you that written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Question 1
You ask whether the retirement lot would qualify as a "qualified farm property" within the meaning of subsection 110.6(1) of the Act and whether our response would be different if the lot were part of a five acre area of the home farm which is not suitable for farming and has never been farmed, but was acquired as part of the 100 acre parcel.
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 was used by the person claiming the capital gains exemption, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares or a family farm partnership in which any of the above persons have an interest, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by a person referred to above.
If the retirement lot was used by the father principally in the course of carrying on the business of farming in at least five years while he owned it, the property would qualify as "qualified farm property" of the father. Since it appears the father farmed the home farm, of which the retirement lot was part, for at least five years, it is likely that the retirement lot would qualify as "qualified farm property".
However, if the retirement lot were part of a five acre area, out of 100 acres, that has never been farmed, it would only qualify as "qualified farm property" if it was principally used in the course of carrying on the business of farming. In this situation, since the retirement lot was never used in the business of farming, it would not qualify as "qualified farm property".
Question 2
You enquire whether the housing unit on the home farm would qualify as "qualified farm property" at the time of the proposed transfer in 1995.
Where a taxpayer disposes of land used in a farming business and such land includes property that was at any time the taxpayer's principal residence, paragraph 40(2)(c) of the Act provides that any gain on the disposition of the land may be calculated using either one of two methods described in paragraphs 27, 28 and 29 of Interpretation Bulletin IT-120R4, a copy of which is enclosed.
If a housing unit on land used in a farming business was never a principal residence, the housing unit may constitute "qualified farm property". Although a housing unit would not normally be considered to be used in a farming business, if it is not a distinct property but forms part of the real property used in the farming business, it may qualify as "qualified farm property" if the entire real property of which it is part was used principally in carrying on the business of farming. Therefore, if the housing unit is part of the home farm and not a distinct property and the home farm was used principally in carrying on the business of farming, the housing unit would constitute "qualified farm property".
Question 3
You inquire whether the housing unit on the second farm would qualify as "qualified farm property" at the time of the proposed transfer in 1995. You also ask whether our response would be different if: (a) the farm employee had paid rent to the father from 1990 to 1995 and (b) the housing unit had always been rented to a third person not employed on the farm.
As we indicated above, if the housing unit is part of the second farm and not a distinct property and the second farm was used principally in carrying on the business of farming, the housing unit on the second farm would constitute "qualified farm property". The fact that rent was paid to the son from 1990 to date and that the housing unit may have been rented to a person not employed on the farm would not, in and by itself, alter our views, unless the housing unit was a property separate from the rest of the farm. If, however, the housing unit is a property separate from the rest of the farm, it would likely qualify as "qualified farm property" if rented to a farm employee, but not if rented to a person not employed on the farm.
Question 4
You inquire whether the retirement lot would be eligible for the subsection 73(3) rollover as "property... used principally in the business of farming" and whether our response would be different if the lot were part of a five acre area of the home farm which is not suitable for farming and has never been farmed, but was acquired as part of the 100 acre parcel.
Subsection 73(3) of the Act requires, inter alia, that, prior to the transfer, the property be "used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis".
In this situation, the property has been used by the son for five years prior to the transfer. Therefore, if the son was actively engaged on a regular and continuous basis in the business of farming and the retirement lot was used principally in that business, the retirement lot could be transferred pursuant to the provisions of subsection 73(3) of the Act. Property will meet the "principally used" test where its use is primarily in the business of farming, that is, more than 50% of the property's use must be in the business of farming.
On the other hand, if the retirement lot were part of a five acre area that has never been farmed, it could not be transferred pursuant to subsection 73(3) of the Act, since it has never been used in the business of farming.
Question 5
You inquire whether the housing unit on the home farm would be eligible for the subsection 73(3) rollover as "property... used principally in the business of farming".
As indicated in paragraph 20(b) of Interpretation Bulletin IT-268R3, a taxpayer cannot use subsection 73(3) of the Act to defer a capital gain attributable to a principal residence located on, and transferred with, farm land being transferred to a child under that subsection. However, as we indicated above, where a taxpayer disposes of land used in a farming business and such land includes property that was at any time the taxpayer's principal residence, paragraph 40(2)(c) of the Act provides that any gain on the disposition of the land may be calculated using either one of two methods described in paragraphs 27, 28 and 29 of Interpretation Bulletin IT-120R4, a copy of which is enclosed.
If a housing unit on land used in a farming business was never a principal residence, the housing unit may be eligible for the subsection 73(3) rollover. Although a housing unit would not normally be considered to be used in a farming business, if it is not a distinct property but forms part of the real property used in the farming business, it may qualify for the subsection 73(3) rollover if the entire real property of which it is part was used principally in the business of farming. Therefore, if the housing unit is part of the home farm and not a distinct property and the home farm was used principally in the business of farming, the housing unit could be transferred pursuant to subsection 73(3) of the Act.
Question 6
You inquire whether the housing unit on the second farm would qualify for the subsection 73(3) rollover at the time of the proposed transfer in 1995. You also ask whether our response would be different if: (a) the farm employee had paid rent to the father from 1990 to 1995 and (b) the housing unit had always been rented to a third person not employed on the farm.
As previously indicated, if the housing unit is part of the second farm and not a distinct property and the second farm was used principally in the business of farming, the housing unit on the second farm could be transferred pursuant to subsection 73(3) of the Act. The fact that rent was paid to the son from 1990 to date and that the housing unit may have been rented to a person not employed on the farm would not, in and by itself, alter our views, unless the housing unit was a property separate from the rest of the farm.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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