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:
The application of 73(3)(b) in a hypothetical situation where a 50% undivided interest in farmland is gifted to an adult child who is resident in Canada.
Position TAKEN:
Provided the farmland was used principally in the business of farming during the time the farmland was owned by the taxpayers, 73(3) would apply. Paragraph 73(3)(c) of the Act states that section 69 does not apply and because of a gift there are no proceeds. Subparagraph 73(3)(b)(iii) of the Act therefore deems the POD to the transferor and the cost of acquisition to the transferee to be the ACB.
Reasons FOR POSITION TAKEN:
Unlike subsection 73(1), there is no way for the taxpayer to elect out of subsection 73(3) and, therefore, in accordance with subparagraph 73(3)(b)(iii) of the Act the ACB would be deemed to be the POD for the transferor and cost of acquisition for the transferee.
L. Barrows
XXXXXXXXXX 952109
Attention: XXXXXXXXXX
October 19, 1995
Dear XXXXXXXXXX:
Re: Application of Subsection 73(3)
This is in reply to your letter of May 9, 1995, wherein you requested our comments on the application of paragraph 73(3)(b) of the Income Tax Act (the "Act") in a particular situation.
In the situation you describe, the taxpayers propose to gift a 50% undivided interest in farmland located in Canada to their adult child who is, at the time of the gift and immediately before that time, resident in Canada. The farmland was used in the business of farming in which the taxpayers were actively engaged on a regular and continuous basis. However, the farmland has not been so used for several years.
You inquire whether paragraph 73(3)(b) of the Act will apply in the situation described above, to deem the proceeds of disposition to the taxpayers and the cost of the land to the child to be the taxpayers' adjusted cost base of the land. In addition, you ask whether it is possible to elect out of the application of paragraph 73(3)(b) of the Act.
The hypothetical situation outlined in your letter would appear to relate to a specific, proposed transaction and confirmation of resulting tax consequences will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2. We can, however, offer the following general comments.
Subsection 73(3) of the Act applies to an inter vivos transfer of farm property from a taxpayer to a child when:
-the child was resident in Canada immediately before the transfer; and
-before the transfer, the taxpayer, the taxpayer's spouse or any of the taxpayer's children used the property principally in the business of farming.
When the above conditions are satisfied, subsection 73(3) of the Act applies and, unlike subsection 73(1) of the Act, the taxpayer cannot elect not to have subsection 73(3) apply.
When reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where its use is primarily in the business of farming. That is, more than 50% of the asset's use must be in the business of farming. In this regard, it is our view that, for the purposes of subsection 73(3) of the Act, it is not necessary for a particular asset to be used in farming at the point in time immediately prior to the transfer. However, using the asset for some purpose other than farming for an extended period of time prior to the date of transfer, could cause the asset to be considered to be used primarily for a purpose other than farming.
Given the limited information provided in your letter, we cannot determine conclusively whether subsection 73(3) of the Act applies in the situation described above, since it is not clear whether the farmland was used principally in the business of farming. However, if the farmland was used by the taxpayers in the business of farming for more than 50% of the time during which the farmland was owned by the taxpayers, subsection 73(3) of the Act would apply to a transfer of the farmland to the child.
As indicated in paragraphs 3 and 5 of Interpretation Bulletin IT-268R3 (a copy of which is enclosed), where an interest in farmland is transferred to a child of a taxpayer for actual proceeds of disposition (consideration) of an amount between fair market value and adjusted cost base of the land, that amount is deemed to be the transferor's proceeds of disposition and the cost of acquisition of the land to the transferee. However, as stated in paragraph 5 of IT-268R3, in the case of a gift, there is no consideration paid or payable and, because of paragraph 73(3)(c) of the Act, section 69 does not apply to otherwise determine the proceeds of disposition. Therefore, as provided in subparagraph 73(3)(b)(iii) of the Act, since, in the case of a gift, the consideration would be less than the lesser of the fair market value and the adjusted cost base of the land, the lesser of these two amounts would be deemed to be the transferor's proceeds of disposition and the transferee's cost of acquisition. We refer you to the examples of the application of subsection 73(3) of the Act which appear on page 3 of IT-268R3 and, more particularly, to Case 5 of these examples which involves gifts.
In addition, where there is a transfer of a 50% interest, it is our view that the transferor has disposed of only one-half of the property. The transferor is therefore considered to have received proceeds equal to one-half of the actual or deemed proceeds of disposition, as the case may be.
We trust these comments will be of assistance to you.
Yours truly,
C. Chouinard
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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