21 May 1997 External T.I. 9628495 - qualified farm property clause APPLIES

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 land, buildings and quota acquired by two grandsons from their grandparent after June 17, 1987 would qualify as qualified farm property, where the property is presently used by a partnership of which the two grandsons are partners.

Position:

The property would likely qualify as qualified farm property, since clause (a)(vi)(A) of the definition of "qualified farm property" would be met: the property was used by the grandparent who was actively engaged in the business of farming and whose sole income was from farming.

Reasons:

Although the property is presently used by a partnership, the post-June, 1987 test can be met if either clause (a)(vi)(A) or (B) of the definition of "qualified farm property" is satisfied. Therefore, if clause (a)(vi)(A) is met, it is irrelevant whether clause (a)(vi)(B), which applies where the property is used by a partnership, is satisfied.

			5-962849
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

May 21, 1997

Dear XXXXXXXXXX:

Re: Qualified Farm Property - Subsection 110.6(1) of the Income Tax Act

We are writing in reply to your letter of August 22, 1996, wherein you requested our comments regarding the definition of "qualified farm property" as it relates to a particular situation.

In the situation you describe, a grandparent carried on the business of farming from a period beginning prior to 1971 and ending in 1990. During those years, the grandparent's gross revenue from the farming business exceeded income from all other sources. In 1990, the grandparent gifted the farm business to his grandsons, Mr. A and Mr. B, such that each received a 50% undivided interest in the property used in the farming business, namely, the land, buildings, equipment and cream/milk quota. The transfer of the property used by the grandparent in the farming business was made pursuant to subsection 73(3) of the Income Tax Act (the "Act"). Mr. A and Mr. B have been carrying on a farming business in partnership since 1990, however, their chief source of income is neither farming nor a combination of farming and some other source of income. The only property held by the partnership is the property used in the farming business. You inquire whether the land, building and milk quota used by the farm partnership qualify as "qualified farm property" of Mr. A and Mr. B.

Our Comments

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 70-6R3. The following comments are, therefore, of a general nature only, and are not binding on the Department.

As a preliminary comment, you should note that it is not clear to us who of the grandsons or the partnership owns the property used in the farming business. However, as the property was transferred to the grandsons pursuant to subsection 73(3) of the Act and since this provision applies in respect of inter vivos transfers of farm property to children and, by virtue of the extended definition of child in subsection 70(10) of the Act, to grandchildren, we assume for the purposes of our response that the property is owned by Mr. A and Mr. B and is presently used by the partnership.

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. For this purpose, where property is acquired after June 17, 1987, the definition of "qualified farm property" in subsection 110.6(1) of the Act requires that the property in question have been owned by an individual, a designated beneficiary of a personal trust, an individual's or a designated beneficiary's spouse, child or parent, a personal trust from which the individual acquired the property or a family farm partnership, throughout the 24 months preceding the disposition. Furthermore, in at least 2 years while the property was so owned, the gross revenue from the farming business carried on by any of these individuals must have exceeded their income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be any of the persons described above.

For purposes of the definition of "qualified farm property", "child" has the meaning assigned by subsection 70(10) of the Act. Accordingly, a grandparent can be considered a "parent" of an individual because of the extended definition of "child" in paragraph 70(10)(a) of the Act, which applies for purposes of section 110.6 of the Act. Therefore, in the situation described above, the grandparent would be considered to be a parent of the grandsons for purposes of the definition of "qualified farm property". Since the grandparent used the land, buildings and quota in the course of carrying on the business of farming and as it appears that, in at least 2 years while this property was owned by the grandparent, the gross revenue of the grandparent from farming exceeded income from all other sources, it is likely that the land, buildings and quota would qualify as "qualified farm property" of the grandsons.

As regards your query as to whether clause (a)(vi)(B) of the Act could be met, on the basis that the property is presently used by the partnership, you should note that, where property was last acquired after June 17, 1987, provided either clause (a)(vi)(A) or (a)(vi)(B) is satisfied, the property will qualify as "qualified farm property". As we mentioned above, it is likely that the requirements of clause (a)(vi)(A) of the definition of "qualified farm property" would be satisfied in the situation described. Therefore, it is not necessary that the requirements of clause (a)(vi)(B) also be met. In order to satisfy clause (a)(vi)(B) of the definition, an interest in the partnership would have to qualify as "an interest in a family farm partnership", within the meaning of subsection 110.6(1) of the Act. According to the definition of "interest in a family farm partnership", throughout the 24 months preceding the disposition, more than 50% of the fair market value of the property of the partnership must have been attributable to property used by the partnership, the taxpayer, a spouse, child or parent of the taxpayer, a beneficiary of a personal trust or a family farm corporation, principally in the course of carrying on the business of farming in Canada, in which the taxpayer, a spouse, child or parent of the taxpayer or a beneficiary of a personal trust was actively engaged on a regular and continuous basis. In addition, at the time of disposition, 90% or more of the fair market value of the property of the partnership must be attributable to property that was used principally in the course of carrying on the business of farming in Canada by the partnership or a person referred to in subparagraph (a)(i) of the definition of "interest in a family farm partnership".

In any particular situation, the fact that section 31 of the Act may apply to restrict a taxpayer's farming loss does not, in and by itself, mean that a farming business is not carried on for purposes of the definitions of "qualified farm property" and "interest in a family farm partnership". Section 31 of the Act in fact recognizes the loss as being on account of carrying on a business of farming, but merely restricts the loss because the taxpayer's chief source of income is neither farming nor a combination of farming and some other source of income. However, where farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business. In our view, in the absence of definitions of "regular" and "continuous" in the Act, these words should bear their ordinary meaning. Accordingly, in order to be "actively engaged on a regular and continuous basis", a person would be expected to contribute time, labour and attention to the business, regularly and continuously, to a sufficient extent that such contributions would be determinant in the successful operation of the business.

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