10 December 1996 External T.I. 9630365 - DISPOSITION OF 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:

1)Is a change in title of land a disposition?

2)Does subdiving land create a disposition ?

Position:

1)Yes
2)No

Reasons:

1)IT 460 and 963007
2)Partition of property legislation TR76

									963036
XXXXXXXXXX							C. Tremblay

December 10, 1996

Dear Sir:

Re: Disposition of farm property

This is in reply to your letter of June 28, 1996, wherein your request our comments in the situation described in your letter. Specifically you ask us two questions. The first is whether a taxpayer can, at a later date, refile his tax return to establish the values of the property and utilize the capital gains exemption available to him regarding the disposition of farm property? The second is would the act of subdividing the farm property by the adult children trigger a deemed disposition?

The situation that is described appears to involve a series of actual completed transactions involving specific taxpayers; consequently, your questions should be directed to your District Services Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

OUR COMMENTS

Paragraph (3)(f) of IT-460 states that the Department considers a capital property transferred by way of gift or donation to be a disposition although no actual proceeds are involved. In the case at hand, transferring the property in 1993, to be held by a spouse and adult children, would cause the ownership to be such that each member of the family would own an undivided interest therein. This in our view, would, in fact, constitute an actual disposition by the taxpayer of his former property. Further, there would be acquisitions, likely by way of gift, by the children. Subsection 69(1) of the Act deems the transferor to have received proceeds of disposition equal to the fair market value of property transferred by way of gift. The cost to the transferee would also be that same fair market value.

Subsection 73(3) of the Act provides for the transfer of farm property from a farmer to one or more of his or her children with no tax being exigible to either the transferor or the transferees on the transfer. Interpretation Bulletin IT-268R4, the subject of which is "Inter Vivos Transfer of Farm Property to Child", is relevant for those purposes.

Subsection 110.6(6) applies where an individual has a capital gain for a taxation year from the disposition of capital property and knowingly or under circumstances amounting to gross negligence fails to report the capital gain. In such cases, a capital gain exemption may be denied.

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, a family farm partnership in which any of the above persons have an interest or a personal trust from which the individual acquired the property, 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 the individual, a spouse, child or parent of the individual, a personal trust from which the individual acquired the property or a family farm partnership. If the capital gains election is filed in respect of this property and the property qualified as "qualified farm property", it would be deemed to have been disposed of and immediately reacquired by his spouse and children. Therefore, the property would be considered to have been last acquired after June 17, 1987. In our opinion, the person meeting the gross revenue test in subparagraph (a)(vi) of the definition of "qualified farm property" need not be the person who owns the property and may be any of the persons mentioned above. Therefore, in certain situations, the property may continue to meet the definition of "qualified farm property" notwithstanding the new acquisition date, if, in at least 2 years while the property was owned by one of the persons mentioned above or by a personal trust from which the individual acquired the property, the gross revenue of such a person from the farming business in which the property was principally used and in which the person was actively engaged on a regular and continuous basis exceeded their income from all other sources for the year.

In our view, a partition of an undivided interest in property does not give rise to a disposition under the Act. Guidelines established in TR-13 and TR-76 regarding unimproved land are that upon a partition, where co-owners of a property each received a separate piece of property equal in value to the respective values of the co-owner's previous undivided interest, there is no disposition or acquisition of property. Further, subdividing in and of itself is not considered to be an improvement of the property and accordingly, there is no disposition at that time.

The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch