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 or not an asset is considered to be used principally in the business of farming in Canada, when a certain portion of the property is unusable.
Position:
The property may be considered an asset used principally in the business of farming in Canada.
Reasons:
If a portion of farm land is unusable (i.e. unsuitable for any use),generally, it may not be considered when determining whether or not 50% of the property is used in active business.
5-963813
XXXXXXXXXX Karen Power, C.A.
Attention: XXXXXXXXXX
March 16, 1998
Dear Sirs:
Re: Definition of a "share of the capital stock of a family farm corporation”
We are writing in response to your letter of November 15, 1996 wherein you requested our views on whether property owned by a taxpayer, is considered to be used principally in the course of carrying on the business of farming in Canada for purposes of the definition of a "share of the capital stock of a family farm corporation" in subsections 70(10) and 110.6(1) of the Income Tax Act (the "Act"). We apologize for the delay in replying.
You have provided us with the following set of facts:
1. A Farm Corporation carries on the business of farming in XXXXXXXXXX.
2. The Farm Corporation owns real property totaling 300 acres.
3. The 300 acres lies on a steep mountainside.
4. The property is zoned RU-ALR (rural agricultural land reserve).
50 acres are suitable for agriculture, are fully utilized as XXXXXXXXXX and have been used that way for many years.
5. 250 acres are completely unsuitable for agriculture and have never been used for anything. This portion of the property XXXXXXXXXX cannot be used for agriculture due to its steep terrain, lack of water and difficult access. A portion of the 250 acres is necessary for an access road to XXXXXXXXXX.
6. The property is used by the Farm Corporation in the course of carrying on the business of farming in Canada in which the shareholders or the spouse, child or parent of the shareholders are actively engaged on a regular and continuous basis.
7. The fair market value of the 300 acre property makes up more than 90% of the fair market value of all the assets of the Farm Corporation.
8. XXXXXXXXXX.
9. The XXXXXXXXXX restricts subdivision into smaller parcels.
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of some assistance to you.
It is a question of fact whether a property is used principally in an active business. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry. The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court in Ensite Limited v. Her Majesty the Queen, (1986) 2 C.T.C. 459, 86 DTC 6521. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business and used to fulfill a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.
The determination of whether real property is used principally by a taxpayer in carrying on a farming business is also a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming.
In response to the situation you have submitted, the Department recognizes that a portion of the total area of a particular parcel of land may not be suitable for any use (ie., a portion may be absolutely useless for any purpose). While the conclusion in any particular case would necessarily depend on all the facts of the case, generally, in such a situation, the Department would not seek to deny that an asset had been used principally in the course of carrying on the business of farming for purposes of the definition of a "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Act.
We trust our comments will be of assistance to you.
Roberta Albert, C.A.
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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