19 August 1997 External T.I. 9640395 - QFP - REPLACEMENT PROPERTY - USE BY NEPHEW

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.Whether a property that is re-acquired in 1996 and used by the taxpayers nephew for farming qualifies as "Qualified Farm Property".

2.Whether this acquisition would qualify as a replacement property of a former property.

Position:

1.No

2.No

Reasons:

1.The property has not been owned for 24-months and the nephew is not a qualified user.

2.The taxpayer is not acquiring the property for the same or similar use since his nephew is not a related person.

964039
XXXXXXXXXX B. Kerr

Attention: XXXXXXXXXX

August 19, 1997

Dear Madam:

Re: Farm Property - Capital Gains

This is in response to your letter of December 6, 1996, concerning the status of farm property for purposes of the capital gains deduction and the replacement property rules.

In the situation you describe, a taxpayer sold 160 acres of farm land to his son in 1989. The taxpayer had owned and actively farmed the land since the 1940's. After the sale, his son actively farmed the land. In 1995, the financial institution that financed the purchase of the farm by the son acquired the farm land by way of foreclosure and put it up for tenders in 1996. The taxpayer was the successful bidder and as a result, re-acquired the farm land. The taxpayer is now renting the farm land to his nephew.

The taxpayer also owns two other properties, one consisting of 150 acres of farm land and the other consisting of 80 acres of farm land. Both properties have been owned and farmed since the 1940's and are presently crop-shared with the taxpayer's brother-in-law.

You inquire whether the 160 acre property would be considered to be "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act"). In the event that the taxpayer sells one of the other two properties, you have also asked if the 160 acre property would qualify as a "replacement property" for purposes of subsection 44(1) of the Act.

Our Comments

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If it relates to a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

The term "qualified farm property" of an individual is defined in subsection 110.6(1) of the Act. Where the property in question was acquired after June 17, 1987, subparagraph (a)(vi) of the definition requires, inter alia, that the property have been owned by one or more of the persons mentioned in that subparagraph throughout the period of at least 24 months immediately preceding the disposition of the property. This requirement would not be met in the situation described above since, in the last 24 months, the property has been owned by a person that is not mentioned in subparagraph (a)(vi) of the definition, namely, the financial institution that foreclosed on the property. Accordingly, the property does not presently qualify as qualified farm property.

In addition, clause (a)(vi)(A) of the definition requires, inter alia, that while it was so owned, the property have been principally used in the business of farming in which a person mentioned in subparagraph (a)(vi) was actively engaged on a regular and continuous basis. Although the taxpayer has farmed the property in the past, since the period of continuous ownership of the property by the taxpayer and his son was interrupted by the foreclosure, the taxpayer's use of the property for farming prior to the foreclosure would not be relevant for purposes of clause (a)(vi)(A) of the definition. Since the only person who has used the property in the course of farming since it was reacquired by the taxpayer is his nephew, and as the nephew is not a person mentioned in subparagraph (a)(vi), the requirement that the property be used by a person mentioned in that subparagraph would not be met. Accordingly, for that reason also, the property would not qualify as qualified farm property.

As regards your query concerning replacement property, subsection 44(5) of the Act provides, inter alia, that a particular capital property of a taxpayer is a replacement property for a former property if it was acquired by the taxpayer for the same or a similar use as the use to which the taxpayer or a person related to the taxpayer put the former property. In addition, where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property must be acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose. Since the farm property is used by a person related to the taxpayer for the purpose of gaining or producing income from a farming business, the replacement property would have to be used by the taxpayer or a related person for such a purpose. In the situation described above, this requirement would not be met, since the person using the particular capital property for purposes of gaining income from a farming business, namely the nephew of the taxpayer, would not be considered to be a person related to the taxpayer. Therefore, in our view, the 160 acre property would not qualify as a replacement property.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch