23 March 1998 External T.I. 9701885 - OPEN ACCOUNT RECEIVABLE OF CASH-BASIS FARMER.

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.

J. Gibbons
XXXXXXXXXX 5-970188

Attention: XXXXXXXXXX

March 23, 1998

Dear XXXXXXXXXX:

We are replying to your letter of January 15, 1997, regarding two farm-related issues. The first issue concerns the tax treatment of a note or open account receivable (the “note”) held by a cash-basis farmer (the “farmer”) when the debtor, in this case a cash-basis partnership (the “partnership”), transfers the debt to a corporation (the “corporation”) pursuant to subsection 85(2) of the Income Tax Act (the “Act”). The note was received by the farmer as consideration for inventory transferred to the partnership under subsection 97(2) of the Act. The second issue concerns the definition of “share of the capital stock of a family farm corporation” in subsection 70(10) of the Act. Specifically, you enquire whether a share of a corporation, whose only asset consists of land that has not been farmed since being transferred to the corporation by the person who farmed it actively, would qualify as a share of the capital stock of a family farm corporation.

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.

Although subsection 97(2) of the Act deems an elected amount to be proceeds of disposition in respect of inventory, it does not deem an amount to have been received. The actual time of receipt is a determination of fact. For purposes of responding to your first issue, we have assumed that subsection 76(1) of the Act would not apply to the farmer on the original rollover of inventory to the partnership. Subsection 76(1) of the Act provides that the value of securities or other forms of indebtedness which are received in respect of a debt which was then payable will be included in the recipient’s income when received. Generally, however, when a security is given at the time a debt arises, subsection 76(1) of the Act would not be applicable since the debt would not be payable until the security matured. On the other hand, if the security is received concurrently with the creation of the debt and as absolute payment thereof, subsection 76(1) of the Act would apply.

Assuming that subsection 76(1) of the Act does not apply on the initial receipt of the note, the farmer would report the income from the transferred inventory as amounts are received or deemed to have been received in payment of the note. In this respect, it is our view that no amount would be considered to have been received by the farmer solely by virtue of the transfer of the note by the partnership to the corporation as part of a subsection 85(2) rollover. Furthermore, this is our view regardless of the type of property, e.g., inventory, equipment, land, accounts receivable, etc., for which the note is exchanged. Similarly, no amount would be considered to have been received by the farmer on the transfer of the note to a partner on the winding-up of the partnership, unless the particular partner is the farmer.

Your second issue involves a transfer of shares from a father to his children. The father would like to take advantage of the rollover rules in subsection 73(4) of the Act, which require that each share must be a “share of the capital stock of a family farm corporation,” as defined in subsection 70(10) of the Act. To qualify, all or substantially all of the fair market value of the property of the corporation has to be attributable to property that has been used by, inter alia, the father principally in the course of carrying on the business of farming in Canada in which the father was actively engaged on a regular and continuous basis.

According to your letter, land which was transferred to the corporation about 5 years ago “forms substantially all the property of the corporation.” By this latter phrase, we assume that you mean that all or substantially all of the fair market value of the property of the corporation is attributable to this land. The land was farmed actively by the father on a regular and continuous basis for some 15 years before being transferred to the corporation. The only concern relating to the “use” test in the definition of “share of the capital stock of a family farm corporation” would seem to be the hiatus of 5 years during which the land was not farmed. It is our view that the “use” test in the definition of “share of the capital stock of a family farm corporation” can be satisfied by prior use. This view is supported by the Technical Notes to Bill C-92 issued by the Department of Finance in June 1992, which, in regard to the definition of “share of the capital stock of a family farm corporation,” state that, provided that the other requirements of the definition are met, prior use of the property is sufficient.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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