13 February 1998 External T.I. 9709285 - QUALIFIED 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:

Whether the land owned by a taxpayer is considered to be "qualified farm property?"

Position:

Perhaps.

Reasons:

Question of fact.

                                       				 970928
XXXXXXXXXX          				Roxane Brazeau-LeBlond, CA

February 13, 1998

Dear Sir:

Re: Whether land is "qualified farm property"

This is in response to your letter of April 1, 1997, wherein you requested our views on whether the land owned by a taxpayer is considered to be "qualified farm property" for the purposes of claiming the capital gains exemption under subsection 110.6(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding.

You have indicated that the taxpayer owns four parcels of land that the taxpayer's husband farmed for periods of more than five years prior to his death in 1995. Two parcels were acquired by the taxpayer before June 18, 1987. One parcel, on which is also located a summer home, was acquired in 1988 from an Offer and Acceptance to Purchase from the Department of Highways and Transportation which was dated November 2, 1985. The fourth parcel was acquired in 1990. We understand that there was no agreement in writing entered into before June 18, 1987 with regards to this acquisition.

Question

The taxpayer would like to obtain confirmation that the four parcels of land constitute "qualified farm property."

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. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

One of the conditions that must be met for real property of an individual to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property has been used in the course of carrying on the business of farming in Canada.

Real property acquired before June 18, 1987 or after June 18, 1987 under an agreement in writing entered into before that date, will be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as "qualified farm property" provided the property was used by the individual, 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 person acquired the property, principally in the course of 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 person, a spouse, child or parent of the person, a personal trust from which the person acquired the property or a family farm partnership.

The determination of whether real property is used principally by a taxpayer in carrying on a farming business is 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. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R. You should note, however, that renting farm land is not considered to be a farming activity.

Real property acquired after June 17, 1987 may be considered to be used in the course of carrying on the business of farming in Canada if it has been owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property throughout the 24 months preceding the sale. In addition, it must meet either of the conditions described in clauses (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act.

Under clause (a)(vi)(A) of the definition of qualified farm property in subsection 110.6(1) of the Act, in at least 2 years while the property was owned by the individual, a spouse, child or parent of such a person, a family farm partnership in which any of the above persons have an interest or a personal trust from which the person acquired the property, the gross revenue from the farming business that is carried on by any of these individuals in which the property was principally used, and in which the individual are actively engaged on a regular and continuous basis, 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 the parent of the individual or any other person described in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property."

Alternatively, pursuant to clause (a)(vi)(B) of the definition of qualified farm property in subsection 110.6(1) of the Act, real property can also be considered to have been used in the course of carrying on the business of farming in Canada where the property was used by a corporation referred to in subparagraph (a)(iv) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, or a partnership referred to in subparagraph (a)(v) of the definition of "qualified farm property" in subsection 110.6(1) of the Act, principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time an individual referred to in any of subparagraphs (a)(i) to (a)(iii) of the definition of "qualified farm property" in subsection 110.6(1) was actively engaged on a regular and continuous basis in the farming business in which the property was used.

When the capital gains election is filed in respect of capital property, the property is deemed, pursuant to subparagraph 110.6(19)(a)(ii) of the Act, to have been reacquired by the elector immediately after February 22, 1994. Therefore, in our opinion, if the capital gains election is filed in respect of "qualified farm property," the property will be considered to have been last acquired after June 17, 1987. However, the fact that the capital gains election gives rise to a new acquisition date does not necessarily mean that property which previously qualified as "qualified farm property" will no longer qualify as such. Although an individual who acquired farm property after June 17, 1987 may not have farmed the property since he or she acquired it, 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 the individual or another qualified owner, the gross revenue test of subparagraph (a)(vi) of the definition of "qualified farm property" described above is met.

There may, however, be situations where, as a result of filing the capital gains election, property which constitutes "qualified farm property" ceases to qualify as such since it fails to meet the gross revenue test found in the "qualified farm property" definition. For instance, farm property acquired by an individual prior to June 18, 1987 which, since its acquisition, has been farmed by the individual while he or she was employed in another capacity, would qualify as "qualified farm property" since it would have been used principally in the course of carrying on the business of farming in Canada in at least five years during which it was owned. However, if the capital gains election were filed in respect of this property, it might no longer qualify as "qualified farm property" since the individual might not meet the gross revenue test.

In response to your question, if, (i) the Offer and Acceptance to Purchase the third parcel from the Department of Highways and Transportation constituted an "agreement in writing entered into before June 18, 1987," (ii) no capital gains election has been filed with respect to the first, second and third parcels and (iii) these parcels were, in fact, used principally in the course of carrying on the business of farming in Canada by the taxpayer's spouse in at least five years during which the parcels were owned by the taxpayer, it would appear that these parcels would be considered to be "qualified farm property." As for the fourth parcel, it may constitute "qualified farm property" if in at least 2 years while the property was owned by the taxpayer, her spouse was carrying on a farming business in Canada in which he was actively engaged on a regular and continuous basis and in which this property was principally used and the gross revenue from that farming business exceeded his income from all other sources for the year.

You have not provided any information concerning the yard sites so we can only reiterate that it is a question of fact as to whether real property is used principally in the course of carrying on the business of farming in Canada. We also refer you to paragraphs 26 to 30 of IT-120R4 for comments concerning a principal residence on land used in the business of farming.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

??