19 February 1998 External T.I. 9732945 - 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 taxpayers is considered to be

"qualified farm property"?

Position:

Perhaps

Reasons:

Question of Fact.

5-973294

XXXXXXXXXX Karen Power, C.A.

Attention: XXXXXXXXXX

February 19, 1998

Dear Sirs:

Re: Whether land constitutes "qualified farm property

We are writing in reply to your letter of December 10, 1997 in which you requested our views on whether land owned by a taxpayer is considered to be "qualified farm property" for the purposes of claiming the capital gains exemption under 110.6(1) of the Income Tax Act (the "Act").

You have provided us with the following facts:

Dad dies in 1968. There were two properties that Dad owned at his death which were farmed by him for a number of years prior to his death. Under the terms of Dad's will, a life interest was granted to Mom in the farm lands. The farm lands vested in the nine children three years after the death of Dad subject to a life interest in favour of Mom.

The farm lands were used principally in the course of carrying on the business of farming in at least 5 years during which the property was owned by Dad.

Dad's gross income from the farming business in which the property was principally used and in which Dad was actively engaged on a regular and continuous basis, exceeded Dad's income from all other sources for at least two years.

Mom dies in 1993.

Two of the nine siblings continue to farm the properties since Dad's death. They report income on their personal tax returns.

Seven of the siblings wish to sell their interest in the farm lands to the two whom have continued to farm the land.

Our Comments

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.

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.

Whether a property is considered to have been used in the course of carrying on the business of farming is dependant on when the property was last acquired by the individual. In your situation, there appears to be some question as to when the children last acquired the farm lands. The Department's general position on whether property has vested indefeasibly is outlined in Interpretation Bulletin IT-449R "Meaning of vested indefeasibly". Paragraph 8 of IT-449R states the following:

"The following examples describe some circumstances in which the issue of whether property has vested indefeasibly is relevant:

(a) a man who wishes to ensure that the absolute ownership of his farm land will ultimately pass to his child after his widow has had the use of the property during her lifetime, could achieve this result by the terms of his will as follows:

(i) he could direct his executors to convey the land to his widow as life tenant and to his child as remainderman. This would not involve the use of a trust.

(ii) he could direct his executors to hold the land in a spouse trust for the use and enjoyment of his widow during her lifetime and, on her death to convey the land to his child.

Since (i) above does not involve a trust the provisions of paragraph 70(6)(b) do not apply. It is the Department's position that the farm land vests indefeasibly in the child on the death of the father. This same result would occur if it is a condition that the widow's interest in the land terminate on her remarriage.

Since the trust described in (ii) above is a spouse trust, if the entire interest in the land becomes indefeasibly vested in the trustees of the spouse trust within the relevant vesting period, the cost of the land to the trustees will be its adjusted cost base to the taxpayer. Upon the death of the widow if the land is transferred or distributed to the child and becomes vested indefeasibly in the child as a consequence of the widow's death and if the child was resident in Canada immediately before the widow's death, subsection 70(9.1) provides that there will be a rollover of the land from the trustees to the child at the adjusted cost base of the land to the trust."

Interpretation bulletin IT-349R3 "Intergenerational Transfers of Farm Property on Death" may provide you with further guidance as to when the siblings last acquired the farm lands.

Real property 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.

In addition, pursuant to subparagraph 110.6(1)(a)(vii) of the Act, real property acquired before June 18, 1987 or after June 18, 1987 under an agreement in writing entered into before that date, will also 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.

In your situation, the requirements of subparagraph 110.6(1)(a)(vi) appear to be met, if in fact, in at least 2 years while the property was owned by the taxpayer (or Dad in this situation), the taxpayer (or Dad) 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 if, in fact, the gross revenue from that farming business exceeded the taxpayer's ( or Dad's) income from all other sources.

The requirements of subparagraph 110.6(1)(a)(vii) also appear to be met, if in fact, in at least 5 years during which the property was owned by the taxpayer (or Dad), the property was used by the taxpayer (or Dad) principally in the course of carrying on the business of farming in Canada.

Since the requirements of both 110.6(1)(a)(vi) and 110.6(1)(a)(vii) appear to have been met, it is our view that the farm lands will qualify as "qualified farm property" regardless of when the siblings last acquired the property.

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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