5 June 1998 External T.I. 9804285 - 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:

1) Whether shares which have been owned by several different individuals would qualify as qualified farm property eligible for the capital gains deduction in subparagraph 110.6(1) of the Income Tax Act (the “Act”) and whether or not these shares would be eligible for a rollover under paragraph 70(9.2) of the Act.

2) Whether “used principally in a farming business” is met farmland was farmed for 21 years and then rented out for 19 years?

Position:

1) The shares may qualify as “qualified farm property” and be eligible for the 70(9.2) rollover.

2) The farmland would be considered “used principally”.

Reasons:

1) In order for shares to qualify as “shares of the capital stock of a family farm corporation” under either subparagraphs 110.6(1) and 70(10) the shares must be owned by the individual at that time and then the other requirements specific to each definitions must be met. Whether or not the shares were previously owned by someone else has no consequence as to whether or not the remaining requirements will be met.

2) Property will meet the “principally used” test where more than 50% of its use is in the business of farming.

		5-980428
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953

Attention: XXXXXXXXXX 

June 5 1998

Dear Sirs:

Re: “Qualified Farm Property”

We are writing in response to your letter of February 8, 1998, wherein you requested our views on whether shares in a particular situation would qualify as qualified farm property eligible for the capital gains deduction in subsection 110.6(2) of the Income Tax Act (the “Act”) and whether or not these shares would be eligible for a rollover under subsection 70(9.2) of the Act.

You have provided us with the following set of facts:

1. A corporation was formed in 1958 for the purpose of operating an active farm. Farmland was transferred to the corporation and some additional land was purchased as part of the active farm operation. At the time of incorporation all of the issued shares were owned by Mr. A and his son Mr. B.

2. In 1961, additional common shares were issued to Mr. B and his three sisters. During the 1960’s, additional shares were issued to Mr. B.

Upon the death of Mr. A in 1980, Mr. A’s shares were transferred to Mr. B. Mr. B then purchased shares from two of his sisters. Mr. B’s wife purchased the shares of the remaining sister, so that Mr. B and his wife owned all of the shares of the corporation.

4. An agreement was made in 1980 between Mr. B and his wife so that each was granted a one-half interest in the other’s shares. As part of a matrimonial dispute settlement between Mr. B and his wife in 1997, Mrs. B’s shares were redeemed by the company, leaving Mr. B as sole shareholder of the company.

5. The farmland has been rented out since at least 1980 and there has been no active farm income since that time. The corporation was actively farming for at least five years after the date of incorporation.

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 comments which may be of some assistance to you.

The definitions of “share of a family farm corporation” in subsection 110.6(1) and 70(10) are not identical. The definition in subsection 110.6(1) of the Act applies for purposes of subsection 110.6 and subsection 70(10) applies for the purposes of sections 70 and 73.

If the shares qualify as “a share of the capital stock of a family farm corporation” as defined in subsection 110.6(1) of the Act, upon Mr. B’s death, the shares will qualify for the capital gains deduction for farm property under subsection 110.6(2) of the Act.

If the shares qualify as “a share of the capital stock of a family farm corporation” as defined in subsection 70(10) of the Act, subsection 70(9.2) would allow for a rollover of the shares to Mr. B’s children upon his death.

Subsection 110.6(1)

In order to qualify as a “share of the capital stock of a family farm corporation” under the definition in subsection 110.6(1) of the Act, at any time (herein referred to as the “determination time”), the requirements of both paragraphs (a) and (b) of the definition must be met. Generally, the requirement in paragraph 110.6(1)(a) of the definition is met if, throughout any 24-month period ending before the determination time, more than 50% of the fair market value of the property owned by the corporation was attributable to property used principally in the business of farming in which an individual described in subparagraph (a)(i) of the definition was actively engaged on a regular and continuous basis. One such individual could be Mr. B’s father, and the 24-month period could be any 24 continuous months while the corporation owned the property. Paragraph 14 of Interpretation Bulletin IT-349R3 indicates that a lessor of farm property is not considered to be using the property in the business of farming.

While the 24-month period does not have to be immediately prior to the determination time, and could, for purposes of paragraph 110.6(1)(a) of the definition, be a period that ended 19 years prior to the determination time, such a situation may prevent a corporation from meeting the paragraph 110.6(1)(b) requirement that all or substantially all of the fair market value of the property owned by the corporation at the determination time be attributable to property that was used principally in the course of carrying on the business of farming. Property will meet this “principally used” test where more than 50% of its use is in the business of farming. For instance, in the situation described above, the period of time that the property was farmed (from 1958 to 1979 - 21 years) is currently longer than the period of time during which it was not used in farming (from 1980 to 1998 - 19 years), therefore the shares would meet the requirements of paragraph 110.6(1)(b) of the definition of a “share of the capital stock of a family farm corporation” since the property owned by the corporation would have been principally used in the course of carrying on the business of farming.

You have not provided us with enough detail to determine whether the requirements of paragraphs 110.6(1)(a) and (b) in the definition of a “share of the capital stock of a family farm corporation” have been met, however, in our view, if in fact, throughout any 24-month period ending before the determination time, more than 50% of the fair market value of the property owned by the corporation was attributable to property used principally in the business of farming in which an individual described in subparagraph 110.6(1)(a)(i) of the definition was actively engaged and all or substantially all of the fair market value of the property owned by the corporation at the determination time is attributable to property that was used principally in the course of carrying on the business of farming, the shares would qualify as “shares of the capital stock of a family farm corporation”. The shares would therefore qualify under paragraph 110.6(1)(b) of the definition of “qualified farm property” and the capital gains deduction provided by subsection 110.6(2) for qualified farm property would be available.

Subsection 70(9.2)

In order to qualify for the rollover provision under subsection 70(9.2), the shares must have been “shares of the capital stock of a family farm corporation” as defined in subsection 70(10) of the Act. The definition of a “share of the capital stock of a family farm corporation” under subsection 70(10) of the Act, indicates that at a particular time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of the definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, child or parent of the person was actively engaged on a regular and continuous basis.

In our view, in the above situation if the family farm corporation used all or substantially all of the fair market value of the property in the course of carrying on the business of farming for more than 50% of the time during which the corporation used the property, and during that time Mr. B’s father was actively engaged on a regular and continuous basis in the business, the shares would qualify as “shares of the capital stock of a family farm corporation” for purposes of the rollover under subsection 70(9.2).

In all of the above comments, the shares in question are those owned by Mr. B immediately before his death. The fact that other individuals had once owned these shares has no consequence on whether or not the requirements in the definitions of a “share of the capital stock of a family farm corporation” in both subsections 110.6(1) and 70(10) have been met.

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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