28 May 1998 External T.I. 9804545 - FAMILY FARM CORPORATION

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 time a farm property was used by an individual in the business of farming prior to incorporation can be used in the calculation of whether the property was used principally in the business of farming in Canada for purposes of paragraph (d) of the definition of a "share of the capital stock of a family farm corporation" in subsection 110.6(1).

Position: Yes this time can be considered.

Reasons:

Paragraph 110.6(1)(b)(i) of the definition of a "share of the capital stock of a family farm corporation" indicates that the property may be used by the corporation or a person referred to in subparagraph (a)(i). Subparagraph (a)(i) refers to the individual.

		5-980454
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953

Attention: XXXXXXXXXX 

May 28, 1998

Dear Sirs:

Re: Section 110.6(1) Share of the capital stock of a family farm corporation

We are writing in reply to your letter of February 20, 1998, in which you requested our views regarding the interpretation and application of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Income Tax Act (“the Act”).

You have outlined a situation where an individual had operated a farming business as a proprietorship for a number of years prior to having transferred the farming property and business to a corporation which he controls. The corporation continued to carry on the farming business with the individual being actively engaged, as an employee, in the farming business on a regular and continuous basis. The individual eventually retires and the corporation rents the farm property to an arm’s length tenant.

You have also provided us with the following set of facts:

1. An individual owns and farms a property for 10 years prior to incorporation.

2. The corporation farms the property for a further 10 years.

3. Subsequently, the corporation rents out the property for 12 years.

Specifically, you have asked whether the time the property was used by the individual in the business of farming prior to incorporation can be used in calculating the period of time the property was used principally in the business of farming.

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.

Paragraph (b) of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act reads in part as follows:

“(b) at that time, all or substantially all of the fair market value of the property owned by the corporation was attributable to

(i) property that was used principally in the course of carrying on the business of farming in Canada by the corporation or a person or partnership referred to in subparagraph (a)(i)”

The determination of whether real property is property that was used principally in the course of carrying on the business of farming 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. In your situation, the requirements of paragraph (b) of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act would be met where the period during which the farm property was used or has been used in the farming business exceeded the period during which it was used in a non-farming business.

In our view, the time the property was used by the individual in the business of farming prior to incorporation, may be included in the determination of whether the property was used principally in the business of farming in Canada. Therefore, in the fact situation you have described, 20 of the 32 years of ownership would be considered years during which the property was used in the business of farming. As a result, the requirements of paragraph (b) of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act would be 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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