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 shares meet the requirements of the definition of a "share of the capital stock of a family farm corporation" in subsection 110.6(1) of the Act.
Position: Perhaps. Not enough information provided.
Reasons: Question of fact. Only general comments provided.
5-980633
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
Attention: XXXXXXXXXX
June 5, 1998
Dear Sirs:
Re: Advance Ruling Request
We are writing in response to your letter dated March 1, 1998, wherein you requested an advance income tax ruling on behalf of the shareholders of XXXXXXXXXX Specifically, you ask whether or not the shareholders are eligible for the $500,000 capital gains exemption on the sale of their shares.
You have provided us with the following facts:
1. The company operated a pig farming business for approximately 12 years from 1969 to 1981. The company owned four quarters of farm land during this period.
2. For the years 1982 to 1985, the company “crop shared” its land out and received income based on crop share.
3. In the years 1985 to 1992, the company went back to farming its farm land itself.
4. In the years 1993 to 1996, the company received cash rent revenue for renting its farm land.
5. In the years 1996 and 1997, the company received crop share revenue.
6. In approximately 1985, the company sold two quarters of farm land. Another quarter was sold in 1991.
An advance ruling is a written statement given by the Department to a taxpayer stating how it will interpret specific provisions of existing Canadian income tax law in its application to a definite, proposed transaction or transactions which the taxpayer is contemplating. Full disclosure is required and where the transaction is to be completed at some indefinite future time or where satisfactory evidence is lacking that a proposed transaction is being seriously contemplated the request for an advance ruling may be refused. Additionally, where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling an advance ruling will not be granted.
As discussed on May 25, 1998 (XXXXXXXXXX/Power), an advance ruling cannot be issued because of the numerous questions of fact that need to be resolved. In the event that you should later decide to re-submit a ruling request on this matter or a similar matter, we suggest that, in addition to the above requirements, the relevant documents and other information referred to in paragraphs 16(a) to (n) of Information Circular 70-6R3 be submitted with your request. A copy of IC 70-6R3 is enclosed for your files.
Although an advance income tax ruling will not be issued on this matter, we have provided you with the following general comments with respect to 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").
Paragraph 110.6(2) of the Act permits a lifetime capital gains deduction of $500,000 for an individual resident in Canada throughout the year who disposed of “qualified farm property” in the year. "Qualified farm property" of an individual within the meaning of subsection 110.6(1) of the Act, includes a “share of the capital stock of a family farm corporation”.
A “share of the capital stock of a family farm corporation” is defined in subsection 110.6(1) of the Act. In order to qualify as a “share of the capital stock of a family farm corporation”, 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 (a) 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. Such an individual could be the spouse, child or parent of the individual and the 24-month period could be any 24 continuous months while the corporation owned the property.
The 24-month period does not have to be immediately prior to the determination time and could, for purposes of paragraph (a) of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act, be a period that ended 6 years prior to the determination time. You have not provided us with sufficient information to determine whether the requirements of paragraph (a) of the definition have been met.
Subparagraph (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. Each farm property must meet the principal use test based on its own use. In your situation, the principal use test requirement of subparagraph (b)(i) 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 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.
Paragraph 9 of IT-433R “Farming or Fishing - Use of Cash Method” indicates that the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming. The reference to “sharecropping arrangement” means an arrangement where a taxpayer or landlord receives from a tenant a share of crop in lieu of rent. There may be other types of sharecrop arrangements, where the sharecropper is actually an employee of the taxpayer and receives a share of the crop as remuneration for services rendered. Under these other types of arrangements the landlord could be in the business of farming depending upon the facts of a specific case. We cannot determine conclusively from the facts you have provided what type a sharecropping arrangement exists.
In your situation, it appears that only the years during which the company was involved in the pig farming business itself, would qualify as years in which the property was used in the business of farming. Since the period of time that the property was farmed (1969-1981 and 1985-1992) is longer than the period of time during which it was not used in farming, the property owned by the corporation appears to have been used principally in the course of carrying on the business of farming.
Although we cannot comment further on the situation you describe, by reason of the limited information you have provided, we caution that any of subsections 84.1(1), 110.6(7) or 110.6(8) of the Act may apply where shares are sold.
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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