16 July 1998 External T.I. 9812995 - QUALIFIED FARM PROPERTY - CLAUSE (A)(VI)(A)

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 farm property qualifies for the $500,000 capital gains deduction pursuant to subsection 110.6(2) of the Act.

2. Must the property be used for a period of 24 months in the business of farming to qualify for the capital gains deduction pursuant to subsection 110.6(2) of the Act.

3. Whether the gain on the sale of farm property can be deferred using the replacement property rules in section 44.

Position:

1. No.

2. Yes
3. No

Reasons:

1. Clause (a)(vi)(A) requires that the property be used for at least 2 years principally in the business of farming. In this situation, the farm property has been rented and never farmed. Thus the requirements of clause (a)(vi)(A) have not been met and the property is not "qualified farm property".

2. Clause (a)(vi)(A) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, requires that in at least 2 years while the property was owned by an eligible individual, 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 is actively engaged on a regular and continuous basis, must have exceeded the individual’s income from all other sources for the year

3. Rental property is excluded from the definition of ‘former business property’

		5-981299
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
Attention:  XXXXXXXXXX 

July 16, 1998

Dear Sirs:

Re: Eligibility for $500,000 Capital Gains Exemption for “Qualified Farm Property”

We are writing in reply to your letter of May 11, 1998 in which you requested a ruling on three separate questions relating to the situation described in the following facts.

Facts

1. A farm operation was commenced in 1979 and has continued since that time on farm land rented by the taxpayer.

2. Gross income from the farm operations has exceeded income from all other sources for a continuous 24-month period since June 18, 1987.

3. A farm property was acquired by the taxpayer in 1991 and has been rented out for cash since that time. This farm property has not been used in the taxpayer’s farming operations.

4. The original intention of the taxpayer was to move the farming operations from the rented land to the purchased land and to expand operations at that location. However, this was never achieved and the taxpayer is considering selling the 1991 farm property.

Our Comments

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.

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 each of your questions.

Question #1

Does the farm property acquired in 1991 qualify for the $500,000 capital gain exemption for farm property?

Subsection 110.6(2) of the Income Tax Act (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. 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 dependent on when the property was last acquired by the individual. In the above situation, the farm property was acquired in 1991. Consequently, the farm property can be considered to have been used in the course of carrying on the business of farming if the requirements of subparagraph (a)(vi) of the definition of “qualified farm property” in subsection 110.6(1) of the Act are met.

Pursuant to subparagraph (a)(vi) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, 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, the real property must meet the conditions described in clause (a)(vi)(A) or (a)(vi)(B) of the definition of "qualified farm property" in subsection 110.6(1) of the Act. Clause (a)(vi)(B) of the definition of “qualified farm property” in subsection 110.6(1) of the Act will only apply when the farm land was used by a corporation or a partnership and does not appear to apply in this situation.

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 is actively engaged on a regular and continuous basis, must have exceeded the individual’s 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 or spouse of the individual.

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.

A review of all of the facts surrounding a situation would be required to conclusively resolve whether the farm property meets the requirements of “qualifies farm property” and this would be best resolved by a Tax Services Office. Nevertheless, in our view, the requirements of clause (a)(vi)(A) of the definition of “qualified farm property” in subsection 110.6(1) of the Act have not been met, since the 1991 farm property was not used principally in the business of farming in at least two years while the property was so owned. Rental income would not be considered to be part of a farming business.

Question #2

If the answer to question #1 is “No”, would it be necessary to use this farm property in the taxpayer’s farming activities for a period of 24 months or would it only be necessary to be using the property in farming activities at the time it was sold, assuming at that time the income from all farming activities exceeded income from other sources?

As discussed above, clause (a)(vi)(A) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, requires that in at least 2 years while the property was owned by an eligible individual, 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 is actively engaged on a regular and continuous basis, must have exceeded the individual’s income from all other sources for the year. This requirement can only be met once the farm property is used principally in the business of farming for at least 24 months. In addition the gross revenue from the farming business must exceed the income from all other sources throughout a period of at least 24 months.

Question #3

If the answer to question #1 is “No”, and the 1991 farm property was sold, would this property qualify for a deferred gain under the replacement property rules in section 44 of the Act?

Subsection 44(1) of the Act allows taxpayers to defer taxable capital gains in respect of the disposition of a capital property if they acquire a "replacement property." Where the disposition is voluntary, the property disposed of must qualify as a 'former business property' and must be replaced before the end of the first taxation year following the taxation year in which the “former business property’ was disposed.

The term 'former business property' is defined in subsection 248(1) of the Act and generally refers to capital property of the taxpayer that was used by the taxpayer or a related person primarily for the purpose of gaining or producing income from a business and that was real property of the taxpayer or an interest of the taxpayer in real property. Rental property is excluded from the definition of ‘former business property’.

The property acquired to replace the former property must be acquired by the taxpayer for the same or a similar use as the use to which the taxpayer or a person related to the taxpayer put the former property, and the ‘replacement property’ must be acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose.

In our view, the gain on the sale of the 1991 farm property may not be deferred pursuant to section 44 of the Act as it does not qualify as ‘former business property’.

We trust our comments will be of assistance to you.

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

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