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 three farm properties qualify as "qualified farm property".
2. Whether the acquisition of a new farm property would qualify as "replacement property" of a former property.
Position:
1. Two of the properties may qualify as "qualified farm property. The third property will not.
2. The new land may be considered "replacement property", however no gain may be deferred as the replacement cost of the new property does not exceed the cost of the former property. The new house will not be considered "replacement property".
Reasons:
1. Question of fact. The third property has not been owned for 24 months.
2. The new house will not be used for a same or similar used and consequently the requirements of 44(5)(a.1) have not been met.
3-982215
XXXXXXXXXX Karen Power, CA
(613) 957-8953
October 15, 1998
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
Further to our telephone conversation (Power/XXXXXXXXXX) on September 23, 1998, this letter will confirm that you wish to withdraw your advance income tax ruling request of August 25, 1998 on behalf of the above-noted taxpayer.
We have, however, agreed to provide the following comments which are of a general nature and are not binding on the Department.
The facts as we understand them are as follows:
1. On XXXXXXXXXX, the taxpayer purchased the “XXXXXXXXXX” property (approximately 160 acres) and began to farm the property along with his father.
2. In 1993, the taxpayer started working in a PMU barn to supplement his income. In 1994, the taxpayer purchased some PMU mares to enter into the business.
3. On XXXXXXXXXX, the taxpayer purchased the “XXXXXXXXXX” property (approximately 200 acres).
4. At the end of 1996, the taxpayer formed a company and purchased a highway tractor to haul grain instead of continuing to work as an employee.
5. On XXXXXXXXXX, the taxpayer purchased the “XXXXXXXXXX ” property which consisted of 320 acres of land and a house.
6. During the taxation years of 1995, 1996 and 1997, the taxpayer’s gross revenue from the business of farming exceeded his income from all other sources.
7. The taxpayer is actively engaged on a regular and continuous basis in his farming business.
8. The taxpayer is considering selling each of the three farm properties, in order to purchase a different farm operation in a different location. The new farm property, if purchased will include 431 acres of land, the rights to 309 acres of leased land, house, buildings and cattle handling facilities.
9. If the “XXXXXXXXXX” property does not qualify as “qualified farm property” or for a gain deferral using the replacement property rules, the taxpayer will consider subdividing the “XXXXXXXXXX” property, in order to sell the house along with several acres of land. The remaining land will continue to be farmed.
The original cost of the properties is as follows:
XXXXXXXXXX.
10. The anticipated purchase price of the new property is as follows:
land $XXXXXXXXXX
house $XXXXXXXXXX
outbuildings $XXXXXXXXXX
Specifically, you have requested our comments on whether the properties would be considered “qualified farm property” for purposes of claiming the capital gains exemption under subsection 110.6(2) of the Income Tax Act (the “Act”). In addition, you would like our comments, as to whether the purchase of the new farm will qualify as “replacement property” for purposes of subsection 44(1) of the Act. Finally, you have asked us to comment on the taxation of the sale of the “XXXXXXXXXX” property house.
Qualified 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, all three farm properties were acquired after 1987. Consequently, the farm properties 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 “qualified 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 appear to be met for the “XXXXXXXXXX” and “XXXXXXXXXX” property.
The “XXXXXXXXXX” property has not been owned throughout the 24 months preceding the sale and would therefore not meet the requirements of “qualified farm property” as defined in subsection 110.6(1) of the Act. Once the property has been held for a period of 24 months, the property may qualify as “qualified farm property” if all of the other requirements of subsection 110.6(1) of the Act have, in fact, been met.
Exchange of Property
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.' 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.
As indicated in paragraph 10 of Interpretation Bulletin IT-259R3, the replacement of two or more capital properties with one property may be accepted. Therefore, farmland that is purchased to replace all three farm properties may qualify as replacement property if it is, in fact, a replacement property and it meets the requirements of subsection 44(5) of the Act. However, as indicated in paragraph 4 of IT-259R3, where more than one capital property has been disposed of in circumstances where subsection 44(1) of the Act is applicable, the provisions of that subsection apply to each such property and its replacement property individually. Paragraph 27 indicates that where two or more capital properties are replaced by one replacement property, the portion of the cost of the replacement that can be considered to be a replacement for a particular former property should be allocated on a reasonable basis to the particular former property. Normally the allocation should be based on the proportion that the original cost of a former property is to the total cost of all former properties.
Generally, when analysing the replacement property rules, the Department does not accept as a replacement property, any excess property acquired as a replacement for the former property. Moreover, the Department takes the position that the provisions of section 44 of the Act are not intended to encompass business expansions.
Subsection 44(5) requires the following:
“(a) it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(a.1) it was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property;
(b) where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was 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; and...”
Whether a particular property has been acquired for the same or similar use, as required by paragraph 44(5)(a.1) of the Act, is a question of fact.
The new house which the taxpayer is considering acquiring will become the taxpayer’s principal residence and consequently, in our view, will not qualify as “replacement property” for the former house of the “XXXXXXXXXX” property as the requirements of paragraph 44(5)(a.1) have not been met.
In our view, if in fact, the new land which is purchased qualifies as “replacement property” for all three former properties, as the replacement cost of the new land does not exceed the adjusted cost base of the former land, there is no opportunity to defer any resulting capital gain on the disposition of the former land. (There would still be no opportunity to defer any capital gain if, in fact, the new property was considered to replace only the “XXXXXXXXXX” property.)
Sale of House Situated on “XXXXXXXXXX” Property
If the “XXXXXXXXXX” property is subdivided, such that the house along with several acres can be sold, any proceeds of disposition in excess of its allocated cost will result in a capital gain. This gain will not be eligible for the capital gains exemption.
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
.../cont'd
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