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 land owned by taxpayers is considered "qualified farm property"?
Position: Perhaps.
Reasons: Question of Fact.
5-982287
XXXXXXXXXX Karen Power, CA
(613) 957-8953
October 19, 1998
Dear XXXXXXXXXX:
Re: Capital Gains Exemption - “Qualified Farm Property”
We are writing in reply to your letter of August 28, 1998, in which you requested our views on whether land owned by your family is considered to be “qualified farm property” for the purposes of claiming the capital gains exemption under subsection 110.6(2) of the Income Tax Act (the “Act”).
You have provided us with the following set of facts:
XXXXXXXXXX
The particular circumstances in your letter on which you have asked for our views relates to 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. However, we are prepared to offer the following general comments which may be of some assistance to you.
Subsection 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. 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 children acquired the farm property in 1998. 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. XXXXXXXXXX on the other hand last acquired the property in 1984, consequently, on her death the farm land can be considered to have been used in the course of carrying on the business of farming if the requirements of either subparagraph (a)(vi) or (a)(vii) 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. We have enclosed copies of these interpretation bulletins for your files.
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) may be met by XXXXXXXXXX as well as daughter XXXXXXXXXX , if in fact, in at least two years, while XXXXXXXXXX owned the property, daughter XXXXXXXXXX gross revenue from the farming business, in which the property was principally used, and in which XXXXXXXXXX was actively engaged on a regular and continuous basis, exceeded her income from all other sources for the year. In our view, the property held by the remaining siblings, sons XXXXXXXXXX and daughter XXXXXXXXXX , will not meet these requirements.
Pursuant to subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act, real property acquired before June 18, 1987 or after June 18, 1987 under an agreement in writing entered into before that date, will be considered to have been used in the course of carrying on the business of farming in Canada and, therefore, qualify as "qualified farm property" provided the following requirements are met. The property must be used by the individual, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares, 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, principally in the course of carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the person, a spouse, child or parent of the person, a personal trust from which the person acquired the property or a family farm partnership.
In our view, the requirements of subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) of the Act also appear to be met for XXXXXXXXXX, if in fact, daughter XXXXXXXXXX used the property principally in the course of carrying on the business of farming in Canada, in the year of XXXXXXXXXX death or in at least five years between XXXXXXXXXX. Provided all of the requirements of subsection 110.6(2) of the Act are met, XXXXXXXXXX would be eligible for the capital gains deduction, on any gains resulting from the deemed disposition on death of the land pursuant to subsections 70(5) or 70(9) of the Act.
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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