20 January 1999 External T.I. 9832255 - QUALIFIED FARM PROPERTY

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: qualified farm property: raising horses and farm in year of disposition.

Position: both qualify if considered "carrying on business of farming"

Reasons: def; in 110.6(1)

XXXXXXXXXX 	D. Duff
		983225
Attention: XXXXXXXXXX 

January 20, 1999

Dear XXXXXXXXXX:

Re: Qualified Farm Property

This is in reply to your letter of December 2, 1998, requesting our comments on the applicability of the enhanced capital gains deduction on the disposition of the property described below.

An individual purchased 110 acres of land in 1970. The individual built a house and buildings on the property and used 10 acres, including the buildings, for breeding and raising horses. The remaining 100 acres has always been rented by the individual to a third party. It is your understanding that the principal residence would be exempt and the 10 acres would meet the definition of qualified farm property pursuant to subsection 110.6(1) of the Income Tax Act (the "Act"). Also, you asked if the individual farmed the 100 acres in 1999 instead of renting it, would it meet the definition of qualified farm property for the individual.

Our comments

The particular circumstances in your letter on which you have asked for our views relate 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. Should your transaction involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department, but may be of some assistance to you.

Qualified farm property includes real property of an individual, other than a trust, that is used by the individual "in the course of carrying on the business of farming in Canada and ..." for this purpose property last acquired before June 18, 1987, will not be so considered unless it meets the criteria in either subparagraphs (a)(vi) or (a)(vii) of the definition of qualified farm property in subsection 110.6(1) the Act. The criteria in subparagraph (a)(vii) is met if the property was used by the individual "... principally in the course of carrying on the business of farming in Canada

A) in the year the property was disposed of by the individual, or

B) in at least 5 years during which the property was owned by the individual...".

A review of all of the facts surrounding a situation would be required to conclusively resolve whether the land owned by the individual meets the requirements of qualified farm property and this would be best resolved by a Tax Services Office. Nevertheless, subject to the comments below, the requirements of subparagraph (a)(vii) of the definition of qualified farm property in subsection 110.6(1) of the Act appear to be met for the 10 acres if, in fact, the horse breeding operation constitutes the carrying on of a farming business, and can be met for the 100 acres if the individual uses it principally in the course of carrying on the business of farming in the year of disposition.

It is always a question of fact whether a particular asset is used principally in a farming business, whether a particular operation constitutes a farming business, and whether an individual is carrying on that particular farming business. 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. This test is applied on a property by property basis, so it will depend on whether the land is one or more properties. If the entire 110 acres is considered one property, then more than 50% of the 110 acres use must be in the business of farming as described above for the property to qualify. If it is one property and less than 50% of the property's use is in the business of farming, none of the property will qualify. In subsection 248(1) of the Income Tax Act the term "farming" is defined to include "...tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing...". In determining 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 paragraphs 4 and 5 of 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. If an operation results in income being earned exclusively from looking after horses for a fee, it would not be a farming business. On the other hand, an individual may be considered to be in the business of farming if a profit can reasonably be expected from the raising and exhibiting of horses.

The Department's position on the disposition of farmland that includes a principal residence is discussed on page 41 of the 1997 Farming Income Guide. Basically one acre of land is considered to be part of the principal residence unless it can be proven that more is required.

We trust our comments will be of assistance to you.

Yours truly,

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