1 March 1999 External T.I. 9833675 - FARM LAND AS 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: is land qualified farm property and can it be rolled per 73(3) &70(9) in different situations

Position: depends on situation

Reasons: legislation

XXXXXXXXXX 	D. Duff
		983367
Attention:XXXXXXXXXX 

March 1, 1999

Dear XXXXXXXXXX:

Re: Farm Land as Qualified Farm Property

This is in reply to your letter of December 11, 1998, requesting our views as to whether farm land, described in various situations, would be considered to be qualified farm property for the purposes of subsection 110.6(2) and whether it can be rolled pursuant to subsections 70(9) and 73(3) of the Income Tax Act. All references are to the Income Tax Act.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to relate to a factual situation involving specific taxpayers. 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.

Situation 1.

Mr. A owns farm land.

Opco uses this farm land in its farming operations.

Holdco's only assets are shares of Opco.

Holdco shares are owned by individuals.

All or substantially all of Opco's assets are represented by assets used in its farming business and this has always been the case.

Mr. A owns common shares of Holdco and preferred shares of Opco and is actively engaged in the farming operations of Opco.

We assume the land was last acquired after June 17, 1987 and it was not previously owned by Mr. A's parents.

Question 1: Is the land qualified farm property pursuant to the definition in subsection 110.6?

The land will be qualified farm property of Mr. A at a particular time if it is used by a corporation in the course of carrying on the business of farming in Canada, and Mr. A's share of the corporation is a share of a family farm corporation. Therefore, Mr. A's shares of Opco must be shares of the capital stock of a family farm corporation and Opco must have used the land in the course of carrying on the business of farming in Canada.

Mr. A's preferred shares of Opco would qualify if for any previous 24-month period more than 50% of the fair market value of Opco's property was property used by it principally in the business of farming in Canada in which Mr. A was actively engaged on a regular and continuous basis, and at the particular time, all or substantially all of the fair market value of Opco's property was attributed to property used principally in the course of carrying on the business of farming in Canada. Since at least 90% of the fair market value of Opco's assets have always been used in the farming business and Mr. A is actively engaged is this business, Mr. A's shares of Opco would be shares of the capital stock of a family farm corporation if this situation has existed for at least 24 months.

For the definition of qualified farm property, Opco will have used the land in the course of carrying on the business of farming in Canada if it meets the criteria in clause (a)(vi)(B) of the definition. This criteria will be met if Mr. A owned the land for the immediately preceding 24 months and Opco used the land principally in the course of carrying on the business of farming in Canada throughout any 24 month period while the property was so owned and Mr. A was actively engaged on a regular and continuous basis in the business. This is the current situation and if it has existed for the last 24 months this criteria will have been met, and the land will be qualified farm property pursuant to the definition in subsection 110.6(1).

Question 2: Can the land be rolled to a child on death pursuant to subsection 70(9) or on an inter vivos basis pursuant to subsection 73(3)?

Basically, an individual's land can be rolled to a child who is resident in Canada on death pursuant to subsection 70(9), or on an inter vivos basis per subsection 73(3), if before death or the transfer the land was used principally in the business of farming in which the individual was actively engaged on a regular and continuous basis, and for the purposes of subsection 70(9), the transfer is done as a consequence of the death of the individual.

In our view, subsection 73(3) does not require the property to be used by the taxpayer, the taxpayer's spouse or children, rather it only requires that the property be used principally in the business of farming in which any of those individuals was actively engaged on a regular and continuous basis. Subsection 70(9) has the same requirement. In our view, the farming business does not have to be the taxpayer's business for him or her to be actively engaged in it. The reference in 73(3) to "... eligible capital property in respect of a business carried on in Canada by a taxpayer..." only refers to the eligible capital property being used in the taxpayer's business.

Since Mr. A owns the land, the land is used by Opco principally in the business of farming, and Mr. A is actively engaged in this business on a regular and continuous basis, the requirements for subsections 70(9) and 73(3) are met.

Situation 2.

Mr. A owns farm land.

Opco uses this farm land in its farming operations.

Holdco's only assets are shares of Opco.

Holdco shares are owned by individuals.

All or substantially all of Opco's assets are represented by assets used in its farming business and this has always been the case.

Mr. A owns common shares of Holdco but no shares of Opco, and is actively engaged in the farming operations.

We assume the land was last acquired after June 17, 1987 and it was not previously owned by Mrs. A's parents.

Question 1: Is the land qualified farm property pursuant to the definition in subsection 110.6?

The land would be qualified farm property at a particular time if it is used by a corporation in the course of carrying on the business of farming in Canada, and Mr. A's share of the corporation is a share of the capital stock of a family farm corporation. Since the land is being used by Opco and Mr. A does not own a share of Opco, this condition cannot be met. The land would not be qualified farm property pursuant to subsection 110.6(1).

Question 2: Can the land be rolled to a child on death pursuant to subsection 70(9) or on an inter vivos basis pursuant to subsection 73(3)?

As stated above, the criteria for a roll pursuant to subsections 70(9) or 73(3) requires the land to be used principally in the business of farming in which the individual is actively engaged on a regular and continuous basis. Since the land is used by Opco in the business of farming and Mr. A is actively engaged on a regular and continuing basis it can be rolled pursuant to subsections 70(9) and 73(3).

Situation 3.

Mrs. A owns farm land, but does not own any shares of Opco or Holdco and, neither she nor Mr. A nor their children are actively engaged in the farming operations.

Opco uses this farm land in its farming operations.

Holdco's only assets are shares of Opco.

Holdco shares are owned by individuals.

All or substantially all of Opco's assets are represented by assets used in its farming business and this has always been the case.

We assume the land was last acquired after June 17, 1987, and it was not previously owned by Mrs. A's parents.

Question 1: Is the land qualified farm property pursuant to the definition in subsection 110.6(1)?

As in situation 2, one of the criteria would require Mrs. A to own a share of Opco and such share would have to be a share of the capital stock of a family farm corporation. Since Mrs. A does not own any shares of Opco, this condition is not met and the land is not qualified farm property pursuant to the definition in subsection 110.6(1).

Question 2: Can the land be rolled to a child on death pursuant to subsection 70(9) or on an inter vivos basis pursuant to subsection 73(3)?

A roll over would require either Mrs. A, Mr. A or their children to be actively engaged in the farming operation in which the land is being used. Since none of them are, the land cannot be rolled under either provision.

Situation 4:

Mrs. A owns farm land, but does not own any shares of Opco or Holdco and, neither she nor Mr. A nor their children are actively engaged in the farming operations.

Mrs. A last acquired the land after 1987.

Mrs. A owned the property for the last 24 months.

Mrs. A's parent owned the land prior to the existence of Opco, and the parent's only income during this time was from the farming business in which the parent was actively engaged.

Opco uses this farm land in its farming operations.

Holdco's only assets are shares of Opco.

Holdco shares are owned by individuals.

All or substantially all of Opco's assets are represented by assets used in its farming business and this has always been the case.

We assume Mrs. A acquired the land from her parent.

Question 1: Is the land qualified farm property pursuant to the definition in subsection 110.6(1)?

Mrs. A acquired the land after 1987 from her parent who previously used it in his farming business and, during this time, his only income was from farming. To be qualified farm property to Mrs. A, the property must meet the criteria in subparagraph (a)(vi) of the definition of qualified farm property. The preamble in subparagraph (a)(vi) requires a 2 year holding period by, among others, Mrs. A or her parents for the period immediately preceding the particular time. This is met since Mrs. A has owned it for 2 years. In addition, it must meet either of the usage criteria described in clauses (a)(vi)(A) or (a)(vi)(B).

The test in clause (a)(vi)(B) is not met because, although the property was used by a corporation, it is not a corporation a share of which is a share of the capital stock of a family farm corporation of any of Mrs. A, Mr. A, a parent or child of Mrs. A. However, the test in clause (a)(vi)(A) will be met if in at least 2 years while either Mrs. A or her parent owned the property, the gross revenue from the farming business that is carried on by either of these individuals in which the property was principally used, and in which the individual was 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 of the individual or any other person described in subparagraphs (a)(i) to (iii) of the definition of qualified farm property. This test is not met by Mrs. A but it will have been met by her father if he farmed the land as described above for a period of at least 2 years. In that case the land will be qualified farm property for Mrs. A.

Question 2: Can the land be rolled to a child on death pursuant to subsection 70(9) or on an inter vivos basis pursuant to subsection 73(3)?

Although the land is used principally in the farming business of Opco, neither Mrs. A, Mr. A nor their children are actively engaged in the business so the land cannot be rolled under subsections 70(9) or 73(3). The fact that her father farmed the land before she owned it is not relevant for these purposes.

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