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: General questions on qualified farm property
Position: Provided general responses
Reasons: Summarized the provisions of the law in 110.6
XXXXXXXXXX 990402
C. Tremblay
July 26, 1999
Dear XXXXXXXXXX:
Re: Qualified Farm Property
This is in reply to your letter of February 5, 1999, wherein you asked whether land used in the business of farming by a partnership may be considered to be used in an active business of a corporate partner, in the situation outlined below. We apologize for the delay in responding.
The hypothetical situation is as follows:
A trust owns all the common shares of a corporation that is a “Canadian-controlled private corporation” [as defined by subsection 125(7) of the Income Tax Act (the Act)] that owns farm land. You have asked us to assume that each of the shares owned by the trust is a “share of the capital stock of a family farm corporation,” as defined by subsection 110.6(1) of the Act.
A corporation is planning to rent its farm land to a farm partnership, consisting of the corporation and an unrelated farmer. The farm land will be used by the partnership in the business of farming in Canada.
You ask whether the corporation’s share of the partnership income as well as the income from renting the farm land will be considered to be active business income. In a second question, you asked that should the trust, which owns of all the shares of the corporation, sell its shares would the enhanced capital gain exemption as provided for under subsection 110.6(2) of the Act, be available to the beneficiaries.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R3. The following comments are therefore, of a general nature only, and are not binding on the Department.
As noted in paragraph 12 of Interpretation Bulletin, IT-138R, Computation and flow-through of partnership income,” where a partnership leases property owned by a partner, the rent is an expense of the partnership and income of the member, and not an allocation of partnership income. Therefore, the corporation that owns the farm land must report all of the rental income derived from renting the property to the partnership.
The question of whether the corporation’s income from renting property to the partnership is income from an active business will require an examination of the definition of “income of the corporation for the year from an active business,” as defined by subsection 125(7) of the Act. Under this definition, such income includes income that pertains to or is incidental to an active business, as well as income from property that is incidental to or pertains to an active business (see exclusion in paragraph (b) of the definition of “income or loss” of a corporation...from a source that is a property). In order for you to make a definitive determination relative to your particular fact situation, we suggest that you refer to the comments in paragraphs 3 to 7 of interpretation bulletin IT-73R5, The Small Business Deduction.
For each share owned by individual beneficiaries of the trust, that meets the definition of a “share of the capital stock of a family farm corporation” held by the trust, it is our view that each beneficiary could claim the enhanced capital gain exemption to the extent provided by subsection 110.6(2) of the Act. In regard to the rules governing the flow through of capital gains of a personal trust to beneficiaries, we suggest that you review the comments in paragraphs 6 to 9 of IT—381R3, Trusts-Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to the Beneficiaries.
We trust these comments will be of assistance.
Your truly
John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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