10 June 1999 External T.I. 9905205 - QUALIFIED FARM PROPERTY- ACQUIRED BY A TRUST

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: Does a trust (whose beneficiaries are grandchildren of a former 50% owner and grandnieces,and grandnephews of the other 50% former owner) owning farm property (now being rented) acquired from the sister and daughter of the prior owners qualify for the enhanced capital gain exemption ?

Position: Question of fact but it appears they do not qualify

Reasons: Use test and Ownership test in 110.6 Definition of parent

XXXXXXXXXX 990520
C. Tremblay
Attention: XXXXXXXXXX

June 10, 1999

Dear XXXXXXXXXX:

Re: Qualified Farm Property - Acquired by a Trust

We are writing in reply to your letter of February 17, 1999, wherein you requested our comments on the definition of “qualified farm property” with respect to trusts, and the application of section 110.6 of the Act.

You are concerned whether a particular farm property to be acquired by a trust in the future would qualify as “qualified farm property” for the purposes of claiming the enhanced capital gains exemption, if it was farmed by an immediate family member in the 1950’s and 1960’s, or whether the property has to meet the post-1987 acquisition rules, such that one of the beneficiaries must farm the property and meet the gross revenue test. You have also asked us to comment on whether a beneficiary of a trust who is designated under subsection 104(21.2) of the Act, can have the capital gain on the disposition of “qualified farm property” allocated to him or her, and whether more than $375,000 of taxable capital gains of a trust can be allocated to the beneficiaries.

Our Comments

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.

In deciding which part of the definition of “qualified farm property” in subsection 110.6(1) of the Act to use, you must determine when the property was last acquired by the individual (which includes a personal trust). In regard to your concern, the requirement of the definition of “qualified farm property” in subparagraph (a)(vii) “...where the property is a property last acquired by the individual before 1987..” cannot be met because the trust will acquire the property in the future. Accordingly, in order for the property to be considered “qualified farm property”, the requirements of subparagraph (a)(vi) of the definition must be met.

Where the owners of the farm property in the 24 months immediately preceding the transfer to the trust are persons referred to in subparagraph (a)(vi) of the definition of “qualified farm property”, the gross revenue from the farming business carried on in Canada by any of these persons must have exceeded their income from all other sources for the year. In our view, a grandparent can be considered a “parent” of an individual because of the extended meaning of “child” in paragraph 70(10)(a) of the Act, which applies for purposes of the definition of child in section 110.6 of the Act. However, it is also a question of fact whether a particular owner of farm property can be considered a “parent” to the beneficiaries of a trust because of the extended definition of child and parent under subsections 252(1) and (2) of the Act. Thus, where a parent is claimed to be the present owner of farm property, consideration of these definitions is necessary to determine if the “ownership” test is met.

Additionally, in our view, the “use” test is also not met if the gross revenue from the property is not farming but rental income, and the present owner has never farmed the property. Accordingly, it is also our view that in order for the property to meet the “qualified farm property” definition, the trust or the beneficiary seeking the exemption must have farmed the property for a period of 24 months on a regular and continuous basis and the income from farming would need to exceed income from all other sources during that period.

We confirm your understanding that should the property meet the “qualified farm property” definition in subsection110.6(1) of the Act of a personal trust, as defined in subsection 248(1) of the Act, the capital gain on its disposition by the trust can be allocated to a beneficiary or beneficiaries who are so designated under subsection 104(21.2) of the Act. Further, each beneficiary can claim the enhanced capital gain exemption on the capital gain allocated by the trust.

We trust that our comments will be of assistance.

Yours truly,

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch