22 September 1999 External T.I. 9921515 - QFP - SEVERING QUAL. PORTION OF LAND

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: If a portion of a taxpayer's land is farmed and a portion is not farmed, can the taxpayer sever the farmed portion and sell it to take advantage of the capital gains exemption, i.e., as a qualified farm property

Position: It depends on the facts and circumstances. Further, no assurance given as to whether section 245 applies.

Reasons: Question of fact. Further, the Department comments on the application of subsection 245 only after examining all of the facts and circumstances relating to a given situation.

	xxxxxxxxxx	J. Gibbons
	5-992151
September 22, 1999

Dear XXXXXXXXXX:

This is in response to your letter of July 28, 1999, in which you requested our views concerning the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act. More specifically, you wish to know whether a particular property, which you described in your letter, will qualify under this definition.

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 ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only

You describe the following situation:

1.A parent owns 12 acres (one legal title) of property.

2.Of the 12 acres, the parent has always farmed 5 acres. The parent is actively engaged with the farming on a regular and continuous basis. The farming operations are a business. The parent's gross revenue from the farming business has exceeded his income from all other sources for at least two years.

3.The 7 acres that are not farmed is comprised of (i) the parent's principal residence, and (ii) bush land that could be farmed if cleared
4.The parent would like to sever the 5 acres and sell it to an adult child (the "farming child") at fair market value ("FMV") and take back a mortgage. The farming child farms an adjoining piece of real property that is a separate legal title.

5.The reason for the sale is estate planning. The parent does not want the farming child to have to purchase the 5 acres from the other children upon the parent's death. The parent will provide that the mortgage is forgiven on the parent's death.

6.The parent would like to leave the remaining 7 acres to the other children in his or her will.

7.The parent has sufficient access to the qualified farm property capital gains exemption to offset a capital gain realized on the sale of the 5 acres at FMV.

You express the view that it is apparent that the 5 acres meets the definition of qualified farm property since:

1.The 5 acres were used by the parent in the business of farming.

2.The parent was active in the business and the property meets the 2 year gross revenue test.

3.The 5 acres have been owned throughout the period of at least
24 months immediately preceding that time

4.The 5 acres were used entirely in the business of farming in at least five years during which the property was owned by the parent.

It is also your view that the transactions would not be offensive since the object is estate planning and the transfer is from parent to child.

Our views

Based on your comments outlined above, we are inclined to agree with your analysis that the 5 acres of farmland would likely meet the definition of qualified farm property by virtue of subparagraph (a)(vi) of the definition in subsection 110.6(1) of the Act. However, a final determination can only be made after an examination of all of the surrounding facts and circumstances. Similarly, the determination of whether or not the general anti-avoidance rules (GAAR) in section 245 would apply to a transaction or to a series of transactions requires an examination of all of the surrounding facts and circumstances. Thus, the Department will not comment on the application of GAAR unless all of the facts and circumstances are known. If you wish to confirm whether subsection 245(2) will apply to a proposed transaction or to a series of proposed transactions, you should request an advance ruling in the manner set out in IC 70-6R3.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate