Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] Whether a given property is qualified farm property within the meaning of subsection 110.6(1) of the Act.
Position: This is a question of fact.
Reasons: See 9821269, 9822875, 9832245, 9900153, 9919475, 9709285, 9709965, 9715205, 9802093, 9811605, 9818025.
XXXXXXXXXX 992378
G. Moore
December 23, 1999
Dear Sir,
Subject: Qualified farm property
This is in response to your letter dated August 26, 1999 regarding qualified farm property within the meaning of subsection 110.6(1) of the Income Tax Act (the “Act”).
You have asked for our opinion on the entitlement to deduct capital gains on the disposition of farm property in the following hypothetical situation:
Mr. X purchased land for $10,000 on January 1, 1973, which he used principally in the course of carrying on the business of farming from January 1, 1973 to December 31, 1983. Throughout this period, Mr. X was actively engaged on a regular and continuous basis with carrying on the business of farming, and his gross farming revenue exceeded his income from all other sources for each of those years. On December 31, 1983, the land was worth $25,000. As of January 1, 1984, the land was leased to various individuals, and Mr. X received property income from it rather than business income. On June 30,1999, Mr. X sold the land to his child, whom we will call Child X, and the land was then worth $50,000. Child X leased the land to various individuals to earn property income. On December 31, 2003, Child X sold the land for $60,000.
You are asking for our comments on the following points:
• Was there a deemed disposition of the land on January 1, 1984?
• Will Mr. X be entitled to the capital gains deduction for qualified farm property (assuming there is no cumulative net loss on investments) because he realized a capital gain on the sale of the farm property to Child X?
• Will Child X be entitled to the capital gains deduction in respect of the disposition of the land in 2003? Will the land be “qualified farm property” to Child X within the meaning of subsection 110.6(1) of the Act?
Our Comments
As stated in paragraph 21 of Information Circular 70-6R3 dated December 30, 1996, it is our practice not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices following their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments.
Under subsection 110.6(2), an individual who is resident in Canada throughout the year and who has qualified farm property during the year is entitled to a capital gains deduction of up to $500,000 of gains during their lifetime. One of the conditions for an individual's property to be considered qualified farm property within the meaning of subsection 110.6(1) is that the property was used in the course of carrying on the business of farming in Canada.
Whether property is considered to have been used in the course of carrying on the business of farming in Canada depends, among other factors, on the date the property was last acquired. In the situation described above, Mr. X acquired the land on January 1, 1973. Consequently, the farm land may be considered to have been used in the course of carrying on the business of farming if the conditions set out in subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1) are satisfied.
Under subparagraph (a)(vii) of the definition of “qualified farm property” in subsection 110.6(1), property acquired before June 18,1987, or after June 17, 1987 under an agreement in writing entered into before that date, is considered to have been used in the course of carrying on the business of farming in Canada and therefore constitutes qualified farm property, provided that the following conditions are satisfied. The property must have been used by the individual ... principally in the course of carrying on the business of farming in Canada in the year the property was disposed of by the individual, or in at least 5 years during which the property was owned by the individual.
Determining whether property is used by a taxpayer principally in the course of carrying on the business of farming is a question of fact. Where property must be used principally in the course of the business of farming, the property meets this condition if more than 50% of the use of the property is in the course of the business of farming. In addition, it is also a question of fact whether a particular farming activity constitutes the business of farming at a given time. Some of the criteria to consider in determining whether an enterprise is a business are set out in Interpretation Bulletin IT-322R, Farm Losses. In addition, our general position on the meaning of the term “farming business” is set out in paragraph 8 of Interpretation Bulletin IT-433R, Farming or Fishing – Use of Cash Method, and in paragraph 9 of Interpretation Bulletin IT-145R, Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax.
A review of all the facts of a situation would be necessary to conclude that the farm property held by Mr. X meets the requirements to be qualified farm property. Nevertheless, in the situation described, it appears that the conditions of paragraph (a)(vii)(B) of the definition of “qualified farm property” in subsection 110.6(1) are satisfied if, in fact, during at least five of the years in which it was held, the property was used principally in the course of carrying on a farming business in Canada. It also appears that the conditions of subparagraph (a)(vi) are satisfied in respect of the disposition of the property by Mr. X (we make further comments on that subparagraph in the context of the disposition of the property by the child - see below).
You also asked whether there was a deemed disposition of the farm land on January 1, 1984 because the farm property ceased to be used in a business on that date and began to be leased. Whether there is a deemed disposition as a result of a change in use is a question of fact. If there is no change in use, there is no deemed disposition at that time. Subsection 45(1) sets out the deemed disposition rules that apply in cases where, for example, property was acquired for income-producing purposes and then began to be used for another purpose. However, in Mr. X's situation, there appears to have been neither a change in use nor a deemed disposition of the farm property on January 1, 1984, since the property continued to be used to earn income, albeit rental income instead of income from a farming business.
You also asked whether the farm property purchased by Child X would be considered a “qualified farm property” within the meaning of subsection 110.6(1) at the time of the disposition of that property by Child X in 2003. Child X last acquired the farm property on June 30, 1999; consequently, when the farm property was disposed of in 2003, it may be considered to have been used in the carrying on of the business of farming if the conditions set out in subparagraph (a)(vi) of the definition of “qualified farm property” in subsection 110.6(1) are satisfied. According to subparagraph (a)(vi) of that definition, property may be considered to be used in the course of a farming business in Canada if, throughout the period of at least 24 months immediately preceding the sale, it was owned by, among others, the individual, the individual's spouse, a child or parent of such individual. In addition, the property must meet the conditions set out in clauses (a)(vi)(A) or (a)(vi)(B) of the definition of “qualified farm property” in subsection 110.6(1). Subparagraph (a)(vi)(B) of that definition applies only if the farm land was used by a corporation or partnership, which does not appear to have been the case in the example you have provided.
Under paragraph (a)(vi)(A) of the same definition, for at least 2 years while the property was so owned the gross revenue of such a person … from the farming business carried on in Canada in which the property was principally used and in which such a person … was actively engaged on a regular and continuous basis must have exceeded the income of the person from all other sources for the year. In our opinion, the individual who meets the gross revenue test may be someone other than the current owner of the property and may be the individual's parent or spouse who was previously the owner of the property.
With respect to Child X, it is a question of fact whether a particular property is a “qualified farm property” as defined in subsection 110.6(1) and whether it is used in the course of carrying on the business of farming in Canada. However, it appears that the farm property owned by Child X would likely have satisfied — at the time of its disposition — the 24-month holding requirement set out in subparagraph (vi) and the gross revenue requirement set out in clause (vi)(A) of the definition of “qualified farm property” in subsection 110.6(1). Consequently, Child X would likely be entitled to the capital gains deduction in respect of any capital gain he realizes on the disposition of the qualified farm property in 2003.
We hope that our comments are helpful.
Best regards,
J. Wilson
for the Director,
Business and Publications Division,
Income Tax Rulings Directorate,
Policy and Legislation Branch,
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