6 January 2000 External T.I. 9926285 - PRINCIPAL RESIDENCE -FARM

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:

1) Is all the property consisting of residence and XXXXXXXXXX acres considered a principal residence?

2) Does a portion of the sale qualify as "qualified farm property" ?

3) Can the provisions of subsection 110.6(19) be used to offset a portion of the gain?

4) Is GST payable on the sale?

5) On the subsequent disposal of a XXXXXXXXXX % interest in the property, is there a capital gain?

Position:

1) Question of fact, but presumably No
2) Possibly, if "qualified farm property"
3)No
4)No
5) Yes

Reasons:

1) Principal residence if farm property determined under 40(2)(c) and two methods described in IT 120R4

2) Rules in 110.6(1) "Qualified farm Property" for acquisition prior to June 18,1987.

3) Time for election expired
4) No GST as property is an exempt real property per Schedule 5 - section 12(b)
5) 69(1)(b) applies

XXXXXXXXXX 992628
C. Tremblay
January 6, 2000

Dear XXXXXXXXXX:

This is in reply to your letter of September 27, 1999, and further to our telephone conversation of November 17, 1999, (XXXXXXXXXX/Tremblay) wherein you seek assistance in determining how to report your mother's sale of property to your son. Specifically, you seek our opinion as to whether all the property qualifies as a principal residence, and, if not, whether there is a capital gain on the sale and whether or not any GST is required from the purchaser.

In your letter, you state that your mother and father acquired the property in XXXXXXXXXX and your father farmed the land up to XXXXXXXXXX at which time he retired. Since that time, the land has been idle and used only for recreation and enjoyment. In XXXXXXXXXX, your father passed away and some of the property was given to your brother. Your mother continued to live on the remaining XXXXXXXXXX acres, which consists of the dwelling, barns and out buildings. In XXXXXXXXXX, she moved into a seniors' residence. The barns and out buildings have either fallen down or are in a state of disrepair.

XXXXXXXXXX

Your son is in the process of purchasing his grandmother's property, the house and the XXXXXXXXXX acres of land. It is being purchased at fair market value based on an appraisal obtained from a licensed appraiser. The house was appraised for $XXXXXXXXXX and the land at $XXXXXXXXXX.

Since the property is to be 100% financed, the Bank required that you and your wife guarantee your son's mortgage on the property and that you be included on the Deed. You have chosen to be registered as tenant in common with a XXXXXXXXXX% ownership which you plan to transfer to him in XXXXXXXXXX years. Accordingly, in addition to the tax implications to your mother as requested above, you have also asked whether at the time of transfer of your XXXXXXXXXX% interest to your son, if the property has increased in value, whether any capital gain would be required to be reported by you in that year.

Our Comments:

Written confirmation of the tax consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance tax ruling request submitted in the manner set out in Information Circular 70-6R3 (copy enclosed). Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments which are of a general nature.

Sale of Property by Mother

Principal Residence

Whether or not a particular property qualifies as a principal residence is a question of fact which can only be determined after a review of all pertinent information. A principal residence designation is made in the taxation year in which the disposition of the property occurs. Generally, a property would qualify as a principal residence in the years the taxpayer ordinarily resided in the housing unit.

A determination of how much land can be considered part of a principal residence in any particular case is a question of fact. As indicated in paragraph 20 of Interpretation Bulletin IT-120R4, entitled Principal Residence, the principal residence of a taxpayer for a taxation year is deemed to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the taxpayer's use and enjoyment of the housing unit as a residence. In addition, as indicated in paragraphs 21 and 22 of the Bulletin, the question of whether land in excess of 1/2 hectare contributes to the use and enjoyment of the housing unit, and therefore qualifies as a principal residence, is a question of fact. We also note that the comments in paragraph 22 of that bulletin on a legally imposed minimum lot size exceeding 1/2 hectare only relate to a situation where residential zoning is involved.

With regards to farmland paragraphs 26 to 30 of IT-120R4 contain information regarding principal residence situated on land used in a farming business. The capital gain in respect of a principal residence located on land used in a farming business is determined under paragraph 40(2)(c) of the Income Tax Act (the "Act"). Two methods are allowed, the first method is described in paragraph 27 of IT-120R4. Using the first method, the land is regarded as being divided into two portions; the principal residence portion and the remaining portion. An allocation on a reasonable basis between each portion is required in order to determine the gain for each portion. The second method is described in paragraph 28 of IT-120R4 and illustrated in Schedule B of that bulletin. The gain otherwise determined is reduced by $1,000 plus $1,000 for each taxation year it was used as a principal residence by the taxpayer.

As mentioned above, by using the principal residence exemption with respect to the portion of the property that qualifies as principal residence, all or a portion of the accrued capital gain on the property may be sheltered from taxation. If the excess land is found not to qualify as a principal residence, the accrued capital gains on the excess land, or a portion thereof, may nevertheless qualify for the "qualified farm property" exemption.

Qualified Farm Property

Given that your father farmed the property, the property may meet the "qualified farm property" definition in subsection 110.6(1) of the Act and be eligible, on disposition, for the $500,000 capital gains exemption. It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making the determination are set out in Interpretation Bulletin IT-322R, entitled Farm Losses. The Canada Customs and Revenue Agency's (the "Agency") general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R , entitled Farming - Use of Cash Method. We enclose copies of both of these Interpretation Bulletins for your review.

One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will generally qualify as "qualified farm property" provided it was used by the individual claiming the capital gains exemption, a spouse, child or parent of such an individual, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the individual, a spouse, child or parent of the individual.

In the situation described, if the property was used in a farming business in at least five years during the years XXXXXXXXXX, the property will qualify as "qualified farm property" provided the other conditions of the definition in subsection 110.6(1) of the Act are met. We should point out, however, that we do not have enough information to determine whether the entire XXXXXXXXXX acres was used by your father in the farming operation carried on from XXXXXXXXXX .

Capital Gains Deduction

The capital gains deduction for property other than qualified farm property and qualified small business corporation shares was repealed by chapter 3 of the 1995 Statutes of Canada for 1996 and subsequent taxation years. In order to allow an individual who had an accrued gain on capital property as of February 22, 1994, a final opportunity to shelter such a gain, the Act was also amended to allow an individual to voluntarily include the accrued capital gain in income for the 1994 taxation year and claim the capital gains deduction thereon.

A capital gains election under subsection 110.6(19) of the Act to include the accrued gain in income for the 1994 taxation year was required to be filed by the date that the individual's income tax return for that year was due. For most individuals,

the time limit imposed under subsection 110.6(24) of the Act required the election to be filed by April 30, 1995. Although the capital gains election under subsection 110.6(19) is not an election which is prescribed for the purposes of subsection 220(3.2) of the Act, subsection 110.6(26) of the Act provides similar relief in that it permitted an individual to file a capital gains election within 2 years of the date the election was required to be filed, provided that the appropriate penalty was paid. However, there is no provision in the Act which would permit an individual to file an election after the two year extension of time has expired.

Sale of XXXXXXXXXX % interest to your son

In response to your question dealing with the ultimate transfer of your portion of the property to your son in the future, the following comments are relevant. At the time of transfer of a portion of the property to an adult child for no consideration, where the property has increased in value, a capital gain is determined and the provisions of subparagraph 69(1)(b)(ii) of the Act are applicable. The transferor will be deemed to have received proceeds of disposition equal to the fair market value of his or her interest in the property which is disposed of by way of a gift. In such cases the transferor would be deemed to have transferred the property at its current fair market value thereby triggering any taxable gain or loss upon the transfer. The recipient adult child would then be deemed to have acquired the property at its fair market value. In the case of a XXXXXXXXXX% interest in property (i.e. where that XXXXXXXXXX % represents a XXXXXXXXXX% interest in the beneficial ownership - see comments below), such tax implications may be nominal.

Paragraph (e) of the definition of the term disposition in section 54 of the Act makes it clear that, for purposes of subdivision c of Division B of Part I of the Act, a disposition will not occur as a result of any transfer of property in which there is a change in legal ownership of the property without any change in the beneficial ownership thereof. The determination of whether there has been a change in beneficial ownership is a question of fact. In this regard, we refer you to paragraphs 2 to 5 of the enclosed Interpretation Bulletin IT-437R, entitled Ownership of Property (Principal Residence), for the Agency's general views on what constitutes beneficial ownership.

General Sales Tax

As a general rule, supplies of real property are subject to the General Sales Tax (the "GST") unless they are exempt real property sales. For example, sales of used residential housing by someone other than the builder is generally an exempt real property sale for GST purposes. However, should you require further information regarding specific GST issues, you should direct your enquiry to your local Tax Services Office.

The above comments are only expressions of opinion on the application of the Income Tax Act, and, as such, should not be construed as advance income tax rulings, nor are they binding on the Agency. If you require further assistance, we would recommend that you contact your local Tax Services Office.

We trust our comments are of assistance.

Your truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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