29 August 1989 Income Tax Severed Letter AC58472 - Sale of Farm Property Avoidance Transaction if Primary Purpose to Obtain Benefit of Capital Gains Deduction

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.

58472
                                S.J. Tevlin
                                (613)957-2118

19(1)

Re: Section 245 of the Income Tax Act (the "Act")

This is in response to your letter of August 3, 1989 wherein you requested a technical interpretation with respect to the applicability of section 245 of the Act to the following hypothetical situation:

1. The taxpayer, Mr. A, is a Canadian resident individual.

2. Mr. A owns land that is "qualified farm property" as defined in subsection 110.6(1) (the Farm Property).

3. Mr. A owns all the shares of a Canadian corporation, B Co, a share of which is "a share of the capital stock of a family farm corporation" (as defined in subsection 110.6(1)).

4. B Co has rented the Farm Property from Mr. A and used it in its farming business for a number of years.

5. Mr. A transfers his interest in the Farm property to B Co.

6. Mr. A and B Co jointly elect under subsection 85(1) to transfer the Farm Property at an agreed amount that is in excess of Mr. A's tax cost in the Farm Property but not in excess of an amount that results in a taxable capital gain equal to Mr. A's available capital gains deduction under subsection 110.6(2) and subsection 110.6(3).

7. The consideration received by Mr. A on the transfer consists of the following:

     a)   non-share consideration, the value of which equals
          the agreed amounts;

b) one common share with nominal value; and

     c)   a number of redeemable preference shares with no
          par value, redeemable/retractable at an amount
          equal to the excess, if any, of the fair value
          of the farm property over the total fair value
          of a) and b) above."

Your concern is whether the transaction described above is an avoidance transaction as defined in subsection 245(3) of the Act, and if so would it be considered a misuse or abuse of the provisions of the Act as described in subsection 245(4) of the Act.

You also wish to know how subsection 245(5) would be applied to deny the tax benefit if subsection 245(2) of the Act were applicable to the particular transaction.

Opinions

In the hypothetical fact situation described above, the tax benefit, within the meaning of subsection 245(1) of the Act would be the tax saved by Mr. A pursuant to the use of subsection 110.6(2) of the Act to attain the use of the available capital gains deduction.

The sale of the Farm Property to B Co would be an avoidance transaction, within the meaning of subsection 245(3) of the Act, if its primary purpose were to obtain the aforementioned tax benefit.

In our view, although such a transaction would be an avoidance transaction within the meaning of subsection 245(3) of the Act, it would not constitute a misuse or abuse of the law. If there were a proposal to repeal or reduce the deduction, our response might be different.

As explained in paragraph 24 of the Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch