25 September 1989 Income Tax Severed Letter ACF3161 - 1989 Farming Income Tax Guide

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.

September 25, 1989

Legislative Affairs Directorate D.W. Joy 957-2083

Mrs. P. McNally Director Enquiries and Taxpayer Assistance Division

Attention: K. Meathrell

1989 Farming Income Tax Guide

This is in reply to the T782 request of August 1, 1989 prepared by K. Meathrell concerning the annual review of the above guide.

We have the following comments with respect to changes needed to reflect changes to the legislation:

1) Form T2041 - CCA schedule

Refer to comments made in the August 17 memo with respect to the 1989 Fishing Income Guide.

2) The terms "fiscal period", "year" and "taxation year" appear to be used indiscriminately. This seems to be inappropriate for the 1989 guide since some adjustments to farm income (concerning the mandatory inventory adjustment and the optional value of livestock election, for example) are relevant for fiscal periods rather than taxation years. (Details of those adjustments are discussed later.)

In addition, the term "fiscal year-end" is also used, but its meaning is not clear.

3) Page 9 - Drought-induced sales of breeding herd

     (a)  Where a farmer lives is not relevant; what is relevant
          is whether the farming business is carried on in an
          area that is, at some time during a fiscal period that
          ends after 1987, a prescribed drought region.

     (b)  The deferral is optional.  The farmer may defer any
          amount up to the maximum permitted by the formula (like
          CCA).

     (c)  The deferral is available only for dispositions that
          occurred in the fiscal period for which the claim (for
          deferral) is made; i.e., deferral is not available for
          proceeds received in respect of sales that occurred in
          a prior fiscal period.

     (d)  It is not yet known whether any region will be
          prescribed for any part of 1989.  Where a farmer
          claimed a deferral under subsection 80.3(4) for 1988
          and no part of his farming business was carried on in a
          prescribed drought region during his 1989 FISCAL
          PERIOD, the 1988 deferral must be included in 1989
          income,.  Where a farmer carried on a farming business
          in a region that was prescribed for at least part of
          his 1988 and 1989 fiscal periods (e.g., in Manitoba,
          with a November 30 fiscal period), then none of the
          1988 deferral has to be included in 1989 income, but
          the farmer may choose to include part or all of the
          deferral in 1989 income.

          Where a farmer claimed a deferral under subsection
          80.3(4) for 1988 and died in 1989, the deferral must be
          included in 1989 income whether or not the relevant
          prescribed drought region (for part or all of his 1988
          fiscal period) is prescribed for any of his 1989 fiscal
          period.

     (e)  As a consequence of the Bill C-28 amendment to
          subsection 11(2), that subsection will apply in respect
          of section 80.3.

4) Page 12 -

     The "Code 510" item in the 1988 guide (Optional Inclusion of
     value of livestock on hand) is still relevant for 1989
     fiscal periods that commenced before 1989.  The upcoming
     Technical Bill will change the coming-into-force for the
     Bill C-139 changes to section 28 and 30 from "taxation years
     commencing after 1988" to "fiscal periods commencing after
     1988".  This change is public information (see attached copy
     of December 1988 letters between     19(1)     and Finance,
     and the coming-into-force provision for the Bill C-28
     changes to section 28(1)).

5) Pages 15 to 18 - Motor Vehicle Expenses

The various amounts ($8.33/day for interest, $20,000 cost of passenger vehicles, $600/30 day period for lease costs) apply only for passenger vehicles leased or acquired before September 1989. Finance Release #89-083, dated August 14, 1989, advises that the values will change "on September 1, 1989". Actually, the new amounts will apply for acquisitions made after August 1989 and for leases entered into, renewed or extended after August 1989.

6) Page 19 - Note re: new leasing rules

You might consider clarifying that these new rules will not apply to automobiles. Perhaps the note should also be relocated (they would be relevant to the leasing of e.g., combines).

21(1)(b)

8) Page 31 - T2041

     (a)  Should readers be advised to list each class 10.1
          property separately?

     (b)  Since the rules for determining what is to be included
          in class 10.1 are to be changed as of the inception of
          the class, readers should be advised to re-do the class
          10 and 10.1 portions of the 1988 CCA schedule under the
          new rules.

          This would be easier (less confusing) than using
          subsection 13(5.1) to re-transfer inappropriate class
          10.1 properties back to class 10 and would be the
          technically correct route/procedure since it would
          eliminate inappropriate recaptures and terminal losses
          for 1988 in respect of class 10 properties.  If this is
          done, the "Note" at the bottom of page 32 may have to
          be revised.

9) Page 42 - Cumulative eligible capital account

As discussed (Burnett/Meathrell), the description of the proceeds to be credited to the pool in respect of eligible capital property dispositions needs to be amended. For dispositions that occurred before June 18, 1987 (or after June 17 but grandfathered) the proceeds are credited as they become due. For dispositions (not grandfathered) that occur after June 17, 1987, the proceeds are credited at the time of the disposition.

The rate of inclusion is 50% for proceeds included in fiscal periods that commence before 1988, and 75% for proceeds included in fiscal periods that commence after 1987.

10) Page 43 - Proceeds of disposition

Shouldn't the discussion under this heading indicate the significance of the result; i.e., that the deemed taxable capital gain in respect of the disposition of eligible capital property used to earn income from a farming business will qualify for the $500,000 life-time capital gains deduction?

21(1)(b)

12) chapter 7 - pages 54 and following

We understand that the reference to "qualified expenditures" was dropped deliberately because of the unlikelihood of individuals incurring R & D costs. If that is correct, the text of the chapter should be examined to delete irrelevant references to "or expenditures made". Some of those references have been indicated on attached photocopies of the draft 1989 guide.

13) Pages 56 and 57 - ITC's

There doesn't seem to be clear information that unused ITCs for properties acquired (or R & D expenditures made) before April 20, 1983 is not available in 1989. Such a statement would be useful in the guide. Also, form T2038 for 1989 should have box (1) "Balance of credits carried forward" starred to indicate this fact. Also, although not submitted with the draft guide, form T2038 also needs to be revised to at least change the 60% "specified percentage" for approved project property to 45%, for acquisitions after 1988.

14) Page 58 - Partnership information return

You should check this material with Audit (Al Smith) since we understand they have prepared a News Release on the subject which exempts five person partnerships from the reporting requirements.

In addition to the foregoing, the attached copy of various pages of the draft guide have comments of a minor nature that you may wish to consider.

B.J. Bryson Acting Director Current Amendments and Regulations Division

c.c.: Mr. A. Cockell

DWJ/jab