26 February 1999 Income Tax Severed Letter e9902585.txt - SHARE OF FAMILY FARM CORPORATION

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:

Whether a mortgage taken back by a corporation on the sale of real property is an asset used principally in the course of carrying on the business of farming.

Position TAKEN:

Although it is a question of fact, generally, we would not consider a mortgage receivable to be an asset used principally in the course of carrying on the business of farming.

Reasons FOR POSITION TAKEN:

Although a mortgage is an asset whose existence may be relevant to the equity of a corporation, it is not generally an asset used in principally carrying on the business of farming, as the funds tied up in the mortgage are no longer available for the business uses of the corporation.

XXXXXXXXXX 		5-990258
G. Moore
February 26, 1999

Dear XXXXXXXXXX:

Re: Mortgage Receivable - Used in a Business

We are writing in response to your letter of January 22, 1999, regarding the definition of "share of the capital stock of a family farm corporation" in subsections 70(10) and 110.6(1) of the Income Tax Act (the "Act").

In the situation you describe, a Canadian company (“the Company”) is carrying on the business of farming in Canada. The Company sells farm land to an arms length third party and takes back a mortgage receivable. The mortgage receivable is not used as security for any loans of the Company or for any other purpose. You have asked if the mortgage receivable would be considered property that has been used principally in the course of carrying on the business of farming in Canada for purposes of the definition of “share of the capital stock of a family farm corporation” in subsections 70(10) and 110.6(1) of the Act.

It is your view that since capital property is purchased and sold regularly as part of carrying on a farming business, the money received or receivable from selling capital property is received in the normal course of business and therefore would be considered used primarily in the farming operation. In addition, you believe that sales proceeds from the disposition of capital property are usually kept on hand for future property acquisitions so that the business can continue at its current level and, accordingly, the receivable in this situation is used principally in the course of carrying on the business of farming because the underlying nature of the transaction is farming related. You also indicate that since the receivable originated from the sale of qualifying land, the receivable itself should be considered a qualifying property.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are 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, and are not binding on the Department.

The definitions of “share of the capital stock of a family farm corporation” in subsection 110.6(1) and 70(10) of the Act are not identical. The definition in subsection 110.6(1) of the Act applies for purposes of subsection 110.6. The definition in subsection 70(10) of the Act applies for purposes of section 70 and 73. If the shares qualify as a share of the capital stock of a family farm corporation, as defined in subsection 110.6(1) of the Act, the shares could qualify for the capital gains deduction for qualified farm property under subsection 110.6(2) of the Act. If the shares qualify as a share of the capital stock of a family farm corporation, as defined in subsection 70(10) of the Act, subsection 70(9.2) of the Act would allow for a rollover of the shares upon death.

In order to qualify as a share of the capital stock of a family farm corporation under the definition of subsection 110.6(1) at any time (“the determination time”), the requirements of both paragraphs (a) and (b) of the definition must be met. Generally, the requirement in paragraph 110.6(1)(a) of the definition is met if, throughout any 24-month period ending before the determination time, more than 50% of the fair market value of the property owned by the corporation was attributable to property used principally in the course of carrying on the business of farming in Canada in which an individual described in subparagraph (a)(i) of that definition was actively engaged on a regular and continuous basis. Such an individual could be the spouse, child or parent of the individual and the 24-month period could be any 24 continuous months while the corporation owned the property.

Subparagraph (b) of the definition of a “share of the capital stock of a family farm corporation” in subsection 110.6(1) of the Act reads in part as follows:

“(b) at the time, all or substantially all of the fair market value of the property owned by the corporation was attributable to

(i) property that was used principally in the course of carrying on the business of farming in Canada by the corporation or a person or partnership referred to in subparagraph (a)(i)”.

In order to qualify for the rollover provision under subsection 70(9.2) of the Act, the shares must have been shares of the capital stock of a family farm corporation, as defined in subsection 70(10) of the Act. The definition of a “share of the capital stock of a family farm corporation” under subsection 70(10) of the Act indicates that at a particular time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of that definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, child or parent of the person was actively engaged on a regular and continuous basis.

The determination of whether real property is property that was used principally in the course of carrying on the business of farming is a question of fact that requires a review of the relevant circumstances. Where reference is made to an asset being used principally in the business of farming, the asset will meet this requirement if more than 50% of the asset’s use is in the business of farming. Each farm property must meet the principal use test based on its own use. The relevant circumstances include the actual use to which the asset was put in the course of the business, the nature of the business involved and the practice in the particular industry. The Supreme Court of Canada in the Ensite case (86 DTC 6521) considered the issue of whether property was used or held in the course of carrying on business and held that the proper test is whether the property is employed and risked in the business. A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations themselves. The test is not whether the taxpayer was forced to use the property to do business; the test is whether the property was used to fulfill a requirement which had to be met in order to do business.

With regard to mortgages, it is the Department's view that, although a mortgage is an asset whose existence may be relevant to the equity of a corporation, it is not generally
an asset used in an active business, as the funds tied up in the mortgage are no longer available for the active business uses of the corporation. However, mortgages may in certain circumstances be considered an asset used in an active business. For example, mortgages taken back by a developer in order to facilitate sales may initially appear to be assets used in an active business, but if such mortgages are retained for more than a short period, they appear to have become more in the nature of investments. In summary, mortgages having normal commercial terms and conditions and held as investments are not considered to be assets used in an active business.

Given our position above, in our view, the mortgage in the situation you describe would not generally be considered to be used in the course of carrying on the business of farming since the funds tied up in the mortgage are not available for the use of the corporation. We do not agree with your view that because the mortgage receivable originated from the sale of qualifying farm land, the receivable itself should be considered a qualifying property.

We trust that these comments will be of assistance.

Yours truly,

R. Albert, C.A.

for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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