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.
Dear Sirs:
This is in reply to your letter dated March 23, 1981 concerning possible income tax implication in the following situation:
A husband and his wife propose to transfer a farm they operate to a corporation presently controlled by the husband. The majority of the shares will be transferred to a charity so that the income from renting the farm will flow to the charity.
In the above situation, section 85 of the Income Tax Act could apply to defer the recapture and capital gain on the transfer of the farm property from the husband and his wife to the corporation. However, there could still be adverse income tax consequences depending on when and how the transaction are carried out. The requirements for the application of section 85 of the Act are, however, quite complicated and if not strictly adhered to could result in recapture of capital cost allowance and capital gain in the hands of the husband and his wife or one of them. Further, a capital gain on the transfer of the corporation's shares to the charity could also result and there is a possibility that the charity could lose its registered status as a consequence of the transactions. We wish also to point out that the deduction for charitable donations is limited to 20% of the corporation's income in a year. Finally, the eventual sale of the farm by the corporation could result in a recapture of capital cost allowance and capital gains.
The ability to elect under section 85 is not affected by the fact that the farm land is registered in joint ownership. An interest in property that is jointly owned may be transferred by each owner under section 85 for shares which are owned separately. As long as the value of the shares which are received by each spouse as consideration for their interest in the farm land is equal to the value of the interest in the farm land transferred by each spouse to the corporation paragraph 85(1)(e.2) will not apply. The fact that the interest in the farm land owned by the taxpayer's spouse may have been acquired by her from the taxpayer for no consideration does not affect the applicability of paragraph 85(1)(e.2).
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© Her Majesty the Queen in Right of Canada, 1981
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© Sa Majesté la Reine du Chef du Canada, 1981