7 February 2013 External T.I. 2013-0474461E5 - Principally used in a farming business

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.

Principal Issues: Whether certain land is used principally in a farming business under subsection 110.6(1.3), subsection 73(3), or subsection 70(9) in the two hypothetical situations considered.

Position: No, No

Reasons: If part of the land is not used for any farming purpose (i.e., it is lying idle), then that part, when deciding whether the entire parcel of land is used principally in the business of farming, would not be so used. The use test must be applied to each legal parcel of land or separate property (i.e., the determination must be made on a property by property basis).

XXXXXXXXXX
2013-047446
K. Robinson

February 7, 2013

Dear XXXXXXXXXX:

Re: Farm Property

This is in response to your correspondence dated January 7, 2013 wherein you requested our views on the phrase "used principally" requirement in subsections 110.6(1.3), 73(3), and 70(9), of the Income Tax Act (the "Act") as it may apply in the following two hypothetical situations.

Situation 1

Assume that an individual owns a single parcel of land consisting of 100 acres ("Land A"). The individual carries on a farming business in Canada. However, only 40 acres are being used by the individual in the farming business because the remaining 60 acres are not arable and are not otherwise being used for any other purpose.

Situation 2

Same assumed facts as in situation 1 except that Land A is situated adjacent to a separate parcel of land also owned by the same individual and consisting of 100 acres ("Land B"). The entire 100 acres representing Land B is being used in the individual's farming business.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

The determination of whether a real property is being used principally by a taxpayer in carrying on a farming business in Canada for the purposes of subsections 110.6(1.3), 73(3), and 70(9), of the Act remains a question of fact. Further, such a determination must be made on a property by property basis. Real property, such as land, will generally be considered as meeting the "used principally" requirement if more than 50% of its actual use is in the business of farming carried on in Canada. Where in a particular year more than 50% of a particular property is being used for some purpose other than farming or is otherwise vacant, generally speaking, such "non-farming use" would result in the entire property not being considered as being used principally in the business of farming in Canada for that year.

Accordingly, in the two hypothetical situations described above, since only 40% of Land A is being used in the individual's farming business it is not possible to conclude that Land A is being used principally in a farming business carried on in Canada (i.e., Land B's use in a farming business has no impact or bearing on the determination of the use for Land A).

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch