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: Requirements for a taxpayer's farmland to be considered as QFP.
Position: To meet the definition of QFP, the property must meet the ownership test and the farming-use test in subsection 110.6(1.3).
Reasons: Wording of the Act
XXXXXXXXXX
2011-039639
S. Kim
(905) 721-5199
July 7, 2011
Dear Sir:
Re: Qualified Farm Property
This is in response to your email of February 17, 2011, concerning the capital gains deduction under section 110.6 of the Income Tax Act (the "Act") in respect of qualified farm property ("QFP").
As we understand it, you have the following situation:
1) A taxpayer purchased 2 quarters of farmland in 1964 and used the land to start his farming business.
2) The taxpayer expanded his farm by purchasing an additional one quarter of farmland from a sibling in 1969 to be used in his farming business.
3) Sometime in 1971, the taxpayer decided to cease his farming business and the farmland was rented out until 2011, when the farmland was eventually sold.
4) During the period from 1964 until the taxpayer started renting the farmland in 1971, the taxpayer actively carried on the business of farming and during this period farming income was his only source of income.
Your question is whether the farmland is considered to be QFP that is be eligible for the capital gains deduction in the taxpayer's hands.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, subject to exceptions indicated in the Circular. Where the particular transactions are completed (as is the case in your situation), the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
Subsection 110.6(2) of the Act permits a capital gains deduction of up to $375,000 for an individual (taxpayer), other than a trust, who was resident in Canada throughout the year and disposed of a QFP in the year. The definition of QFP in subsection 110.6(1) of the Act provides, inter alia, that QFP includes "real or immovable property that was used principally in the course of carrying on the business of farming in Canada" by certain qualifying users, which may include the taxpayer, his or her spouse or common-law-partner, children or parents (referred to hereafter as the "Persons Referred to Above").
A property of an individual must meet one of two general farming-use tests to be considered to be used in the course of carrying on the business of farming in Canada. The two farming-use tests are set out in current subsection 110.6(1.3) of the Act, as proposed to be amended by draft legislation released to the public on November 5, 2010. They are described in general terms below.
The first farming-use test is made up of two parts. The first part is that the property of an individual must satisfy an ownership period in that it must have been owned by certain qualifying owners, which may include, inter alia, any of the Persons Referred to Above, throughout a period of at least 24 months immediately preceding the disposition. The second part of this farming-use test is that in at least 2 years during the mentioned ownership period, the gross revenue from the farming business that was carried on by the operator (being a person in the list of qualifying owners, which may include, inter alia, any of the Persons Referred to Above) in which the property was principally used, and in which a person in the list of qualifying owners was actively engaged on a regular and continuous basis, must have exceeded the operator's income from all other sources for the year. The second part of the test may also be satisfied (in the alternative) if throughout a period of at least 24 months during the ownership period mentioned above the property was used by a corporation (a share of the capital stock of which is a share of the capital stock of a family farm corporation) or a partnership (an interest in which is an interest in a family farm partnership) in a farming business in which a person in the list of qualifying owners was actively engaged on a regular and continuous basis.
In our view, the operator meeting the gross-revenue requirement above need not be the individual who disposes of the property. For example, if, while the operator owned the property, the property was used by the operator principally in a farming business in which the operator was actively engaged on a regular and continuous basis and the operator has met the gross-revenue requirement mentioned above, the property will qualify as QFP in the hands of the operator and as well, in the hands of a child of the operator to whom the property is transferred by the operator.
The second farming-use test is a special test that applies only to a property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date). Generally, this second farming-use test is satisfied if the property was used by certain qualifying users, which may include any of the Persons Referred to Above, principally in carrying on the business of farming in Canada, either in the year the property is disposed of or in at least five years during which the property was owned by certain qualifying owners, which may include any of the Persons Referred to Above.
Under the rules in subsection 110.6(1.3), as proposed to be amended by the November 5, 2010, draft legislation, a property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date) will be considered to be used in the course of carrying on the business of farming in Canada if it meets either the first farming-use test or the second farming-use test described above, whereas all other properties must meet the first farming-use test.
Generally, a property is considered to be used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation. It is a question of fact, generally to be resolved by audit, whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria to be considered in making this determination are set out in Interpretation Bulletin IT-322, Farm Losses, which is available at www.cra-arc.gc.ca/E/pub/tp/it322r/README.html. For more information, please refer to the T4003, Farming Income guide, at www.cra-arc.gc.ca/E/pub/tg/t4003/README.html.
We trust that these comments will be of assistance.
Yours sincerely,
S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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