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 a taxpayer is eligible to claim a capital gains deduction for qualified farm property.
Reasons: The farmland would not meet the first farming-use test as the taxpayer did not have at least 2 years during the ownership period where gross revenue from the farming business exceeded income from all other sources for the year. In addition, the second farming-use test would not be met as the property was acquired after 1987.
May 24, 2011
Dear XXXXXXXXXX :
Re: Disposition of Farm Property
This is in response to your email of March 31, 2011 and our telephone conversation (Parnanzone/XXXXXXXXXX ), concerning the availability of the capital gains exemption under subsection 110.6(2) of the Income Tax Act (the "Act") in respect of the disposition of land that was used in a farming business.
You have indicated that you purchased farmland in 1997 and immediately started raising sheep. As your flock was small the raising of sheep was not your main source of income but you are active in the daily care of the flock. This was confirmed by your son, XXXXXXXXXX , who indicated that your gross revenue from farming has always been less than your income from other sources. In 2010, you sold approximately one acre of the farmland to XXXXXXXXXX .
You want to know whether you can claim a capital gains deduction under the deposition of the one acre of farmland you sold in 2010.
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to make the general comments set out below, which may be of assistance.
Generally speaking, subsection 110.6(2) of the Act permits an individual (other than a trust) who is resident in Canada throughout the taxation year to claim a capital gains exemption of up to $750,000 where that individual has disposed of property that is "qualified farm property" ("QFP") as that term is defined in subsection 110.6(1) of the Act. QFP includes, inter alia, property that is real or immovable property that was used by certain qualifying owners in a farming business in Canada. To be a QFP, the property must also meet one of two general farming-use tests set out in subsection 110.6(1.3) of the Act. The two tests (based on the proposed amendment to subsection 110.6(1.3) of the Act as contained in the draft legislation released to the public on November 5, 2010) 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 test in that it must have been owned by one or more qualifying owners, which may include, inter alia, the individual, or a spouse, common-law partner, child or parent of the individual, throughout a period of at least 24 months immediately preceding the disposition. The second part is that in at least 2 years during the period the property was owned by one or more qualifying owners, the gross revenue of a person (referred to as the "operator" and being a person described in the list of qualifying owners mentioned above) from the farming business carried on in Canada 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 that period. The second part of this test may also be satisfied (in the alternative) if throughout a period of at least 24 months during the time the property was owned by one or more qualifying owners mentioned above the property was used by a corporation referred to in subparagraph (a)(iv) of the definition "qualified farm property" (i.e., a share of the capital stock of a corporation which is a "share of the capital stock of a family farm corporation"), or by a partnership referred to in subparagraph (a)(v) of the definition "qualified farm property" (i.e., an interest in a partnership 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.
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, including, inter alia, the individual, spouse, common-law partner, child or parent of the individual, 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 qualifying owners mentioned above.
Whether or not property is QFP is a question of fact. However, based on our understanding of the facts, the parcel of land you sold in 2010 would not meet the first farming-use test if you did not, in at least 2 years during period in which you owned the land have gross revenue from that farming business that exceeded your income from all other sources for the period. In addition, such land would not meet the second farming-use test as the property was acquired by you after 1987. Consequently, in such circumstances the land you sold in 2010 would not appear to qualify as QFP such that no capital gains exemption could be claimed.
We trust that these comments will be of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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