Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] A. Does the farmland qualify as qualified farm property to the taxpayer?
B. Since an election under subsection 110.6(19) was made in respect of the farmland on February 22, 1994, can the property be considered to have been acquired the last time after 1987?
C. What would be the tax consequences if the taxpayer made a gift of the land to his sons during his lifetime or if the transfer was made on the death of the taxpayer?
Position: A. Question of fact. Some information is missing but possibly yes.
B. Yes, the property was last acquired after 1987.
C. See the discussion below.
Reasons: The Income Tax Act.
November 4,2011
XXXXXXXXXX Tax Services Office Headquarters
Business and Partnerships Division
Attention: XXXXXXXXXX
2011-041334
Property used in a farming business
This is a follow-up to your email that we received on July 6, 2011 regarding the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act ("the Act")
Specifically, you described a situation where a taxpayer acquired farmland in XXXXXXXXXX. From XXXXXXXXXX to XXXXXXXXXX, the taxpayer rented 50% of his land to an unrelated farm producer and 50% of his land to a corporation that operated a nursery there and whose shareholders were the taxpayer, his children and some of his brothers. You indicated that the income from the operation of the nursery was the taxpayer's principal source of income from XXXXXXXXXX to XXXXXXXXXX.
The corporation was dissolved in XXXXXXXXXX, and since that time, the taxpayer has been leasing all the farmland to a farm producer. In 1994, an election was made to declare a capital gain on the farmland.
Questions
A. Does the farmland qualify as qualified farm property to the taxpayer?
B. Since an election under subsection 110.6(19) was made in respect of the farmland on February 22, 1994, can the property be considered to have been last acquired after 1987?
C. What would be the tax consequence if the taxpayer made a gift of the land to his sons during his lifetime or if such transfer was made on his death?
A. Qualification of farmland as qualified farm property
A qualified farm property of an individual is a property owned at that time by the individual, the spouse or common-law partner of the individual or a partnership, an interest in which is an interest in a family farm partnership of the individual or the individual’s spouse or common-law partner.
The property must be real or immovable property that was used principally in the course of carrying on the business of farming in Canada by,
(a) the individual,
(b) if the individual is a personal trust, a beneficiary of the trust that is entitled to receive directly from the trust any income or capital of the trust,
(c) a spouse, common-law partner, child or parent of a person referred to in (a) or (b) above,
(d) a corporation, a share of the capital stock of which is a share of the capital stock of a family farm corporation of an individual referred to in any of (a) to (c) above, or
(e) a partnership, an interest in which is an interest in a family farm partnership of an individual referred to in any of (a) to (c) above.
In this case, we know that 50% of the farmland is used in the operation of a nursery. As noted in paragraph 8 of Interpretation Bulletin IT-433R, in certain factual circumstances it is considered that farming includes the operation of nurseries and greenhouses. The question of whether a nursery or greenhouse activity is a farming activity is a question of fact that can only be resolved after a thorough analysis of all the facts relating to the activity. Generally, we are of the view that the activities of a nursery can constitute farming if, in fact, it can be shown that those activities involve the cultivation and growth of plants, shrubs or trees and not just buying and selling those products. For the present purposes, we have assumed that the corporation carried on a farming business.
We note that the definition of "qualified farm property" provides that the real or immovable property must have been used principally in the course of carrying on the business of farming in Canada. That definition was changed in 2006 and the "term" principally was added to it. However, it appears that that addition was inadvertently made and that paragraph (a) of the definition of "qualified farm property" should be interpreted to ignore the word "principally".
In this case, the requirement that the property was used in the course of carrying on a farming business in Canada is therefore satisfied.
To the extent that the farmland was used as part of a farming business by a corporation, it must be determined whether the shares of that corporation operating the nursery are shares of the capital stock of a family farm corporation of one of the following persons:
- the individual,
- if the individual is a personal trust, a beneficiary of the trust that is entitled to receive directly from the trust any income or capital of the trust,
- a spouse, common-law partner, child or parent of one of the persons listed above.
Under the definition of "share of the capital stock of a family farm corporation", a share owned by an individual at a particular time is a share of the capital stock of a family farm corporation if the following conditions are met:
(a) throughout any 24-month period ending before that time, more than 50% 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 in which the individual, a beneficiary referred to in clause (C) or a spouse or common-law partner, child or parent of the individual or of a beneficiary referred to in clause (C) was actively engaged on a regular and continuous basis, by
(A) the corporation,
(B) the individual,
(C) where the individual is a personal trust, a beneficiary of the trust,
(D) a spouse, common-law partner, child or parent of the individual or of a beneficiary referred to in clause (C) […]
(ii) shares of the capital stock or indebtedness of one or more corporations all or substantially all of the fair market value of the property of which was attributable to property described in subparagraph (iv),
(iii) a partnership interest in or indebtedness of one or more partnerships all or substantially all of the fair market value of the property of which was attributable to properties described in subparagraph (iv), or
(iv) properties described in any of subparagraphs (i) to (iii), and
(b) at that time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property described in subparagraph (a)(iv).
In the absence of information in that regard, we are unable to comment on the requirement that, throughout the 24-month period ending before the time provided in the preamble of the definition of "share of the capital stock of a family farm corporation", more than 50% of the fair market value of the property owned by the corporation was attributable to property that was used in carrying on a farming business.
In addition, we note that under the terms of the above definition, it is necessary that the individual, a beneficiary (if the individual is a personal trust), or a spouse, common-law partner, child or parent of the individual or such beneficiary has been actively engaged on a regular and continuous basis in carrying on the farming business. As always, it is the facts of each case that make it possible to establish whether that requirement is satisfied. However, this requirement will be considered satisfied if the individual "is actively engaged" in the day-to-day administration or activities of the farming business. Normally, the person must devote sufficient time and attention to the corporation so that it can be determined that there has been a tangible contribution to the proper operation of the farming business. It must still be established whether, in fact, the person takes an active part in the business "on a regular and continuous basis", but any activity that is strictly occasional or conducted frequently but at irregular intervals cannot satisfy that requirement.
B. Effect of election under subsection 110.6(19)
For the purposes of the definition of "qualified farm property", subsection 110.6(1.3) specifies the circumstances in which a property will be considered to have been used in carrying on a farming business in Canada. In this case, since the election under subsection 110.6(19) was made in respect of farmland on February 22, 1994, we are of the view that paragraphs 110.6(1.3)(a) and (b) should be applied.
In this case, since the farmland has been owned by the taxpayer since XXXXXXXXXX, we are of the view that the requirement in paragraph 110.6(1)(a) is satisfied. In addition, since the requirements of subparagraph 110.6(1.3)(b)(ii) appear to be satisfied, we are of the view that the farmland was used in the course of carrying on a farming business, to the extent, of course, that the operation of the nursery constituted farming.
C. Tax implications of gifting the land to his sons during the taxpayer's lifetime or on his death
Transfer on death
Subsection 70(9) refers to the transfer of farm property (land in Canada and depreciable property of a prescribed class) to a child of a taxpayer on or after the death of the taxpayer. The application of subsection 70(9) is subject to the following conditions:
- the property must have been used principally in a farming business carried on in Canada in which the taxpayer, the spouse or common-law partner of the taxpayer or a child or a parent of the taxpayer was actively engaged on a regular and continuous basis
- the child of the taxpayer was resident in Canada immediately before the day on which the taxpayer died
- as a consequence of the death of the taxpayer, the property is transferred to and becomes vested indefeasibly in the child within the period ending 36 months after the death of the taxpayer or, if written application has been made to the Minister by the taxpayer’s legal representative within that period, within any longer period that the Minister considers reasonable in the circumstances.
For the purposes of subsections 70(9) and 70(9.01), the ordinary meaning of the term "child" is expanded to include the following:
(a) a child of the taxpayer, born of or out of wedlock;
(b) the spouse of a child;
(c) a child of the taxpayer's spouse (a step-son or step-daughter);
(d) an adopted child;
e) a grandchild;
f) a great-grandchild;
(g) a person adopted in fact.
For the purposes of (g) above, paragraph 252(1)(b) provides that a person who is not related to a taxpayer is deemed to be the child of that taxpayer if the person is wholly dependent on the taxpayer for support and a person of whom the taxpayer has, or immediately before the person attained the age of 19 years had, in law or in fact, the custody and control.
Subsection 70(9) provides for the transfer or distribution of property of the taxpayer's estate as a consequence of the death of the taxpayer to the children of the deceased taxpayer. It does not apply to the sale of property by the estate unless, pursuant to subsection 248(8), the transfer or distribution of property as a result of the sale is considered to be a transfer or distribution of property as a consequence of the taxpayer's death. In addition, subsection 70(9) only applies to property that is land in Canada and that is capital property, or depreciable property of a prescribed class located in Canada that was owned by the taxpayer immediately before the taxpayer’s death. It does not apply to property that belonged to a partnership or a corporation.
If subsection 70(9.01) applies and an election to have paragraph (b) of that subsection apply is not made, the taxpayer will be deemed to have disposed of the property immediately before the death. In the case of land, the taxpayer will be deemed to have disposed of the land for an amount equal to the adjusted cost base of the property to the taxpayer. The child will be deemed to have acquired the land at a cost equal to the deceased taxpayer’s proceeds of disposition. If paragraph (b) applies as a result of an election made by the taxpayer's legal representative, then the taxpayer will be deemed to have disposed of the land for an amount not greater than the greater of the FMV or the ACB and not less than the lesser of those two amounts. The child will be deemed to have acquired the property at a cost equal to the deceased taxpayer’s proceeds of disposition.
Transfer during lifetime
Subsection 73(3.1) applies where a taxpayer transfers to a child of the taxpayer during the taxpayer’s lifetime any property used in carrying on a farming business by the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children. The property may be land in Canada or depreciable property in Canada of a prescribed class or any eligible capital property in respect of a business carried on in Canada. The transfer can be effected as a gift or sale. Generally, in the case of property that is land, the proceeds of disposition for the taxpayer are deemed to be equal to an amount between its fair market value and its adjusted cost base.
Subsection 70(3) will apply if the following conditions are satisfied:
- the property was, immediately before the transfer, land in Canada or depreciable property in Canada of a prescribed class, of the taxpayer, or any eligible capital property in respect of a fishing or farming business carried on in Canada by the taxpayer;
- the child of the taxpayer was resident in Canada immediately before the transfer; and
- the property has been used principally in a fishing or farming business in which the taxpayer, the taxpayer’s spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer was actively engaged on a regular and continuous basis.
We note that subsection 73(3) was amended by the second Budget Implementation Bill, 2006, and that in that amendment the word "immediately" was added to paragraph 73(3)(a), making it more difficult for a taxpayer and their child to take advantage of those rules. We are prepared to read paragraph 73(3)(a) as if the word "immediately" was not there.
As in the case of a transfer made pursuant to subsection 70(9.01), the usual meaning of the term "child" is expanded to include the following:
(a) a child of the taxpayer, born of or out of wedlock;
(b) the spouse of a child;
(c) a child of the taxpayer's spouse (a step-son or step-daughter);
(d) an adopted child;
e) a grandchild;
f) a great-grandchild;
(g) a person adopted in fact.
We bring to your attention the fact that, pursuant to paragraph 73(3)(a), the property must include, among other things, land of a farming business that is carried on by the taxpayer. In this case, the taxpayer has never carried on a farming business himself. We therefore do not believe that he can avail himself of the rollover provided for in subsections 70(3) and 70(3.1).
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that our comments will be of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content