3 January 2012 External T.I. 2011-0423061E5 - Qualified Farm Property

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: 1) Does subsection 110.6(1.3) of the Act apply for the purpose of determining whether "shares of a particular corporation are "shares of the capital stock of a family farm corporation"? 2) Would arrangements such as a cash rental, crop share, custom work and a joint venture with a non-related farm corporation affect the individual's ability to claim the capital gains exemption and/or the individual's ability to transfer these shares to the individual's children on a tax deferred basis

Position: 1) No. 2) General comments provided.

Reasons: 1) If an individual's shares of a particular corporation are determined to be "shares of the capital stock of a family farm corporation" those shares would be "qualified farm property", as that term is defined in subsection 110.6(1) in their own right and there would be no need to refer to the additional requirements set out in subsection 110.6(1.3) of the Act in making such a determination. 2) IT-268R4, IT-349R3 and IT433R were indicated as addressing the questions.

XXXXXXXXXX
2011-042306
Charles Rafuse
613-247-9237

January 3, 2012

Dear XXXXXXXXXX :

Re: Qualified Farm Property

This is in response to your email of October 2, 2011, concerning the availability of the capital gains exemption under subsection 110.6(2) of the Income Tax Act (the "Act") in respect of a possible disposition of shares of a corporation that may be "qualified farm property" ("QFP") as that term is defined in subsection 110.6(1) of the Act.

In your email you indicated that an individual inherited certain farm land (the "Land") from the individual's grandparent as a consequence of the grandparent's death in 1971. The individual and the individual's grandparent used the Land in their farming business. In 1973, the individual transferred the Land to a corporation ("Farmco 1"). The shares of Farmco 1 were owned by the individual and the individual's spouse. You indicate that the Land was used by Farmco 1 in its farming business. In 2002, the Land was transferred by Farmco 1 to a new corporation ("Farmco 2") the shares of which are owned by the individual and the individual's spouse. You indicate that the Land is used by Farmco 2 in its farming business. You also indicate that the individual and/or the individual's spouse have been actively engaged in the farming business carried on by Farmco 1 and Farmco 2.

You have essentially asked if subsection 110.6(1.3) of the Act would apply to the acquisition of the Land by Farmco 2. You have also asked whether the individual's ability to claim the capital gains exemption and/or the individual's ability to transfer these shares to the individual's children on a tax deferred basis would be affected if Farmco 2 enters into a cash rental, crop share, custom work and a joint venture with a non-related farm corporation.

Our Comments

It appears that your particular fact situation involves a proposed disposition of shares of a corporation. Written confirmation of the tax consequences that apply to a particular proposed fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the CRA Web site at www.cra-arc.gc.ca. However, we are prepared to provide the following general comments, which may be of assistance.

A "share of the capital stock of a family farm corporation" is defined in subsection 110.6(1) of the Act. In order for a share to be considered a "share of the capital stock of a family farm corporation" of an individual at a particular time under that definition two main requirements must be met.

The first requirement is set out in paragraph 110.6(1)(a) of that definition which requires that throughout any 24-month period ending before the particular time more than 50% of the fair market value ("FMV") of the corporation's property must be attributable to property listed in subparagraphs (a)(i) to (iv). Generally speaking, such property includes:

• property (i.e., land) that was used principally in the business of farming in Canada in which the individual or certain family members (i.e., a spouse or common-law partner, child or parent of the individual) or a beneficiary of a personal trust was actively engaged on a regular and continuous basis;
• shares or debt of one or more corporations where all or substantially all or substantially all of the FMV of such property is attributable to property used in the business of farming in Canada;
• a partnership interest in or indebtedness of one or more partnerships where all or substantially all or substantially all of the FMV of such property is attributable to property used in the business of farming in Canada; or
• any combination of the above.

The second requirement set out in paragraph 110.6(1)(b) of that definition requires that at the particular time all or substantially all of the FMV of the corporation's property must be attributable to one or more of the properties described above.

Accordingly, if an individual's shares of a particular corporation are determined to be "shares of the capital stock of a family farm corporation" those shares would be QFP in their own right and there would be no need to refer to the additional requirements set out in subsection 110.6(1.3) of the Act in making such a determination.

In respect of your other questions, which appear to be somewhat of a tax planning nature, you could refer to the following Interpretation Bulletins: IT-268R4, Inter Vivos Transfer of Farm Property to Child; IT-349R3, Intergenerational Transfers - Farm Property; and IT-433R, Farming or Fishing - Use of Cash Method for some general comments and guidance on these matters. We would like to mention however, that for custom working arrangements paragraph 13 of IT-349R3 states that, "Even though a farm owner (individual) may engage the services of another person to undertake virtually all of the work associated with the farming activities (custom working), the farm property may still be considered to have been used by the owner in the business of farming for purposes of subsection 70(9) or 70(9.1) where that owner, to the extent that the circumstances of the particular farming operations allow, exercised general management and control of the overall farming operations."

With respect to a "crop share arrangement", paragraph 9 of IT-433R indicates that the crop share received by a landlord under such an arrangement is rental income and not income from farming and that a "sharecropping arrangement" in that context means an arrangement where a taxpayer or landlord receives from a tenant a share of a crop in lieu of rent.

We trust that these comments are of assistance.

Yours truly

Michael Cooke
Manager
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch