20 June 2011 External T.I. 2011-0403741E5 - Interpretations of Subsections 70(9.8) and 70(10)

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) Whether paragraph 70(9.8)(a) requires that all the issued shares of a corporation (Farmco) that uses an individual's property must be owned by the individual, the individual's spouse or common-law partner, a child of the individual or a parent of the individual? 2) Whether for the purposes of paragraph 70(9.8)(a), the individual can own Farmco both directly and also indirectly through a holding company in which the individual is the sole shareholder

Position: 1) No. 2) Yes.

Reasons: 1) There is no requirement in subsection 70(9.8) that all the issued shares of a corporation must be owned by the individual, the individual's spouse or common-law partner, a child of the individual or a parent of the individual. 2) Subsection 70(10) defines a "share of the capital stock of a family farm corporation" as including 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 paragraph (c).

XXXXXXXXXX
				2011-040374
				Charles Rafuse
				613-247-9237
June 20, 2011

Dear XXXXXXXXXX :

Re: Interpretations of Subsections 70(9.8) and 70(10)

This is in response to your email of April 19, 2011, concerning the interpretation of subsections 70(9.8) and 70(10) of the Income Tax Act (the "Act").

You have asked if paragraph 70(9.8)(a) requires that all the issued shares of a corporation must be owned by the individual, the individual's spouse or common-law partner, a child of the individual or a parent of the individual.

You have also asked if for the purposes of paragraph 70(9.8)(a), the individual can own the shares of the corporation referred to in the paragraph both directly and also indirectly through a holding company in which the individual is the sole shareholder as illustrated in the following hypothetical example.

1. Farmco is a taxable Canadian corporation and a Canadian-controlled private corporation.

2. The issued shares of Farmco consist of two classes of common shares owned as follows:

a. Mr. A: 1,000 voting common shares
b. Holdco: 100 non-voting common shares

3. Holdco is a corporation owned solely by Mr. A and Holdco's only property is the shares of Farmco.

4. Farmco leases farmland owned by Mr. A and uses the leased farmland principally in carrying on a farming business in Canada. Mr. A is actively engaged in Farmco's business on a regular and continuous basis.

5. Farmco's property consists of farm equipment, farm supplies and working capital that is essential to the farming business cycle requirements. All or substantially all (i.e. 90% or more) of Farmco's assets are used principally in the course of carrying on a farming business in Canada in which Mr. A is actively engaged on a regular and continuous basis.

In respect of the foregoing hypothetical example, you have asked:

1. Will Farmco be considered a "corporation, a share of the capital stock of which is ... a share of the capital stock of a family farm corporation ... of the individual" for purposes of paragraph 70(9.8)(a) ?

2. Will the farmland, owned by Mr. A and leased to Farmco, be deemed to be used by Mr. A in a farming business carried on in Canada pursuant to subsection 70(9.8) ?

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. 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.

For the purposes of subsections (9) and 14(1), paragraph 20(1)(b), subsection 73(3) and paragraph (d) of the definitions "qualified farm property" and "qualified fishing property" in subsection 110.6(1), subsection 70(9.8) deems that leased property is used in the business of farming or fishing in certain limited circumstances. In particular, a property of an individual is deemed by subsection 70(9.8) to be used by the individual in a farming or fishing business carried on in Canada where the property is used, principally in the course of carrying on a farming or fishing business in Canada, 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 share of the capital stock of a family fishing corporation", of the individual (taxpayer), the taxpayer's spouse or common-law partner, any of the taxpayer's children or a parent of the taxpayer.

Subsection 70(10) of the Act defines a "share of the capital stock of a family farm corporation" ("the subsection 70(10) definition") of a person at a particular time to mean a share of the capital stock of a corporation owned by the person at that time where, at that time, all or substantially all (90% or more) of the fair market value of the property owned by the corporation was attributable to, according to the statutory definition,

"(a) property that has been used by

(i) the corporation or any other corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation of the person or of a spouse, common-law partner, child or parent of the person,

(i.1) a corporation controlled by a corporation referred to in subparagraph (i),

principally in the course of carrying on a farming business in Canada in which the person or a spouse, common-law partner, child or parent of the person was actively engaged on a regular and continuous basis (or, in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect of that woodlot),

(b) 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 paragraph (c), or

(c) properties described in paragraph (a) or (b)."

Based on the above, it is our view that there is no requirement in subsection 70(9.8) that all the issued shares of a corporation (Farmco) must be owned by the individual, the individual's spouse or common-law partner, a child of the individual or a parent of the individual. Rather, the shares of a corporation held by an individual would be considered shares of the capital stock of a family farm corporation of the individual provided that above noted conditions have been met. Consequently, a separate analysis would be performed for each person owning shares of a corporation to determine if their shares would qualify as shares of the capital stock of a family farm corporation.

Regarding the hypothetical example, it is our view that the shares of Holdco held by Mr. A are shares of the capital stock of a family farm corporation as defined in subsection 70(10) of the Act, since all or substantially all of the fair market value of Holdco's property is attributable to property described in paragraphs (a) to (c) of the subsection 70(10) definition. In addition, shares of Farmco held by Mr. A are shares of the capital stock of a family farm corporation as defined in subsection 70(10) of the Act, since all or substantially all of the fair market value of Farmco's property is attributable to property described in paragraphs (a) of the subsection 70(10) definition. The farmland owned by Mr. A and leased to Farmco will be deemed to be used by Mr. A in a farming business carried on in Canada pursuant to subsection 70(9.8) as the shares of Farmco held by Mr. A are shares of the capital stock of a family farm corporation as defined in subsection 70(10) of the Act.

We trust that these comments will be of assistance.

Yours sincerely,

Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch