2 September 2010 External T.I. 2010-0367961E5 - Beneficial Ownership - Farm

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: Is there a change in beneficial ownership when a taxpayer transfers legal title to a property to her friend in order to avoid creditors?

Position: General answer.

Reasons: Question of fact. The transaction is already completed.

XXXXXXXXXX
									2010-036796
									Sam Kim
									(613) 952-1506
September 2, 2010

Dear Madam:

Re: Beneficial Ownership - Farm Property

We are replying to your correspondence of May 10, 2010, concerning the determination of beneficial ownership of property under the Income Tax Act (the "Act").

As we understand it, you have the following situation:

1. Sometime prior to XXXXXXXXXX , a taxpayer acquired farm land, on which her residence was situated, from the taxpayer's parents. The parents had acquired the property in the XXXXXXXXXX 's and used the land for more than 5 years principally in the course of carrying on a farming business in Canada.

2. In XXXXXXXXXX , the taxpayer, in order to protect the property from creditors, transferred the legal title to the property for nominal consideration to a friend with the agreement that the legal title would be reacquired at a later time. The property remained as the taxpayer's residence.

3. In XXXXXXXXXX , the taxpayer reacquired the legal title to the property from her friend, also for nominal consideration, in accordance with the agreement.

4. Recently, the taxpayer has been experiencing financial difficulties and would like to sell a portion of the property to a family-owned corporation (the "Proposed Sale").

5. The taxpayer has never actively farmed the property and the property has not been actively farmed by anyone since it was acquired by the taxpayer in XXXXXXXXXX .

Your question is whether or not the transfer of legal title to the property in XXXXXXXXXX and XXXXXXXXXX , involved a disposition for tax purposes. You are of the opinion that the taxpayer's transfer of the legal title to the property to the taxpayer's friend in XXXXXXXXXX , and the friend's transfer of the property back to the taxpayer in XXXXXXXXXX do not involve a disposition for tax purposes because the beneficial ownership always remained with the taxpayer.

You have concluded that the property would meet the definition of a qualified farm property ("QFP")" as defined in subsection 110.6(1) of the Act only if the farming-use test of paragraph 110.6(1.3)(c) is applicable. In your view, this farming-use test would be applicable only if there is no disposition of property for tax purposes in XXXXXXXXXX . In your view, if a disposition by the taxpayer is considered to have taken place in XXXXXXXXXX , then the property would not be considered to be a QFP as it would not meet the farming-use test in paragraph 110.6(1.3)(b).

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 (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) resident in Canada throughout the year who 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, who may include the taxpayer's parents. Subsection 110.6(1.3) provides that a property will not be considered to have been used in the course of carrying on the business of farming in Canada unless the ownership test in paragraph (a) thereof is satisfied and, in addition, one of the farming-use tests in paragraph (b) or (c) thereof is met. Which farming-use test is applicable depends on when the taxpayer last acquired the property. If the property was last acquired before June 18, 1987 or after June 17, 1987 under an agreement in writing entered into before that date, the farming-use test in paragraph 110.6(1.3)(c) must be met. However if the property was last acquired after June 17, 1987, the farming-use test in paragraph 110.6(1.3)(b) must be met.

You have suggested that the farming-use test in paragraph 110.6(1.3)(c) would apply to the taxpayer's property, and the property would meet the definition of a QPF, only if it is determined that the transfers of legal title to the farm land in XXXXXXXXXX and XXXXXXXXXX were not a disposition of the property for tax purposes. In such a case, if there was no disposition for tax purposes, then paragraph 110.6(1.3)(c) would be applicable because the property was acquired by the taxpayer before June 18, 1987, and accordingly, the farming-use of the taxpayer's parents can be taken into account.

By virtue of paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act, a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property. It is always a question of fact whether there has been a change in the beneficial ownership. In this regard, reference may be made to paragraphs 2 to 5 of the Interpretation Bulletin IT-437R - Ownership of Property (Principal Residence), which generally discusses beneficial ownership.

In the taxpayer's situation, you state that the purpose of the transfer of legal title in XXXXXXXXXX was solely for "creditor protection". In other words, the property was transferred to the taxpayer's friend in order to put it beyond the reach of creditors. We would mention that in Rose v. The Queen (2009 D.T.C. 5076), the Federal Court of Appeals commented that beneficial interest (i.e., beneficial ownership) would need to be divested by a transferor in order to defeat a creditor's claim on a property. The court stated as follows:

"A determination of whether Mr. Rose transferred the entirety of his interest to Ms. Rose must start with his reason for making the transfer. On this, the evidence is unequivocal: Mr. Rose thought that Mr. Holyoak (the creditor) might succeed in his claim against him, and wanted to prevent him from placing a lien on the family home. He had taken his name off the title of his daughter's house for a similar reason.

Mr. Rose's reason for the transfer is almost conclusive evidence of an intention to transfer his beneficial interest to his wife. Only by divesting himself entirely of his interest in the property could Mr. Rose put it beyond the reach of Mr. Holyoak, subject to the right of the latter, if a defeated, hindered or delayed creditor, to seek to have the transfer set aside as a fraudulent conveyance. It is also clear from the evidence that Ms. Rose understood the reason for the transfer of title to her."

Whether or not the taxpayer in your situation divested herself of her beneficial interest in the property in XXXXXXXXXX so as to defeat her creditors' claim as commented in the Rose case is a question of fact. If the taxpayer was successful in defeating the creditors' claim in the property in question then there was a disposition for tax purposes in XXXXXXXXXX because she would have divested herself of her beneficial interest in the property. Accordingly, paragraph 110.6(1.3)(c) would not be applicable and the farming-use by the parents cannot be taken into account as the property would be last acquired by the taxpayer in XXXXXXXXXX , which is after the cut-off date of June 17, 1987. As discussed above, the determination of whether there was a disposition for tax purposes when the taxpayer transferred the legal title in XXXXXXXXXX (in order to determine whether or not the property meets the definition of a QFP) is a question of fact that can only be determined after a review of all the documents and the circumstances applicable to a particular situation. Because the subject matter of your inquiry involves a question of facts and a completed transaction, you may wish to contact the local TSO for an opinion.

We trust that these comments will be of assistance.

Yours truly,

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