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 certain property purchased before 1987 is "qualified farm property" eligible for the enhanced capital gains exemption when it is sold.
Position: It depends on meeting one of the two farming-use tests in subsection 110.6(1.3) as proposed to be amended.
Reasons: It appears that ownership and gross revenue tests are met in the first farming-use test and it also appears that the ownership and second farming use test is also met.
XXXXXXXXXX
2011-039269
S. D'Angelo
(613)952-5803
February 2, 2011
Dear XXXXXXXXXX :
Re: Qualified Farm Property
This is in response to your correspondence of January 13, 2011 and further to our telephone conversation of January 25, 2011 (D'Angelo/XXXXXXXXXX ), concerning the availability of the capital gains exemption under section 110.6 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 your client purchased farm property (land) in Saskatchewan in 1963 and that he actively farmed it until 1977. You have also indicated that during all of that time his farming income exceeded his income from all other sources. Your client then moved his family to Alberta and rented the property to an arms-length party who actively farmed it. Your client also rented the farm to his son, once his son became an adult, intermittently for a period of approximately 8 years. The property has been rented to an arms-length party for the past ten years.
Your client is contemplating selling the property and you are enquiring whether the land will be considered "qualified farm property" ("QFP") eligible for the enhanced capital gains deduction under subsection 110.6(2) of the Act.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the internet at http://www.cra-arc.gc.ca. Notwithstanding the above, we are prepared to provide the following comments 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 QFP in that year provided certain conditions are satisfied.
A property of an individual must meet one of two general farming-use tests to be considered to be used in the course of carrying on the business of farming in Canada. The two farming-use tests are set out in subsection 110.6(1.3) of the Act, as proposed to be amended by draft legislation released to the public on November 5, 2010. They 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 in that it must have been owned by certain qualifying owners, which may include, inter alia, the individual, 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 of this farming-use test is that in at least 2 years during the mentioned ownership period, the gross revenue from the farming business that was carried on by the operator (being a person in the list of qualifying owners mentioned above) 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 the year. The second part of the test may also be satisfied (in the alternative) if throughout a period of at least 24 months during the ownership period mentioned above the property was used by a corporation, a share of the capital stock of which is a share of the capital stock of a family farm corporation, or by a partnership, an interest in 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 users referred to above.
Under the rules in subsection 110.6(1.3), as proposed to be amended by the November 5, 2010, draft legislation, a property last acquired before June 18, 1987, or after June 17, 1987, under an agreement in writing entered into before that date, will be considered to be used in the course of carrying on the business of farming in Canada if it meets either the first farming-use test or the second farming-use test described above, whereas all other properties must meet the first farming-use test.
It is a question of fact whether a particular farming operation constitutes a farming business at any particular time and some of the criteria which should be considered in making this determination are set out in the current version of Interpretation Bulletin IT-322, Farm Losses. Where reference is made to a property being used "principally" in the business of farming, the property will generally meet this particular requirement if more than 50% of the property's use is in the business of farming.
Whether or not your client's property is QFP is a question of fact. However based on the facts described it would appear that it meets both farming-use tests. Consequently, the property appears to qualify as QFP for purposes of the capital gains deduction under subsection 110.6(2) of the Act.
We trust our comments will be of assistance.
Yours truly
S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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