14 December 2010 External T.I. 2010-0386401E5 - 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: Whether certain farmland disposed is Qualified Farm Property eligible for the enhanced capital gains deduction.

Position: Question of fact. Appears probable in this case.

Reasons: The law. Facts provided suggest the property was full time farmed by eligible owner.

XXXXXXXXXX
							2010-038640
							Charles Rafuse
							613-247-9237
December 14, 2010

Dear XXXXXXXXXX :

Re: Qualified farm Property

This is in response to your email of November 7, 2010, concerning the capital gains exemption under section 110.6 of the Income Tax Act (the "Act") in respect of qualified farm property (QFP).

You refer to a situation where individual A is married to individual B. You have indicated that the farm property (farmland) has been in A's family for 4 generations. A's father passed away after June 17, 1987 and his will stated that his wife could live on the farm as long as she lived but that A was to continue farming the property. After A's father's death, A farmed the property for 10 years and then, being unable to farm due to illness, rented the land to other farmers to use. A actively farmed the land for about 10 years with his father and then, after his father's death, by himself for another 10 years.

You asked whether the property is considered to be QFP that would be eligible for the $750,000 capital gains exemption in A's hands and whether it would qualify for the same exemption if the title of the property were jointly held by A and B. In addition, you have asked if the farm property would continue to qualify for the capital gains exemption in B's hands if B inherited the property upon A's death.

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 offer the following general comments, which may be of assistance.

Generally speaking, subsection 110.6(2) of the Act permits a capital gains exemption of up to $750,000 for an individual who is resident in Canada throughout the year and disposed of 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 an individual, the individual's spouse and the individual's parent.

Subsection 110.6(1.3) of the Act, which is proposed to be amended by draft legislation released to the public on November 5, 2010, 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 one of two farming-use tests is satisfied. One of the two farming-use tests is a special test that may be applicable only if the property was last acquired by an individual before June 18, 1987, (or after June 17, 1987, under an agreement in writing entered into before that date). This special test is not applicable in the situation you described because A's acquisition date of the land is after June 17, 1987.

Accordingly, in order to qualify as QFP, the farming-use test that would have to be met by the property in the situation you described is that set out in paragraph 110.6(1.3)(a) (as proposed to amended), which reads as follows:

"(a) the following apply in respect of the property or property for which the property was substituted (in this paragraph referred to as "the property"),

(i) the property was owned throughout the period of at least 24 months immediately preceding that time by one or more of

(A) the individual, or a spouse, common-law partner, child or parent of the individual,

(B) a partnership, an interest in which is an interest in a family farm partnership of the individual or of the individual's spouse or common-law partner,

(C) if the individual is a personal trust, the individual from whom the trust acquired the property or a spouse, common-law partner, child or parent of that individual, or

(D) a personal trust from which the individual or a child or parent of the individual acquired the property; and

(ii) either

(A) in at least two years while the property was owned by one or more persons referred to in subparagraph (i),

(I) the gross revenue of a person (in this subclause referred to as the "operator") referred to in subparagraph (i) from the farming business referred to in subclause (II) for the period during which the property was owned by a person described in subparagraph (i) exceeded the income of the operator from all other sources for that period, and

(II) the property was used principally in a farming business carried on in Canada in which an individual referred to in subparagraph (i), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis, or

(B) throughout a period of at least 24 months while the property was owned by one or more persons or partnerships referred to in subparagraph (i), the property was used by a corporation referred to in subparagraph (a)(iv) of the definition "qualified farm property" in subsection (1) or by a partnership referred to in subparagraph (a)(v) of that definition in a farming business in which an individual referred to in any of subparagraphs (a)(i) to (iii) of that definition was actively engaged on a regular and continuous basis;"

A's parents are also considered to be B's parents for the purposes of the definition of QFP.

In the particular situation you described, we cannot definitely determine whether the farming-use test set out above is met. This farming-use test is made up of two sub-tests that are described in subparagraphs (a)(i) and (ii) of subsection 110.6(1.3). It appears that the property would meet the ownership sub-test in subparagraph 110.6(1.3)(a)(i) in A's hands because the property was owned throughout the period of at least 24 months by qualifying owners, being A and A's parents and grandparents. This ownership sub-test would also be met if B inherited the property from A upon A's death since a spouse is also a qualifying owner.

The sub-test in subparagraph 110.6(1.3)(a)((ii) would also be met by the property in A's hands provided that A, his father or grandparent, had in at least two years while one of them owned the farm property, gross revenue from the farming business that exceeded the income from all other sources and provided that the property was used principally in the farming business in Canada in which one of them was actively engaged on a regular and continuous basis. If, based on the facts, the sub-test in subparagraph 110.6(1.3)(a)((ii) is met with respect to A, then it would also be considered satisfied with respect to A's spouse B, in a situation where A and B inherited the property from A's father.

If the sub-tests in subparagraphs 110.6(1.3)(a)(i) and (ii) are met, the farm property would be considered to be QFP in A's hands and as well in B's hands if B inherits the property upon A's death.

We trust that these comments will be of assistance.

Yours sincerely,

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