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 land purchased before 1987 is "qualified farm property" eligible for the enhanced capital gains exemption when it is sold by the son.
Position: It depends on meeting one of the two farming-use tests in subsection 110.6(1.3), as proposed to be amended.
Reasons: As regards the first farming-use test, it is likely that the ownership and gross-revenue tests are met. As regards the second farming-use test, in at least five years during which the land was owned by the father/grand-parent it was likely used principally by the father/grand-parent in carrying on the business of farming in Canada.
Kathryn McCarthy, CA
December 7, 2010
Dear XXXXXXXXXX :
Re: Qualified Farm Property
This is in response to your letter of September 14, 2010, concerning the above-noted subject.
You described a situation where XXXXXXXXXX acres of farmland has been in your family for several generations. Your great-grandfather owned the land, followed by your grandmother, then your father. In XXXXXXXXXX you purchased XXXXXXXXXX acres of the XXXXXXXXXX acres from your mother (who had inherited the land from your father) and in the same year you inherited the balance (or XXXXXXXXXX acres) of the XXXXXXXXXX acres from your father. Farming was the only source of income for the owners (including your grandparents and parents) of the farmland in the three generations preceding you.
You farmed the land from XXXXXXXXXX to XXXXXXXXXX and each year had a farming loss. During the period, you worked off the farm earning a salary in order to pay the farm expenses and the salary was your main source of income. You do not have a spouse or children and have lived in a trailer on the land for XXXXXXXXXX years.
You enquired whether the land will be considered "qualified farm property" ("QFP") eligible for the enhanced capital gains exemption of $750,000 under subsection 110.6(2) of the Income Tax Act ("the Act"), if it is sold.
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 advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following comments, which may be of assistance.
Generally, 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. In respect of an individual (other than a trust that is not a personal trust), the definition of QFP in subsection 110.6(1) of the Act includes "real or immovable property that was used in the course of carrying on the business of farming in Canada" by certain qualifying users including, inter alia, the individual, spouse, common-law partner, child, parent or grandparent of the individual (referred to hereafter as the "Persons Referred to Above").
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 current 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, any of the Persons Referred to Above, 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, which may include, inter alia, any of the Persons Referred to 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.
In our view, the operator meeting the gross-revenue requirement above need not be the individual who disposes of the property. For example, if, while the operator owned the property, the property was used by the operator principally in a farming business in which the operator was actively engaged on a regular and continuous basis and the operator has met the gross-revenue requirement mentioned above, the property will qualify as QFP in the hands of the operator and as well, in the hands of a child of the operator to whom the property is transferred by the operator.
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, which may include any of the Persons Referred to Above, 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 Persons 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.
Generally, a property is considered to be used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation. It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria to be considered in making this determination are set out in Interpretation Bulletin IT-322, Farm Losses, which is available at www.cra-arc.gc.ca/E/pub/tp/it322r/README.html. For more information, please see the T4003, Farming Income guide, at www.cra-arc.gc.ca/E/pub/tg/t4003/README.html.
Whether or not your land is QFP is a question of fact to be resolved generally through an audit. However based on the facts described, although your land is only required to meet either the first farming-use test or the second farming-use test described above, it would appear that it meets both of them. Consequently, the land appears to qualify as QFP in respect of which a capital gains exemption may be claimed subject to the limits in subsection 110.6(2) of the Act.
We trust the foregoing comments are of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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