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 farm property that was purchased by the taxpayer and his spouse from a mother and was farmed by the father would be eligible for the capital gains exemption in respect of qualified farm property. 2. Whether adding the taxpayer's mother and two minor children to the property's legal title would result in the splitting of any capital gain from the sale of the property amongst five people.
Position: 1) Maybe 2) No.
Reasons: 1) The ownership test in s. 110.6 would be met by the taxpayer (ownership passed from the father to the mother and then to the taxpayer) and the farming use test would also be met if the taxpayer's father in at least two years while he owned the farm property had gross revenue from the farming business that exceeded his income from all other sources. 2) The "used principally" test in s. 73(3)(c) is not met to permit a rollover to a child under s.73(3.1); if a rollover were possible, s. 69(11) may apply to deny the benefits of the rollover. The transfer to the mother would occur at fair market value.
2009-034485
XXXXXXXXXX Charles Rafuse
613-247-9237
February 18, 2010
Dear XXXXXXXXXX :
Re: Qualified Farm Property
This is in response to your letter of August 25, 2009 and our telephone conversation (Rafuse/XXXXXXXXXX ), concerning the capital gains exemption under section 110.6 of the Income Tax Act (the "Act") in respect of farm property you and your spouse own.
You have indicated that the farm property was acquired by you and your spouse in 2007 from your mother who had received the property when your father passed away in XXXXXXXXXX . Prior to that, your father had worked the farm with your uncle and had also worked off the farm full-time in the city nearby. A great uncle had originally acquired the farm property around XXXXXXXXXX and your father acquired the farm property when he immigrated to Canada in XXXXXXXXXX . He had worked the farm property with your uncle from that time and it is thought that prior to 1970 there were years during which your father had been a full-time farmer.
As you are considering selling the property you have asked if the property would be eligible for the capital gains exemption in respect of qualified farm property ("QFP"). You have also asked whether adding your mother and your two minor children to the legal title of the farm property would result in the splitting of any capital gain from the sale amongst five people instead of just between you and your wife.
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. 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 deduction of up to $750,000 for an individual who is resident in Canada throughout the year and disposed of QFP in the year. Real property will meet the definition of QFP in subsection 110.6(1) if certain conditions are satisfied.
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) 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 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.
Since you acquired the property after June 17, 1987, the conditions of paragraphs 110.6(1.3)(a) and (b) must be met.
In the case described, the ownership test in paragraph 110.6(1.3)(a) is met because eligible owners, who may include the individual, or a spouse, child or parent of the individual, owned the property throughout a period exceeding 24 months; however, since the property was acquired by agreement entered into after June 17, 1987, the farming-use test referred to in paragraph 110.6(1.3)(b)(i) must also be satisfied.
The farming-use test in subparagraph 110.6(1.3)(b)(i) will be met if, according to the statutory wording,
"(i) in at least two years while the property was owned by one or more persons referred to in paragraph (a),
(A) the gross revenue of a person (in this clause referred to as the "operator") referred to in paragraph (a) from the farming business referred to in clause (B) for the period during which the property was owned by a person described in paragraph (a) exceeded the income of the operator from all other sources for that period, and
(B) the property was used principally in a farming business carried on in Canada in which an individual referred to in paragraph (a), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis"
Based on the wording used in clauses 110.6(1.3)(b)(i)(A) and (B), we are of the view that the person meeting the gross revenue test need not be the same individual who meets the ownership test. Accordingly, provided that your father had, in at least two years while he owned the farm property, gross revenue from the farming business that exceeded his income from all other sources and provided that the property was used principally in the farming business in Canada in which your father was actively engaged on a regular and continuous basis, the farm property would be considered to be QFP. Whether or not the property was in fact used in the business of farming is a question of fact.
When a taxpayer adds another's person's name to the title of property owned by the taxpayer, the issue arises as to whether there is a disposition of property for tax purposes that would give rise to tax consequences such as capital gains or losses. In the common law provinces, two forms of property ownership are recognized - legal and beneficial. These concepts are discussed in Interpretation Bulletin IT-437R, Ownership of Property (Principal Residence), and particularly in paragraphs 2, 3 and 4. Generally a taxpayer has a disposition for tax purposes if the taxpayer transfers beneficial ownership; i.e., it is not sufficient to add a person's name to the title but there must also be a transfer of beneficial ownership.
Generally, when a taxpayer transfers ownership (including beneficial ownership) of property to another individual, such as the mother and children, the taxpayer is considered to have a disposition and to have received proceeds equal to the fair market value of the property, which could result in a taxable capital gain. However, there are special tax rules (subsections 73(3) and (3.1) of the Act) that essentially provide for the deferral of the tax consequences (rollover) on the transfer of certain properties, including land, used in fishing or farming from a parent to a child during the parent's lifetime. If the conditions for the application of these special tax rules are satisfied, generally the parent is able to transfer such properties at an amount between the cost and the fair market value (depending of the amount paid). These special tax rules are discussed in Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child. This bulletin also discusses situations where the property is transferred to a trust for the benefit of minor children.
In general terms, in order for land to be eligible for the rollover, the following conditions, among others, must be met:
- the land must be in Canada;
- the land must be transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer; and
- the land has been used principally in the business of farming or fishing in which the taxpayer, the taxpayer's spouse (or common-law partner), any of the taxpayer's children or a parent of the taxpayer, was actively engaged on a regular and continuous basis.
The phrase "used principally" above generally refers to the period of time of eligible use (i.e., farming or fishing) being greater than the period of time of ineligible use of the land during the entire period of ownership by the transferor-taxpayer.
Based on the information you provided, the above conditions for the rollover do not appear to be met because the "used principally" test is not satisfied.
We would mention that in a situation where the special tax rules for the rollover to a child have been met, the provisions of subsection 69(11) of the Act may deny the benefit of the rollover (i.e., the disposition by the parent is deemed to occur at fair market value). Generally, subsection 69(11) could apply where the taxpayer, at any particular time as part of a series of transactions or events, disposes of property to a recipient for proceeds of disposition that are less than its fair market value and the recipient subsequently disposes of the property (or substituted property), or arrangements for the disposition are made, within 3 years from the date of the first disposition. However, subsection 69(11) would only apply if it also can reasonably be considered that one of the main purposes of the series is to obtain the benefit of, inter alia, any deduction in computing taxable income (e.g., a deduction under subsection 110.6(2) in respect of QFP) available to the recipient in respect of the subsequent disposition, provided that the recipient is not affiliated with the taxpayer immediately before the series commenced.
As a result of the definition of "affiliated persons" in section 251.1 of the Act, children and their parents are not affiliated while spouses are.
We would also like to draw you attention to the attribution rules which are discussed in paragraphs 29 and 30 of IT-268R4. We would note that where certain properties such as farm land is transferred to a child who is a minor (transferee) on a rollover basis at less that fair market value and in a taxation year (before the end of which the transferee has not attained the age of 18 years) the transferee disposed of the transferred property, the excess of the transferee's taxable capital gains over the allowable capital losses from the disposition of transferred property is deemed to be a taxable capital gain of the transferor. Analogous treatment is accorded to the excess of allowable capital losses over taxable capital gains from transferred property.
The CRA publications mentioned above are available on the internet on the CRA website at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Yours sincerely,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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