14 June 2010 External T.I. 2010-0363401E5 - 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: 1) Whether three farm properties owned by a taxpayer would be eligible for the capital gains exemption in respect of qualified farm property. 2) Whether income under "sharecropping arrangement" received by a farmer from a tenant in lieu of rent is considered to be rental income or farming income.

Position: General comments

Reasons: See response

XXXXXXXXXX
						2010-036340
						Charles Rafuse
						613-247-9237
June 14, 2010

Dear XXXXXXXXXX :

Re: Qualified Farm Property

This is in response to your email of April 7, 2010 and our April 22, 2010, telephone conversation (XXXXXXXXXX /Rafuse), concerning the capital gains exemption under section 110.6 of the Income Tax Act (the "Act") in respect of three parcels of land (farm properties) owned by an individual (Mr. X).

As we understand the situation, Mr. X acquired property A in XXXXXXXXXX , property B in XXXXXXXXXX and property C in XXXXXXXXXX . Property A was farmed by Mr. X for approximately XXXXXXXXXX years and then rented out to arm's length parties on a cash basis until his death in XXXXXXXXXX . Property B was farmed by Mr. X from XXXXXXXXXX to XXXXXXXXXX and then rented on a crop share arrangement to an arm's length tenant farmer from XXXXXXXXXX to XXXXXXXXXX . Property C was never farmed by Mr. X but was rented to an arm's length tenant farmer who paid Mr. X a crop share.

During our telephone conversation, you advised that you inherited one of Mr. X's properties and that the other two properties were inherited by Mr. X's children. You also indicated that the trustee of Mr. X's estate has filed the final income tax return of Mr. X, which has resulted in a substantial tax liability being outstanding, and that issues have arisen between you and the estate which involve the payment of the tax liability and whether the capital gains from the deemed disposition of the properties on Mr. X's death are eligible for the capital gains exemption.

You have asked whether the three properties would meet the definition of "qualified farm property" (QFP) in subsection 110.6(1) of the Act. You have also asked if the rent received and cash value of the crop shares received from tenant farmers should have been be reported by Mr. X as farm income or rental income.

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"). Since the matter of your inquiry involves completed transactions, your inquiry should be directed to the local TSO for resolution. We would also like to mention that the confidentiality provisions of section 241 of the Act prevent the CRA from disclosing taxpayer information of a taxpayer without written authorization. We are, however, prepared to offer the following general comments concerning the requirements to be met for a property to be considered QFP

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 the ownership test in paragraph (a) and one of the farming-use tests in paragraph (b) or (c) thereof are met. The ownership test requires that a property be owned throughout the period of at least 24 months prior to the disposition by eligible owners, which may include the individual, the individual's spouse and the individual's parent. Which farming-use test is applicable depends on when the taxpayer last acquired the property.

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), the farming-use test in paragraph 110.6(1.3)(c) will be met if, according to the statutory wording,

"(i) in the year the property was disposed of by the individual, the property was used principally in the course of carrying on the business of farming in Canada by

(A) the individual, or a spouse, common-law partner, child or parent of the individual,
(B) a beneficiary referred to in subparagraph (a)(ii) in the definition "qualified farm property" in subsection (1) or a spouse, common-law partner, child or parent of that beneficiary,
(C) a corporation referred to in subparagraph (a)(iv) in the definition "qualified farm property" in subsection (1),
(D) a partnership referred to in subparagraph (a)(v) in the definition "qualified farm property" in subsection (1), or
(E) a personal trust from which the individual acquired the property, or

(ii) in at least five years during which the property was owned by a person described in clauses (A) to (E), the property was used principally in the course of carrying on the business of farming in Canada by

(A) the individual, or a spouse, common-law partner, child or parent of the individual,
(B) a beneficiary referred to in subparagraph (a)(ii) in the definition "qualified farm property" in subsection (1) or a spouse, common-law partner, child or parent of that beneficiary,
(C) a corporation referred to in subparagraph (a)(iv) in the definition "qualified farm property" in subsection (1),
(D) a partnership referred to in subparagraph (a)(v) in the definition "qualified farm property" in subsection (1), or
(E) a personal trust from which the individual acquired the property."

If paragraph 110.6(1.3)(c) does not apply the farming-use test in paragraph 110.6(1.3)(b) 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" Under subparagraph (a)(vii) of the definition, the property must have been used by, among others, the individual, a spouse or 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 it was owned by any such person, or

(ii) throughout a period of at least 24 months while the property was owned by one or more persons or partnerships referred to in paragraph (a), 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;"

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 also a question of fact whether a particular farming operation constitutes a farming business at any particular time. 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.

It is generally our view, as indicated in paragraph 9 of Interpretation Bulletin IT-433R, Farming or Fishing - Use of Cash Method, that the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming where the "sharecropping arrangement" is an arrangement under which a taxpayer or landlord receives from a tenant a share of crop in lieu of rent.

IT-433R also explains that there may be other types of sharecropping arrangements, such as where the sharecropper is actually an employee of the taxpayer and receives a share of the crop as remuneration for services rendered, and that under these other types of arrangements the landlord could be in the business of farming depending upon the facts of a specific case.

The 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