2 November 2010 External T.I. 2010-0383601E5 - Inter vivos transfer of farm land

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: Can farm land that is owned or held in a partnership be transferred to a child under subsection 73(3) of the Act?

Position: No. However, referred to rules in subsection 73(4) and subsection 69(11).

Reasons: The law.

XXXXXXXXXX
								2010-038360
								Michael Cooke, C.A.
November 2, 2010

Dear XXXXXXXXXX :

Re: Inter Vivos Transfer of Land used in a Farming Business to a Child

We are writing in reply to your facsimile dated October 6, 2010, wherein you request our comments on the income tax implication under the Income Tax Act (the "Act") pertaining to a proposed inter vivos transfer of land used in active farming business under the elective rules in subsection 73(3) of the Act.

Briefly, we understand your parents carry on a farming business through a partnership. You indicate that your father wants to transfer a particular parcel of land, which is currently being used in that farming business, to you. However, while the deed to the particular parcel of land is registered in your father's name you are concerned that the transfer might not qualify for the elective rules under section 73(3) of the Act if the land is considered to be owned by the partnership. Specifically, you refer to the comments in paragraph 6 of Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child which states in part: "... subsection 73(3) applies only to property owned by the parent immediately before the transfer to a child and thus is not applicable to property owned at that time by a partnership or corporation."

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"). A list of TSOs is available on the "Contact Us" page of the CRA website. Notwithstanding the forgoing, we are prepared to provide the following comments.

Whether a particular activity is operated as a partnership or a joint venture and whether ownership of property is as a joint tenancy or tenancy in common involve mixed questions of law and fact. Interpretation Bulletin IT-90, What is a Partnership?, provides a general discussion on when a partnership is considered to exist. While the Act does not define a partnership (nor does it otherwise deem a partnership to be a person within the meaning of the Act), it does outline the income tax consequences that occur where a partnership exists. However, the determination of these issues would require a consideration of all the relevant facts and circumstances including the conduct and intentions of the particular parties involved and the terms of any agreement (whether written or oral) that might have been entered into by such persons.

If a partnership does exist, the rules in section 96 of the Act provide that income and losses from each source (including taxable capital gains and taxable capital losses from the disposition of partnership property) be computed at the partnership level as if the partnership is a separate person. Each member of a partnership, in turn, must report and pay tax on its proportionate share of such income or losses, including the partnership's taxable capital gains and taxable capital losses from the disposition of any partnership property.

There are also other rules in the Act that deal with transfers of property to or from a partnership and/or the use of partnership property by a partnership. For example, the definition of "interest in a family farm partnership" in subsection 70(10) of the Act, specifically refers to the use of "property of the partnership" for the purposes of determining whether an individual will be able to transfer such an interest to the individual's child under the elective rules in subsection 73(4) of the Act. These rules apply notwithstanding the fact that under the common law the partners of a partnership, and not the partnership itself, are considered to be the owners of the partnership property.

While based on the facts provided we are unable to definitively conclude who is considered to be the owner of the land in your particular situation, we would mention that the fact that the deed to the land is registered in your father's name would not, in and of itself, mean that the land is not otherwise considered to be property owned or held by the partnership for the purposes of the Act. However, while a question of fact, if your parents have been consistently reporting the income or loss from their farming activities on the basis that the farming business is carried on in a partnership, then the presumption (rebuttable by appropriate evidence) would be that any land used by that partnership would be partnership property for the purposes of the Act, especially if deductions for capital cost allowance on any buildings that may be situated on such land and or other deductions related to the ownership of the land (e.g., property taxes) have been made in computing the net income or loss of the partnership.

Accordingly, if the particular parcel of land to be transferred is property of the partnership we would agree that such land cannot be transferred to you under subsection 73(3) of the Act. However, you might want to consider the transfer rules in subsections 73(4) and (4.1) of the Act. Essentially, these rules are similar to the elective rules in subsection 73(3) and 73(3.1) of the Act, except that they apply, inter alia, to an inter vivos transfer of an "interest in a family farm partnership" owned by a parent to a child who was resident in Canada immediately before the transfer. As noted above, the definition of "interest in a family farm partnership" is described in subsection 70(10) of the Act. Since these elective rules are also discussed in IT-268R4, you may wish to refer to that publication for our general views. We would mention that where a child acquires a particular property from a parent on a tax deferred basis (i.e., "rollover") using the elective rules in section 73(3) or section 73(4) of the Act, the provisions of subsection 69(11) of the Act may apply deny the benefit of the rollover.

Subsection 69(11) of the Act may apply where, as part of a series of transactions or events, a taxpayer disposes of property to a recipient for proceeds of disposition that are less than the fair market value of that property (rollover) and the recipient subsequently disposes of that property (or substituted property), or makes arrangements for the disposition of that property, within 3 years from the date of the disposition of the property by the taxpayer. However, subsection 69(11) of the Act would only apply where it also can reasonably be considered that one of the main purposes of the series of transactions or events is to obtain the benefit of, inter alia, any deduction in computing taxable income (e.g., such as a deduction under subsection 110.6(2) of the Act in respect of a "qualified farm property") available to the recipient in respect of the subsequent disposition of that property, provided that the recipient is not an "affiliated person" in respect of 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 persons. It is a question of fact as to whether any particular real property is "qualified farm property" when it is sold. For more information, please see Chapter 6 of the current guide T4003, Farming Income.

Given all the complexities concerning the potential tax implications in your particular situation, you may wish to seek independent professional tax advice.

We trust that these comments will be of assistance.

Yours truly,

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