10 December 1996 External T.I. 9623685 - : Farm Land Held Outside Corporation

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. Does land held outside the family farm corporation qualify for the capital gains exemption
2. Does the 24 month holding period need to be met where the election to take $100,000 capital gain taken

Position:

1. Yes
2. Yes

Reasons:

1. Used by corporation
2. Deemed acquisition and reacquisition - qualified user is relevant

XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sirs:

Re: Farm land held outside the corporation

This is in reply to your letter of July 2, 1996, wherein you request our opinion on two issues involving qualified farm property.

1) You state that after a farmer has incorporated his farm operation, he may not wish to transfer his land to his company because he either wishes to maintain ownership personally and allow transfer to his child or realize more capital exemption because land values are expected to increase. You question whether there is a requirement to have the corporation pay reasonable rent for the use of the farm land held outside the corporation and if rent is paid does the farm land become rental property and thus become disqualified from being "qualified farm property".

Our Response:

It appears that your enquiry relates to specific transactions, either proposed or completed. Where a transaction is proposed, confirmation of the tax implications arising therefrom should be sought by way of an advance income tax ruling request submitted in the manner set forth in Information Circular 70-6R2. When a completed transaction is involved, the enquiry should be addressed to the relevant District Services Office. We offer, however, the following general comments.

There doesn't appear to be any specific provision in the Act that would require the farmer to charge his corporation fair market value rent for his land. If rent is paid to the individual farmer, section 67 of the Act would restrict the expense to the corporation to a reasonable amount and subsection 18(1)(a) of the Act would require that the expense be incurred for the purpose of gaining or producing income from the business or property.

If rent is received from a related family farm corporation for the use of farm property, the income is considered rental income and is reported separately by the individual.

Whether rent was charged or not, in and by itself, will not disqualify the land from being "qualified farm property", provided the real property was used by the corporation (the family farm corporation) in the course of carrying on the business of farming in Canada and owned by the individual farmer throughout at least 24 months immediately preceding the time of disposal of the land. Generally, in our view, a real property rented by an individual throughout a period of at least 24 months to a corporation, a share of the capital stock of which is a share of a family farm corporation of the said individual, at the determination time, would be property used by a corporation referred to in subparagraph 110.6(1)(a)(iv) of the Act for the purposes of clause 110.6(1)(a)(vi)(B) of the Act.

2) You state that a number of your farm clients elected on farm land at February 1994, to use up their $100,000 capital gains exemption. You question that if there is a sale of this elected land to their farm corporation, whether they are required to meet the 24 month holding period as the farm property must have been held or substituted for a property for 24 months prior to the sale date to the corporation in order to be classified as " qualified farm property"

Our Response:

If an individual farmer has filed a capital gains election for qualified farm property, the property is considered to have been sold and have been immediately reacquired. Furthermore, the definition of "qualified farm property" requires a 24 month holding period.

If the land is sold to the family farm corporation, a new entity owns the land and the definition "share of the capital stock of a family farm corporation" applies. The definition requires the real property owned by the corporation to have been used by either the individual or other qualified users as described in subparagraph 110.6(1)(a)(i) or the corporation throughout any 24 month period ending before the time of disposal in the course of carrying on the business of farming.

The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical example given and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We trust our comments will be of assistance to you.

Yours truly

for Director
Financial Industries Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch