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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: A taxpayer and his spouse, who operate a tree farm, would like to know whether they satisfy the tests in respect of clause (a)(vi)(B) of the definition of qualified farm property in subsection 110.6(1) of the Income Tax Act.
Position: General comments were provided.
Reasons: The available information was very limited.
April 2, 2001
Toronto Centre Tax Services HEADQUARTERS
David Ford M. Eisner
Client Services (613) 957-2138
2001-006898
Qualified Farm Property
This is in reply to your memorandum of February 6, 2001 concerning the above-noted subject.
You have indicated that a client has a concern with the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act (the "Act"). In the circumstances of their situation, an individual and his spouse purchased a tree farm after 1987, which they have operated for over 24 months. The farming operation is only a small portion of their income and most of their income comes from employment income. Their concern is whether they meet the definition of "interest in a family farm partnership" as defined in subsection 110.6(1) of the Act, and in particular, as it applies for purposes of clause (a)(vi)(B) of the definition of QFP in subsection 110.6(1) of the Act.
At the outset, we would like to point out that, with respect to your client's request, written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. However, we are prepared to provide the following general comments which may be of assistance.
Whether or not a partnership exists is a question of fact and we are not in a position to comment on whether a partnership exists in the above situation, based on the limited information provided to us. The CCRA's general position on this matter is set out in Interpretation Bulletin IT-90 "What is a Partnership?".
One of the requirements of clause (a)(vi)(B) of the definition of QFP in subsection 110.6(1) of the Act is that the property be used principally in the course of carrying on the business of farming. The determination of whether real property is used principally by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used principally in the course of carrying on the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. 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 Interpretation Bulletin IT-322R "Farm Losses". In addition, the general position of the CCRA with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R "Farming or Fishing - Use of Cash Method" and paragraph 7 of Interpretation Bulletin IT-145R "(Consolidated), Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax".
Another bulletin that could be useful in determining whether an individual is entitled to a capital gains deduction in respect of the disposition of QFP is Interpretation Bulletin IT-373R2 "Woodlots" (and the related Release to this bulletin). This bulletin discusses whether the operation of a woodlot can be regarded as being a business (i.e., a commercial woodlot as opposed to being a non-commercial woodlot where there is no reasonable expectation of profit) and whether it can be considered to be a farming operation. In the event that an operation is not considered to be a farming business, the capital gains deduction could not be claimed in respect of the disposition of such a property.
While we were not provided with sufficient information to establish whether, in the above situation, the requirements of the definition of "interest in a family farm partnership" in subsection 110.6(1) have been met, we would note that one of the requirements of the definition is that the individual or the individual's spouse, inter alia, be actively engaged on a regular and continuous basis in the farming business. Paragraph 27 of Interpretation Bulletin IT-268R4 "Inter Vivos transfer of Farm Property to a Child", reflects the CCRA's interpretation of actively engaged on a regular and continuous basis. Paragraph 27 states that it must be determined on the facts of each case whether a particular person is actively engaged on a regular and continuous basis in the business of farming. Further, that paragraph indicates that the requirement is considered to have been met when the person is actively engaged in the management and/or day-to-day activities of the farming business. Ordinarily, the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operations of the business. Whether an activity is engaged on a regular and continuous basis is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement. When farming is not the chief source of income of a taxpayer, it may be more difficult to demonstrate that the taxpayer was actively engaged on a regular and continuous basis in the farm business.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
We trust that our comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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