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:
1. What will the elected amount be in a 97(2) rollover scenario where an individual transfers class 8 assets to a partnership at an amount equal to the undepreciated capital cost of the assets, and the transferor does not deal at arm's length with the partnership?
2. Would the answer differ if the individual deals at arm's length with the partnership?
3. Would farm land that a son acquired from his father be eligible for the $500,000 capital gains exemption when the son sells the land?
4. Would farm land in respect of which a farmer filed a valid "election for property owned on February 22, 1994" (pursuant to subsection 110.6(19) of the Act) be eligible for the $500,000 capital gains exemption when the farmer sells the land?
Position:
1. If the fair market value of the transferred assets exceeds the greater of (i) the fair market value of the consideration received from the partnership, and (ii) the elected amount, then the elected amount will be increased to the extent it is reasonable to regard any part of the excess as a benefit that the taxpayer desired to have conferred on a related person.
2. Where the transfer to the partnership does not include any person related to the taxpayer, then paragraph 85(1)(e.2) of the Act would not apply to alter the elected amount. However, consideration may be given to the possible application of section 245 of the Act ["GAAR"],depending on the particular circumstances.
3. Yes.
4. Question of fact.
Reasons:
1. Application of subsection 97(2) and paragraph 85(1)(e.2) of the Act.
2. Paragraph 85(1)(e.2) of the Act requires a related person before it applies. In this general reply, we do not know why the transferor would transfer assets for less than fair market value consideration. There may be situations involving avoidance transactions where the application of GAAR would be considered in order to alter the elected amount.
3. The son's father farmed the land and certain criteria were met such that the son disposed of qualified farm property, as defined in subsection 110.6(1) of the Act.
4. In order to claim the capital gains deduction in subsection 110.6(2), amongst other things, the farmer would have to have disposed of qualified farm property, as defined in subsection 110.6(1) of the Act. In order to meet this definition either of subparagraph (vi) or (vii) must be met. It is a question of fact as to whether the farmer would meet the criteria in subparagraph (vi). Since the farmer elected under subsection 110.6(19), he is deemed to have last acquired the property after June 18, 1987. Therefore, the criteria in subparagraph (vii) are not met.
2000-001644
XXXXXXXXXX Allan Nelson
(613) 443-7253
Attention: XXXXXXXXXX
August 15, 2000
Dear Sirs:
Re: Technical Opinion Request
As discussed during our telephone conversation on July 24, 2000 (Nelson/XXXXXXXXXX), we have been asked to reply to your letter dated March 1, 2000, addressed to Mr. Henry Zerbin, at the Winnipeg Taxation Centre.
Your questions appear to relate to specific factual situations. As noted in Information Circular 70-6R3, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. However, we will offer the following general comments.
Scenario A
Background
Your first issue involves a situation where, for example, the following assumptions are made:
(a) subsection 97(2) of the Act is used to transfer depreciable property [Class 8 equipment] from an individual "transferor" to a Canadian partnership;
(b) the transferor was not previously a member of the partnership;
(c) the "Agreed Amount" is (i) equal in amount to the undepreciated capital cost of the transferred assets, and is (ii) less than the fair market value of those assets at the time of the transfer; and
(d) as consideration for the assets, (i) the partnership assumes debt of the transferor,
(ii) the partnership issues a promissory note to the transferor [the total of these first two amounts equals the Agreed Amount] and (iii) the transferor receives a partnership interest.
Your Questions re: Scenario A
1. Where the transferor does not deal at arm's length with the partnership, and in addition to the consideration received by the transferor listed above in (c)(i) and (c)(ii), the only other consideration received by the transferor was a nominal partnership interest (say, for example, the fair market value of the partnership interest was only $1), would the Agreed Amount be increased by the difference between the fair market value of the transferred assets and the total of the Agreed Amount and the fair market value of the partnership interest acquired by the taxpayer [this difference is hereinafter referred to as the "Excess"]?
2. Would the result be any different if the transaction was an arm's length transfer, rather than a non-arm's length transfer?
1. Pursuant to paragraph 97(2)(a) of the Act, paragraphs 85(1)(a) to (f) of the Act [as modified] would apply to the disposition. Paragraph 85(1)(e.2) would apply to the extent it is reasonable to regard any portion of the Excess as a benefit (the "Benefit") that the taxpayer wished to confer on a related person (other than a corporation that was a wholly owned corporation of the taxpayer immediately after the disposition). In such an instance, the Agreed Amount would be deemed to be an amount equal to the total of the Agreed Amount and the Benefit.
2. Where the transfer to the partnership does not include any person related to the taxpayer, then paragraph 85(1)(e.2) of the Act would not apply to alter the Agreed Amount. However, consideration may be given to the possible application of section 245 of the Act ["GAAR"], depending on the particular circumstances and the reason why the taxpayer agreed to only receive a nominal interest in the partnership when such an Excess existed.
Scenario B
Background
Your second issue involves the definition of qualified farm property, under subsection 110.6(1) of the Act. For the sake of discussion, the following assumptions are made:
(a) a father acquired farm land before 1987 and farmed it continuously to 1995. During those years, farming was his chief source of income and the property was qualified farm property, as defined in subsection 110.6(1) of the Act
(i.e., inter alia, the criteria in clause 110.6(1)(a)(vi)(A) were met);
(b) in 1995 the father transferred the farm land to his son on a rollover basis (pursuant to subsection 73(3) of the Act) at the father's adjusted cost base. The son was deemed to acquire the land at an amount equal to the father's adjusted cost base; and
(c) immediately after acquiring the land, the son rented it out to persons who were not related to him or his family. This arrangement continues to exist while the son owns the land.
Your Questions re: Scenario B
If the son sells the land, is he considered to have disposed of qualified farm property eligible for the capital gains deduction in subsection 110.6(2) of the Act?
In order to claim the capital gains deduction in subsection 110.6(2) of the Act, amongst other things, the son would have to have disposed of qualified farm property, as defined in subsection 110.6(1) of the Act.
Subsection 110.6(1) of the Act defines qualified farm property and paragraph (a) states that it includes real property of an individual, "...used by the individual...or parent..." in the course of carrying on the business of farming in Canada. It also provides that property will not be considered to be used in the course of carrying on the business of farming in Canada unless it meets the criteria in either of subparagraphs 110.6(1)(a)(vi) or (vii) of the qualified farm property definition.
In this scenario, the criteria in subparagraph 110.6(1)(a)(vi) of the Act would be met. The farm land was owned by the "individual...or parent of the individual...", throughout the 24 months preceding the sale. In addition, the conditions described in clause 110.6(1)(a)(vi)(A) at the definition of qualified farm property are met (i.e., see Background fact (a) above).
Consequently, the land would constitute qualified farm property and the son would be eligible to claim the capital gains deduction, pursuant to subsection 110.6(2) of the Act, in respect of the sale of the land.
Scenario C
Background
Your third issue also involves the definition of qualified farm property, under subsection 110.6(1) of the Act. For the sake of discussion, the following assumptions are made:
(a) before February 22, 1994, a farmer acquired farm land which, up to and including February 22, 1994, he used in the course of carrying on the business of farming in Canada;
(b) in respect of this land, the farmer filed a valid "election for property owned on February 22, 1994", as provided in subsection 110.6(19) of the Act. This election was never revoked; and
(c) from February 23, 1994, the farmer rented the land out to persons who were not related to him or his family.
Your Questions re: Scenario C
If the farmer sold the land in 1999, is he considered to have disposed of qualified farm property eligible for the capital gains deduction in subsection 110.6(2) of the Act?
As noted in Scenario B, in order to claim the capital gains deduction the farmer would have to have disposed of qualified farm property. The property will not be considered to be used in the course of carrying on the business of farming in Canada unless it meets the criteria in either of subparagraphs 110.6(1)(a)(vi) or (vii) of the definition.
As discussed below, the criteria in subparagraph 110.6(1)(a)(vii) are not met in Scenario C. It also remains a question of fact as to whether the criteria in subparagraph 110.6(1)(a)(vi) are met. The farmer will only be entitled to claim the capital gains deduction in subsection 110.6(2) of the Act, if the criteria in subparagraph 110.6(1)(a)(vi) are met.
Subparagraph 110.6(1)(a)(vi)
In this scenario the farmer owned the land throughout the period of at least 24 months immediately preceding its sale in 1999. We also know that at one point in time the farmer did farm the land. However, we do not know if the following criteria was met:
- in at least 2 years while the land was owned by the farmer, did the farmer have gross revenue from the farming business carried on in Canada in which the land was principally used and in which the farmer was actively engaged on a regular and continuous basis, which exceeded the income of the farmer from all other sources for the year?
If so, then the criteria in subparagraph 110.6(1)(a)(vi) would be met and the land would constitute qualified farm property. The farmer would then be eligible to claim the capital gains deduction, pursuant to subsection 110.6(2) of the Act, in respect of the sale of the land.
If the above criteria is not met, the farmer would not be eligible to claim the capital gains deduction, in respect of the sale of the land.
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 business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Furthermore, 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. Generally, rental income would not be considered to be part of a farming business. In addition, the Canada Customs and Revenue Agency's ("CCRA") general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.
Subparagraph 110.6(1)(a)(vii)
In order to meet the criteria in subparagraph 110.6(1)(a)(vii), amongst other conditions, the property must have been last acquired by the farmer before June 18, 1987. This is not the case here. When the farmer elected under subsection 110.6(19) of the Act, paragraph (a) thereof deemed him to have disposed of the land at that time and to have immediately reacquired it. Thus, the land was not last acquired by the farmer before June 18, 1987, and therefore the criteria in subparagraph 110.6(1)(a)(vii) are not met.
In accordance with paragraph 22 of Information Circular 70-6R3, the above comment is only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor is it binding on the CCRA.
We hope the above will be of assistance to you.
If you have any additional queries on this matter please feel free to contact us.
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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