21 September 1999 External T.I. 9919895 - ROLLOVER-PROPERTY FARMED BUT NOT OWNED

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: Whether the time that a property was not owned by a taxpayer but was used in a farming business in which the taxpayer was actively engaged on a regular and continuous basis can be considered in determining whether the property was before the transfer used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis.

Position: Yes.

Reasons: Subsection 73(3) does not include a requirement that property be owned by a taxpayer in those years where it is considered to be used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis.

Xxxxxxxxxx J.Gibbons
5-991989
Attention: xxxxxxxxxx

September 21, 1999

Dear XXXXXXXXXX:

This is in response to your letter of July 16, 1999, in which you requested our views concerning the application of subsection 73(3) of the Income Tax Act. In particular, you wish to know whether the time that a property was not owned by the taxpayer but was used in a farming business in which the taxpayer was actively engaged on a regular and continuous basis can be considered in determining whether the property was "before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis."

As requested, we have considered your situation and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

The facts are as follows:

1.Mr. A owns a piece of property.

2.Mr. A is unrelated to Mr. B.

3.Mr. A and Mr. B have jointly run a farm business for 20 years on the property and split profits.

4.Both Mr. A and Mr. B are actively engaged in the farm business on a regular and continuous basis.

5.Mr. B inherits the property on Mr. A's death. ceases farming operations and rents the property to an unrelated third party for 5 years.

6.Mr. B would like to transfer the property to his children (all residents in Canada) under subsection 73(3).

Our view

In our view, subsection 73(3) does not include a requirement that property be owned by a taxpayer in those years where it is considered to be used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis. However, in the situation outlined, the taxpayer rented the farm property to an unrelated third party for the last 5 years when he did own it. Accordingly, we draw your attention to our comments in paragraphs 24 and 25 of Interpretation Bulletin IT-268R4, "Inter-Vivos Transfer of Farm Property to Child," concerning this issue. The last sentence of paragraph 24 indicates that if property is used for some purpose other than farming for some period of time, a question may arise as to whether the property was used primarily for that other purpose rather than in the business of farming. In paragraph 25, it states that a lessor of farm property is not considered to be using the property in the business of farming.

The determination of whether real property is used principally by a taxpayer in carrying on a farming business and whether a particular farming operation constitutes a farming business at any particular time are questions of fact. Accordingly, such a determination requires a review of all of the facts surrounding a situation including which portions of the farm land were utilised throughout the period of ownership. If you have an actual situation in mind, you should submit all of the relevant information and documentation to the applicable tax services office.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate