19 February 1990 Ruling 59411 F - Corporate Owned Farm Residences

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.

February 19, 1990

Dear Sirs:

Re:  Corporate Owned Farm Residences

This is in reply to your letter of January 5, 1990 requesting our opinion on the tax treatment of a residence owned by a corporate farm which is occupied by an employee of the business and his or her family, all of whom may or may not be shareholders.

It has come to your attention that such an asset may be viewed as not being used in an active business" but rather as a passive asset.  In your view this has substantial adverse tax ramifications.  Among these are:

i)      If the house and any other non-qualifying assets are more than 10%  of the fair market value of the corporation's assets, the sale of shares may not qualify for the enriched $500,000 capital gains exemption under section 110.6 of the Income Tax Act (the "Act").

ii)      A farmer owning shares in such a company may be denied a tax-free rollover of the family farm to his children under section 70(9.2) of the Act on death or under section 73(4) of the Act on an inter-vivos basis.

iii)      An otherwise qualifying small business corporation may not be exempt from the corporate attribution rules of section 74.4(2) of the Act.

You provided the following example as a not untypical listing of farm assets:

          $                     %

Receivables           25,000      3.10Inventory of feed and   livestock           150,000      18.75Equipment           100,000      12.50Land           300,000      37.50House and 1 Acre      100,000      12.50Barn           125,000       15.65           800,000      100.00

You state that all assets are used in farming for the corporation.  The shareholder/employee lives in the house and uses one room out of eight for the office of the farm business.

You request the Department's opinion with respect to the following:

a)     In the above example would Revenue Canada, Taxation deny the enriched $500,000 capital gains exemption under section 110.6?

b)     If the holder of shares in the above corporation died after bequeathing his shares to his son, would Revenue Canada deny the tax-free transfer of this farm to the next generation?

c)     If the husband was financing all of his corporation with loans and shares and there were other designated persons as shareholders, would Revenue Canada assess income to the husband under 74.4(2) if no dividends/interest was reserved by him?

d)     Would the answer be different if the shareholder managed the business from off the farm and an employee who owned no shares lived in the house?

e)     Is there a different treatment depending on whether the occupant of the house pays rent or is assessed a taxable benefit on his T4?

Our comments follow the point order of your questions.

Our Comments

The Department's position in this matter is basically set out in two Interpretation Bulletins.  Paragraph 5 of IT-486R outlines the Department's position with respect to assets used in a business.  In essence it states that an asset is used in a business if its primary or principal use (considered to be more than 50% of its use) is in respect of that business.  Paragraph 29 of IT-268R3 says essentially the same thing, but in addition it deals specifically with a residence owned by a farm corporation.  There it states that in this context a residence owned by a farm corporation will be regarded as used in the business of farming if more than 501 of its use is as accommodation for persons who are actively employed in the farming business or their dependants.  It then goes on to say that if the 50% farming business usage test is not met that particular asset will be included in assets acquired for non-qualified uses.

(1)     With respect to your first question, the Department will only deny the enriched capital gains deduction in your hypothetical example where less than 50% of its use is as accommodation for persons who are actively employed in the farming business.  This is a question of fact that cannot be determined from the information supplied. If the farm house accommodates only the farm shareholder/employee who is actively engaged in the farming business, and his family, the farm house would appear to qualify as an asset used in the farm business for purposes of the enhanced capital gains deduction in subsection 110.6 of the Act.

(2)     The answer to your second question is basically the same as in 1 above.  The corporate owned farm house will be regarded as used in the business of farming if more than 50% of its use at the time of death, was as accommodation for persons who were actively employed in the farming business or their dependants.  Thus in the circumstances of your example, shares of the family farm corporation may be rolled from the taxpayer to his son on a tax free roll-over basis.  This assumes of course that all other conditions of subsection 70(9.2) of the Act are met.

(3)     In view of our explanation regarding the use of a residence owned by a farm corporation meeting the primary or principal use test in paragraph 29 of IT-268R3, it appears to us that the corporation in your example would meet the definition of "small business corporation" in subsection 248(1) of the Act.  In this regard, we are assuming that the farm house in your example is used in the business of farming because more than 50% of its use is as accommodation for persons who are actively employed in the farming business or their dependants.  As a consequence of the farm corporation meeting the definition of "small business corporation", subsection 74.4(2) of the Act would have no application.

(4)     The answer in 3 above would only be different if the employee who lived in the farm house wasn't actively employed in the farm business and therefore less than 50% of the farm residence's use was as accommodation for persons who are actively employed in the farming business or their dependants.

(5)     Whether the occupant of the house pays rent or is assessed a taxable benefit makes no difference in determining if more than 50% of its use is as accommodation for persons who are actively employed in the farming business.  If on the other hand the farm residence was merely a rental property occupied by persons not employed in the farm business it would clearly be an asset acquired for investment or non-qualified use.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch