7 October 1991 Income Tax Severed Letter - Qualification as \"Share of the Capital Stock of a Family Farm 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.

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We are writing in reply to your letter of June 6, 1991, wherein you requested our opinion as to whether or not the shares of Corporation X would qualify as a "share of the capital stock of a family farm corporation" as defined in paragraph 70(10)(b) of the Income Tax Act (the Act) and thus eligible for the enhanced capital gains deduction under subsection 110.6(2) of the Act.

Our understanding of the situation, as set out in your letter, is as follows:

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Our Comments

Our response to the questions posed in your letter are as follows:

Would the shares of Corporation X be "family farm corporation" shares eligible for the enhanced capital gains exemption?

The answer to this question appears to have been addressed in our letter to you dated July 22, 1991, a copy of which is attached.

Would the individual be considered to be "actively engaged" in the business of farming because the individual's work on the farm is billed through his partnership?

With respect to the definition of "share of the capital stock of a family farm corporation" there appears to be some clarification required as to which definition applies for purposes of subsection 110.6(2) of the Act. Subparagraph 70(10)(b)(i) of the Act (which contains the phrase "that person, his spouse or his child was actively engaged,") applies only for the purposes of sections 40, 44, 70, and 146 of the Act. The definition set out in subsection 110.6(1) of the Act (which contains the phrase "any individual referred to in subparagraph (ii)(iii) or (iv) was actively engaged on a regular and continuous basis") has application for purposes of subsection 110.6(2) of the Act.

In our view the words "actively engaged on a regular and continuous basis" in paragraph 110.6(1)(a) of the Act, refer to a person who in their capacity as shareholder or employee was actively involved in the management and/or day to day activities of the farming business carried on by the corporation. The person would ordinarily be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operation of the business. This is in contrast to a passive shareholder or investor who would not be considered to be "actively engaged on a regular and continuous basis".

Whether or not the members of the board of directors of a family farm corporation expend enough time on the business to be considered "actively engaged on a regular and continuous basis" is a question of fact. It is our opinion that (for example) attending various meetings during the year and being involved only in the major decisions concerning the management of the family farm corporation, would not fulfil the requirement of being "actively engaged on a regular and continuous basis" in the day to day operations of the family farm corporation. Questions of fact of this nature are usually resolved by officials of the local district taxation office, who are generally in a better position to appreciate all the circumstances of the case.

Would the person be considered to be actively engaged if the individual was a director who received directors fees, or in the alternative received nominal employment income of $6,000 per year?

In view of the above, it is our opinion that neither the billing for an individual's services through a partnership nor the receipt of directors fees or a nominal salary, would evidence that the individual was "actively engaged on a regular and continuous basis" in the operation of the family farm corporation.

We trust our comments will be of assistance to you.