17 June 1992 Administrative Letter 9201386 F - Replacement & Qualified Farm Property - Foreign

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.

June 17, 1992

Audit Technical                                   Manufacturing Industries,

Support Division                                     Partnerships and Trusts

Division

Attention:  Phil Jolie                              G. Kauppinen

957-4363

920138

Subject: Replacement Property Rules - Farms

This is in reply to your memorandum dated January 7, 1992 regarding the replacement property rules in section 44 of the Income Tax Act ("Act") and the definition of "qualified farm property" in subsection 110.6(1) of the Act. We have addressed your questions in the order in which you have posed them.

Questions 1 and 2

We confirm that prior to April 3, 1990 a Canadian resident could use a foreign farm property as a replacement for a Canadian farm property for purposes of an election under section 44 of the Act. 

However, pursuant to Bill C-18, which received Royal Assent on December 17, 1991, paragraph 44(5)(c) of the Act has been amended so that where the "former" property was taxable Canadian property (which includes real property situated in Canada pursuant to subparagraph 115(1)(b)(i) of the Act), or property which would have been taxable Canadian property if the taxpayer had been a non-resident throughout the year in which the former property was disposed of, then the replacement property must also be taxable Canadian property (or property that would be taxable Canadian property if the taxpayer had been a non-resident throughout the year in which the replacement property was acquired) in order for the rollover provisions of section 44 of the Act to be applicable.  Consequently, subject to certain grandfathering provisions, a foreign farm property will no longer qualify as a replacement property for a former property disposed after April 2, 1990.

Question 3

We further confirm that, prior to January 1, 1988, if a taxpayer owned property used in the business of farming in Canada and, in the year of an acquisition of a foreign property used in the business of farming a taxpayer elected on his tax return to have it treated as a "replacement property" for the Canadian property pursuant to subsection 44(1), then the foreign property would have been a "qualified farm property" at the time of its disposal for the purposes of subsection 110.6(1), provided that the Canadian property was used in the business of farming either in the year the foreign property was disposed of or in at least five years during which the foreign property was owned by the individual, his spouse or his children. In both scenarios the Canadian property would have to be disposed of before the foreign property for the replacement property rules in section 44 to work.

Question 4

The definition of "qualified farm property" was amended by 1988, c.55, s.81(3) applicable to the 1988 and subsequent taxation years to change the test in 110.6(1)(a) which formerly allowed a foreign replacement property to be considered to be carrying on the business of farming in Canada if it satisfied the tests in subparagraphs 110.6(1)(a)(iv) or (v).

The former words effectively expanded the meaning of "carrying on business in Canada". However, in 1988 the relevant words were changed from   " real property that has been used..... in the course of carrying on the business of farming in Canada and for the purposes of this definition property will be considered to have been used in the course of carrying the business of farming in Canada if..."to       "real property that has been used ....in the course of carrying on the business of farming in Canada and for the purpose of this paragraph, property will not be considered to have been used in the course of   carrying the business in Canada unless..."(other conditions were satisfied).

The original wording allowed a replacement farm property which was not physically in Canada to qualify for the enhanced capital gains exemption if it satisfied the conditions of the extended definition. However, the new wording restricts the definition. That is, to be considered as "qualified farm property" the property must be used in the business of farming in Canada and therefore all foreign property is immediately excluded from the definition. Other Canadian property will also be excluded from the definition if it does not satisfy the further conditions in subparagraphs 110.6(1)(a)(vi) or (vii).

Consequently, pursuant to the foregoing and in our opinion, 19(1) conclusion in paragraph 3 of his letter was correct.

We wish to advise you that we have received a separate request from 19(1), dated December 9, 1991, dealing with the same queries he posed to you. Consequently, we would ask that you forward to us a copy of your response to 19(1) so that we may reply appropriately to his separate letter to us. 

for DirectorMerchandising, Manufacturing, Partnerships  and Trusts DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch