9 December 1991 External T.I. 9131285 F - Qualified Farm Property — Transfer of Property

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.

5-913128

Dear Sirs:

Re:  Subsection 110.6(2), Definition of "Qualified Farm Property"

We are writing in reply to your letter of November 7, 1991 wherein you requested a technical interpretation relating to the above definition in the following hypothetical situation.

Mr. and Mrs. A are spouses who each acquired a one-half interest in a real property prior to June 18, 1987, which property was used by Mr. A in the course of carrying on the business of farming in Canada for at least five years during which the property was owned by the two spouses.  Mr. and Mrs. A eventually separate and Mr. A transfers his half interest in the property to Mrs. A after June 17, 1987, with Mr. A electing out of the rollover provisions of subsection 73(1).  Thereafter, Mrs. A uses the property to derive rental income, until its eventual sale.  Prior to the sale, the individuals cease to be spouses. 

You have noted that the test which must be met to determine if the property is a "qualified farm property" at the time of the eventual sale is that contained in paragraph (vi) of the definition.  Since the property was used by a person who was the spouse of Mrs. A in the course of carrying on the business of farming in Canada in a least five years, the property qualifies as a "qualified farm property".  As a consequence, Mrs. A will be entitled to claim a deduction pursuant to subsection 110.6(2) if she realizes a capital gain on the sale of the property, provided she is resident in Canada throughout the year in which the property is sold. In your view, the property cannot be considered to be one described in paragraph (vii) of the definition of "qualified farm property" from the perspective of Mrs. A, as she did not acquire it after June 17, 1987 but rather increased her interest therein from 50 to 100%.   

It appears that the above situation may be an actual situation which should be the subject of an advance income tax ruling request as indicated in Information Circular 70- 6R2 dated September 28, 1990.  However, we are prepared to provide the following general comments.

Our Comments

1.            In general, the Department views the transfer of an interest in a property as a disposition by the transferor and an acquisition of the transferee.  Interpretation Bulletin 258R2 reflects the Department's position on the `Transfer of Property to a Spouse'.  Paragraphs 3 and 4 indicate that as a result of the transfer of property between spouses under the provisions of subsections 73(1) and (2) "depreciable property is deemed to be disposed of by the transferor for proceeds equal to its undepreciated capital cost and to have been acquired by the transferee for the same amount....Other capital property is deemed to have been disposed of for proceeds equal to its adjusted cost base to the transferor and acquired by the transferee for the same amount."  Where the transferor elects out of subsections 73(1) and (2), the capital property is transferred at fair market value rather than deemed to be transferred for proceeds equal to its undepreciated capital cost or its adjusted cost base.

In a situation such as that described above, Mrs. A would have two acquisition dates of property: one date prior to June 18, 1987 and the other date after June 17, 1987.

2.            In support of the transfer of property resulting in a disposition\acquisition:

(a) Webster's Ninth New Collegiate Dictionary defines "transfer" as "conveyance of right, title, or interest in real property from one person to another"; and

(b) Proposed amendments in Bill C-18 reflected in subparagraphs 248(20) to (23) indicate that the Department considers a partition of property to result in a disposition and acquisition of property where the fair market value of the person's interest in the property changes as a result of the partition.

3.      Your view that Mrs. A has not acquired property after June 17, 1987 but has rather increased her interest therein from 50% to 100% is the view generally taken with respect to partnership interests.  However, in the case of Stursberg v MNR 90 DTC 1159 the Tax Court of Canada decided that a disposition had occurred where partner A's interest was reduced from 40% to 15% and partner B's interest was increased from 10% to 35% with a cash payment from partner B to the partnership which was immediately paid by the partnership to partner A.  At the 1990 Revenue Canada Round Table the Department indicated in Question 31 that each partnership situation will have to be resolved on the appreciation of the particular facts involved.

We trust that these comments will be of assistance.

Yours truly,

G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch