3 January 2002 External T.I. 2001-0096095 - TRANSFER OF FARM 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

(a) Whether a transfer of a family farm to children occurs at fair market value.

(b) Whether the property is "qualified farm property."

Position:

(a) Question of fact - Subsection 73(3) may apply; general comments provided.

(b) Question of fact; general comments provided.

Reasons:

(a) Subsection 73(3).

(b) Subsection 110.6(1), 110.6(2).

XXXXXXXXXX  	2001-009609
			Randy Hewlett, B.Comm.
January 3, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation - Qualified Farm Property

We are writing in response to your letter dated July 30, 2001, wherein you requested our opinion on whether the transfer of farm property from a parent to a child would qualify for the capital gains exemption.

In your letter, you outline a situation in which it is contemplated that farm property, including land, will be transferred from a parent to several children. In your view, there would be a disposition at fair market value when the property is transferred. However, you inquire whether the property would qualify for the capital gains exemption.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Except as expressly provided in the Income Tax Act (the Act), where property is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds less than its fair market value, or to any person by way of gift while the taxpayer is living, paragraph 69(1)(b) deems the taxpayer to have received proceeds of disposition equal to the fair market value.

One exception in the Act is when there is a non-arm's length transfer of farm property, under the rules in subsection 73(3). This provision is explained in detail in Interpretation Bulletin IT-268R4 Inter Vivos Transfer of Farm Property to a Child, dated April 15, 1996. The provision provides a deferral for part or all of the tax consequences on the transfer of farm property to a child during an individual's lifetime. The requirements, in part, are as follows:

(a) the farm property is in Canada;

(b) the farm property is transferred to a child of the individual who was resident in Canada immediately before the transfer; and

(c) before the transfer, the farm property was used principally in the business of farming in which the individual, the individual's spouse or common-law partner, or any of their children, were actively engaged on a regular and continuous basis.

Application of the provision will involve findings of fact in several respects. For example, it will have to be determined whether the particular activity in which the farm property was used is actually a farming activity. Interpretation Bulletin IT-433R Farming or Fishing - Use of Cash Method, dated June 4, 1993, provides detailed information on what constitutes a farming activity.

It will also have to be determined whether a particular farming activity constitutes a farming business at any particular time. Some of the criteria that should be considered in making this determination are set out in Interpretation Bulletin IT-322R Farm Losses, dated October 25, 1978. Whether the individual is engaged in the farming activity on a regular and continuous basis will also have to be determined.

Where a "qualified farm property," as defined in subsection 110.6(1) of the Act, is disposed of and a capital gain does result, subsection 110.6(2) may eliminate some or the entire tax burden in the form of a capital gains deduction. For example, the provision can apply where land last acquired before June 18, 1987 by an individual (or after June 18, 1987 under an agreement in writing entered into before that date) is used principally in the course of carrying on the business of farming in Canada by the individual, the individual's spouse or common law partner, child or parent, either in the year it was disposed of, or in at least five years during which that person owned the land.

The provision may also apply to an individual for land acquired after June 17, 1987 that was principally used by the individual, the individual's spouse or common law partner, child or parent, in the course of carrying on the business of farming in Canada throughout the 24 months preceding the disposition, and in at least 2 years while this person owned the land, he or she used it on a regular and continuous basis to generate gross revenue from the farming business that exceeded his or her income from all other sources for the year.

Since your situation involves an interpretation of relatively complex provisions of the Act, consideration should also be given to consulting professional legal or accounting advice. The interpretation bulletins noted above can be found on our website at http://www.ccra-adrc.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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