27 May 2009 External T.I. 2009-0316191E5 - Qualified 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.

Principal Issues: 1. Whether a deemed disposition occurs when the use of real property such as land changes from rental to the business of farming. 2. Whether real property is qualified farm property when it is sold. 3. If real property is qualified farm property eligible for the capital gains exemption, whether the exemption will apply from the date of purchase or from the time the property is used in the business of farming. 4. Whether the farm property is eligible for a tax free transfer when it is bequeathed to a son.

Position: 1. No. 2. It is a question of fact. 3. From the date of purchase. 4. It is a question of fact.

Reasons: 1. Each use is an income earning function of the same taxpayer. 2. It depends on the use and ownership of the property. 3. The exemption applies to the full period of ownership. 4. It depends on the use of the property and the residence of the son.

XXXXXXXXXX 						2009-031619
							Kathryn McCarthy CA
(613) 828-9377
May 27, 2009

Dear XXXXXXXXXX :

Re: Qualified Farm Property

This is in response to your letter of April 1, 2009, and further to our telephone conversation on May 7, 2009 (McCarthy/XXXXXXXXXX ), concerning the above-noted subject. You described approximately XXXXXXXXXX acres of farmland which you and your wife purchased in XXXXXXXXXX (XXXXXXXXXX of which is arable). You reported the income generated from the land as farming income but, as a result of a Canada Revenue Agency ("CRA") audit, were advised that the income was actually rental income. It is your intention to farm the land beginning in XXXXXXXXXX , however you do have other sources of income (i.e. interest and Old Age Security pension).

You enquired as to whether a capital gain will occur when the use of your land changes from rental to the business of farming. Further, you enquired as to whether the property will be considered "qualified farm property" ("QFP") when it is sold and in the event that the property is QFP which qualifies for the capital gains exemption, whether the exemption applies from the date of purchase or from the time the property was used in the business of farming. Finally, you enquired as to what the implications are under the Income Tax Act ("the Act") if the property is bequeathed to your son.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at www.cra.gc.ca. Should the situation involve a specific taxpayer and transactions that have already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Generally, where a taxpayer has acquired property for the purpose of gaining or producing income and has commenced at a later time to use it for some other purpose, the taxpayer is deemed to have disposed of the property at that later time for proceeds equal to its fair market value and to have immediately thereafter reacquired it at a cost equal to that fair market value. The CRA considers that such changes in use do not include a transfer of property from one income-earning use to another income-earning use of the same taxpayer. In our opinion, therefore, the change in use of real property such as land from rental to the business of farming will not trigger a deemed disposition because each is an income earning use of the taxpayer.

It is a question of fact as to whether any particular real property is QFP when it is sold. For more information, please see the T4003, Farming Income guide, at www.cra-arc.gc.ca/E/pub/tg/t4003/t4003-e.html.

Generally, real property is QFP only if it is used to carry on a farming business in Canada by any one of the following:

• the taxpayer, the taxpayer's spouse or any of the taxpayer's parents or children; or
• a family-farm partnership where any of the above persons owns an interest in the partnership.

Further, the CRA considers real property to be used to carry on a farming business in Canada if the following conditions are met:

• immediately throughout the 24 months before the sale, the taxpayer, the taxpayer's spouse or any of the taxpayer's children or parents or a family-farm partnership (in which any of these persons has an interest) must have owned the property; and
• the taxpayer meets one of the following two conditions:

o in at least 24 months of ownership, the property or the property it replaced was used mainly in a farming business in Canada in which any of the above persons was actively engaged on a regular and ongoing basis and the person's gross income from the farming business was larger than the person's income from all other sources in the year; or
o a family-farm partnership used the property for at least 24 months, mainly to carry on a farming business in Canada. Also, during this time, the taxpayer, the taxpayer's spouse or any of the taxpayer's children or parents must have been actively engaged on a regular and ongoing basis in the farming business.

Whether or not your land constitutes QFP will depend on whether the above conditions are met and whether these conditions are met is a question of fact to be resolved generally through an audit. However, in our opinion, if a particular real property such as land is QFP and its use changed from rental to farming business, the capital gains exemption will apply to the gain that accrued during the full period of ownership (and not merely during the period since the property began to be used in the business of farming).

It is a question of fact as to whether any particular farm property such as land bequeathed to a child qualifies for a tax-free transfer under the Act. Please see Chapter 6 of the T4003, Farming Income guide, for more information. The CRA allows a tax-free transfer of a deceased taxpayer's Canadian farm property to a child if all of the following conditions are met:

• the child was resident in Canada just before the parent's death; and
• the property was used mainly in a farming business on a regular and ongoing basis by the deceased or the deceased's spouse before the parent's death.

The determination of whether any particular real property such as land was used mainly by a taxpayer in a farming business for the purpose of a tax-free transfer to a child is also a question of fact. Such a determination must be made on a property-by-property basis. Land may meet this requirement if more than 50% of the land's area was used in the business of farming. Further, the use test for purposes of a tax-free transfer may be met where the farming use is more than 50% of the years that the property is owned. For more information on whether a particular farming operation constitutes a farming business at any particular time, see Interpretation Bulletin IT-322R, Farm Losses, at www.cra-arc.gc.ca/E/pub/tp/it322r/README.html.

Generally, a tax-free transfer of land used in a farming business to a child occurs if the transfer price is equal to the adjusted cost base to the deceased. Generally, where any particular farm land qualifies for a tax-free transfer to a child, the transfer price can also be any amount from the adjusted cost base to the fair market value of the property and the deceased's legal representative will choose the amount in the year of the death of the parent. A capital gain may result in the hands of the deceased if the transfer price chosen exceeds the adjusted cost base. In such a case, the CRA considers the child to acquire the property at the amount chosen.

We trust this information is helpful.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch