16 March 1998 External T.I. 9604645 - ASSETS USED IN ACTIVE BUSINESS

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 Department.

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

Principal Issues:

Whether or not a farming property is used principally in an active business if a portion of the property in unusable.

Position:

May be considered an asset used principally in an active business.

Reasons:

If a portion of farm land is unusable (i.e. unsuitable for any use), generally it may not be considered when determining whether or not 50% of the property is used in active business.

XXXXXXXXXX 5-960464

Karen Power, C.A.

Attention: XXXXXXXXXX

March 16, 1998

Dear Sirs:

Re: Assets Used in Active Business

We are writing in response to your letter of January 4, 1996 wherein you requested our views on whether land owned by a taxpayer, in a hypothetical situation, is considered to be used principally in an active business for purposes of the definitions of "small business corporation" and "qualified small business corporation share" in subsection 248(1) and 110.6(1) respectively of the Income Tax Act (the "Act"). We apologize for the delay in replying.

You have provided us with the following hypothetical set of facts:

1. A Canadian company (the "company") owns a 100 acre parcel of farm land (the "land") located in Canada.

2. The company itself farms 40 acres of the land (the "asset") and carries on an active business using the asset.

3. The company rents 35 acres of the land to another farmer (the "farmer") who farms the said piece of land and pays the company rent.

4. The remaining 25 acre parcel of the land (the "unused land") is not being farmed by the company or rented to the farmer. It consists of ponds, swampy areas and some deep bush. The unused land could only be converted to useable land at a very great expense. Assume that it would not be economically practical to convert the unused land for some considerable time. This would apply if the intention was to actively farm the unused land or rent it out.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

The definition of a small business corporation as set out in subsection 248(1) of the Act reads in part,

"all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are

(a) used principally in an active business carried on primarily in Canada...".

The determination of whether real property is used principally by a taxpayer in carrying on a farming business is a question of fact. Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming. Furthermore, it is also a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria which should be considered in making this determination are set out in Interpretation Bulletin IT-322R. In addition, the Department's general position with respect to the meaning of a farming business is outlined in paragraph 8 of Interpretation Bulletin IT-433R and paragraph 9 of Interpretation Bulletin IT-145R.

In response to the situation you have submitted, the Department recognizes that a portion of the total area of a particular parcel of land may not be suitable for any use (ie., a portion may be absolutely useless for any purpose). While the conclusion in any particular case would necessarily depend on all the facts of the case, generally, in such situations, the Department would not seek to deny that the asset had been used principally in an active business for purposes of the definition of "qualified small business corporation shares" of subsection 110.6(1) of the Act.

In circumstances such that, in the future, it was possible to use some combination of the pond, swampy area or bush in the company's active farming activity, this would weaken an argument based on uselessness. Generally, it would not appear that such unused land could be said to be used in an active business, although, much will depend on the facts of the particular case.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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