27 May 1997 External T.I. 9706785 - ATTRIBUTION, QUAL FARM PROPERTY, SHARECROPPING

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:

qualified farm property; income from land received under a sharecropping arrangement: title to land transferred to joint ownership with spouse in 1993

Position:

1) income from a sharecropping arrangement is not income from the business of farming
2) land transferred to a spouse after 1987 will be subject to the post-june 87 rules of the def'n of qualified farm property if the spouse reports the gain, but if the attribution rules apply, the pre-June 87 rules may apply if the transferor last acquired the property before June 18, 1987

Reasons:

1) longstanding position on sharecropping is set out in para 9 of it-433R

2) if the attribution rules apply, 74.2(2) deems the transferred property to have been disposed of by the transferor, so that the transferor may be entitled to a 110.6 deduction. Under the def'n of qualified farm property, property which is owned by the individual, the individual's spouse or by a family farm partnership is qualified farm property of the individual, if, among other things, the property was used in the business of farming. The date the property was last acquired by the individual claiming the 110.6 deduction is relevant for that purpose. When the attribution rules apply, it is the date when the transferor last acquired the property which is relevant for the purpose of determining which test applies (the pre- or post-June 87 test)

A. Humenuk
XXXXXXXXXX 970678

May 27, 1997

Dear Sir:

Re: Definition of "Farming" and "Qualified Farm Property"

We are replying to your letters of March 3, and April 10, 11 and 30, 1997, in which you ask for an advance income tax ruling confirming the status of land owned by yourself and your spouse as qualified farm property.

Information Circular 70-6R3 sets out the conditions and restrictions involved in issuing an advance income tax ruling in respect of a proposed transaction. We have enclosed a copy of this document for your information. As indicated in the Information Circular, advance income tax ruling requests must include a deposit of $481.50 as an advance payment for the ruling, as well as a complete description of the facts and the proposed transaction. However, a ruling cannot be issued when the matter in respect of which the ruling is requested is primarily one of fact. In this respect, you should note that the Department does not rule on the issue of whether a farming business is or has been carried on, as it is primarily a question of fact.

As your request for an advance income tax ruling does not comply with the requirements set out in Information Circular 70-6R3, we cannot provide you with a ruling. We are, however, prepared to offer the following general comments, which are based on our understanding of the facts of your situation as you have related them to us in the above-mentioned correspondence and our telephone conversation (XXXXXXXXXX/Humenuk) of April 11, 1997.

Facts

You acquired 65.5 hectares of farmland in XXXXXXXXXX. Until 1991, the land or part thereof was used in the production of grain under an oral sharecropping arrangement. In 1991, the sharecropping arrangement was ended and the property was leased for farming to a person unrelated to you who continued to farm the land. In 1993, you transferred a one-half undivided interest in the land to your spouse, such that you became joint owners of the land. You indicate that you have assisted the sharecropper in the past with the farming.

Our Comments

One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act"), is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will qualify as "qualified farm property" provided it was used by the person claiming the capital gains exemption, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares, a family farm partnership in which any of the above persons have an interest or a personal trust from which the individual acquired the property, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the individual, a spouse, child or parent of the individual, a personal trust from which the individual acquired the property or a family farm partnership.

The determination of whether land is used by a taxpayer in carrying on a farming business is a question of fact. In an actual situation, where more than one party is involved, it is necessary to review the relevant agreements and the method by which the agreements are carried out. As indicated in paragraph 9(a) of Interpretation Bulletin IT-433R, Farming or Fishing - Use of the Cash Method (a copy of which is enclosed), the crop share received by a landlord in a sharecropping arrangement is considered to be rental income and not income from farming. The reference to "sharecropping arrangement" means an arrangement where a taxpayer or landlord receives from a tenant a share of crop in lieu of rent. The Department considers that a lessor of farm property does not use such property in the business of farming.

Although you indicated during our telephone conversation that your income from the land was received under a sharecropping arrangement, you also stated that you assisted with the farming to a limited extent and that the grain tickets were issued in your name. In the absence of any documentation providing details of your particular sharecropping arrangement and the manner in which the terms of the arrangement were carried out, we cannot determine conclusively whether you were a lessor of land or whether you were in the business of farming. However, since the assistance you provided to the sharecropper was limited, it is unlikely that you would be considered to have carried on the business of farming.

With respect to your spouse's interest in the property, the documents submitted suggest that she acquired her interest in 1993 and thus, after June 17, 1987. Where property is acquired after June 17, 1987, the definition of "qualified farm property" in subsection 110.6(1) of the Act requires that the property in question have been owned by an individual, a designated beneficiary of a personal trust, an individual's or a designated beneficiary's spouse, child or parent, a personal trust from which the individual acquired the property or a family farm partnership, throughout the 24 months preceding the sale. Furthermore, in at least 2 years while the property was so owned, the gross revenue from the farming business carried on by any of these individuals must have exceeded their income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be any of the persons described above.

As we indicated previously, we cannot determine from the facts you have provided whether you and your spouse have used the property in carrying on the business of farming. Therefore, we cannot comment on whether the post-June, 1987 test in the definition of "qualified farm property" would be met in regards to your spouse's interest in the property.

In addition, you should note that any capital gain realized by your spouse in respect of the disposition of her interest in the property may be attributed to you, with the result that it must be included in your income, if the attribution rules of subsection 74.2(1) of the Act apply. In such circumstances, you would be considered to have disposed of the transferred property by virtue of subsection 74.2(2) of the Act, and, in determining whether the transferred property is "qualified farm property", the "individual" referred to in the definition of "qualified farm property" would be yourself. Therefore, the determination of whether the pre or post-June, 1987 rules of the definition of "qualified farm property" would apply in these circumstances would hinge upon the date that you last acquired the transferred property. We are enclosing a copy of Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property, which provides additional information concerning the attribution of capital gains on property transferred to a spouse.

As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R3, they are not binding on the Department.

We hope that these comments have clarified the Department's interpretation of the definition of "qualified farm property" for the purpose of the capital gains deduction.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosure