23 March 1999 External T.I. 9902995 - SHARE OF CAPITAL STOCK OF FAMILY FARM CORP

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: Paragraph 22 of IT-268R4 indicates that a property is used principally in a farming business if its primary use is in respect of the farming business operations as opposed to use in concurrent corporate or partnership operations that may even be ancillary or related to the farming operation such as, for example, storage or trucking of farm products for others or contract harvesting. What is intended by “concurrent corporate ...operations”? Is “concurrent operations” intended to include activities that involve further processing or marketing of the farm products that are carried on to achieve better return? Would it make a difference to the retail outlet question if the product is first enhanced through processing and packaging before being supplied to the retail outlet?

Position TAKEN: General comments.

Reasons FOR POSITION TAKEN: N/A

		5-990299
XXXXXXXXXX 	G. Moore

March 23, 1999

Dear XXXXXXXXXX:

Re: Definition of “Share of the Capital Stock of a Family
Farm Corporation” in subsection 70(10) of the Income Tax Act

We are writing in response to your letter of January 27, 1999, regarding the definition of "share of the capital stock of a family farm corporation" in subsection 70(10) of the Income Tax Act (the "Act").

In that definition, there is a requirement that at a particular time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of that definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, child or parent of the person was actively engaged on a regular and continuous basis. Paragraph 22 of IT-268R4, Inter Vivos Transfer of Farm Property to Child, states “a property is used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation as opposed to use in concurrent corporate or partnership operations that may even be ancillary or related to the farming operation...”. You are seeking clarification as to what is intended by “use in concurrent corporate ... operations”. Paragraph 22 of IT-268R4 cites as an example of concurrent operations, the storage of farm products for others or contracting harvesting. You have asked if concurrent operations is intended to include activities that involve further processing or marketing of the farm products that are carried on to achieve a better return. Such activities could include grinding wheat into flour and retailing the flour at farmers markets, processing and bottling honey, or establishing retail outlets through which farm produce is marketed. With respect to retail outlets, you are also asking if it makes a difference if the product is first enhanced through processing and packaging before being supplied to the retail outlet.

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 submitted in the manner set out in Information Circular 70-6R3. 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 only and are not binding on the Department.

In order to qualify for the rollover provision under subsection 70(9.2) of the Act, the shares must have been shares of the capital stock of a family farm corporation, as defined in subsection 70(10) of the Act. The definition of a “share of the capital stock of a family farm corporation” in subsection 70(10) of the Act indicates that, at a particular time, all or substantially all of the fair market value of the property owned by the corporation was attributable to property that was used by a person or persons described in subparagraphs (a)(i) to (a)(iv) of that definition, principally in the course of carrying on the business of farming in Canada in which the person or a spouse, child or parent of the person was actively engaged on a regular and continuous basis. Whether a farming business has been carried on and whether a particular property has been used principally in the course of carrying on the business of farming in Canada are questions of fact which are best resolved by a Tax Services Office.

For the purpose of the definition of “farming” in subsection 248(1) of the Act, farming involves all aspects of commercial production of crops, including natural growth, but does not include the processing of foods. Therefore, where the development of the basic food product involves the growing process and natural biological changes, as opposed to artificially manufactured goods or mere processing, it is considered to be farming, even though farm workers and manually-controlled implements have been replaced by machinery and scientifically developed technical processes. In addition, it has been established that, if to best prepare his or her crop for market, the farmer washes and packages his potatoes or carrots, picks, trims, and packages mushrooms, dries beans or sprays ethylene gas on tomatoes to control colour, these activities are considered an integral part of his or her farming activities. Where a person’s activities involve, for example, grape growing and winemaking, it is our view that these two activities are too different to classify both as various aspects of a single commercial production. Therefore, the activity of growing grapes would be considered farming, but the activity of winemaking would not, since the end product is totally different from the raw materials and it goes beyond the natural growth stage. Growing grapes and producing wine can be compared to growing tomatoes and making tomato paste and sauce. In both scenarios, the first activity falls under the broad definition of farming, whereas the latter does not. Similarly, where fish are raised and matured whether naturally or in an internally controlled computerized environment using scientific methods, the activity is considered farming since the end product is the result of natural growth. However, the activities carried out after the fish have matured and are taken to a processing area, such as gutting, cleaning, freezing, packaging and storage of the frozen product prior to shipping, will normally qualify as processing, not farming.

When a taxpayer is carrying on a farming operation together with some other business operation (e.g., the processing of farm products), it is a question of fact dependent on the circumstances of the case as to whether the farming operation can be considered a separate business. Normally, a taxpayer will be considered to operate two separate businesses if the businesses are not so interlaced, interdependent and interconnected that it is virtually impossible to separate one operation from the other. The fact that the business operations of a taxpayer are of different natures, for example, manufacturing and selling, does not preclude them from being the same business if there is sufficient interconnection between the operations. When determining the degree of interconnection, interlacing, or interdependence between simultaneous business operations, factors to be considered could include:

(i) The extent to which the two operations have common factors that may be pertinent (i.e., do the two operations have the same processes, products, customers, services offered to customers, types of inventories, employees, machinery and equipment?).

(ii) Whether the operations are carried on in the same premises.

(iii) One operation may exist primarily to supply the other.

(iv) Whether the operations have differing fiscal year-ends.

(v) Whether the accounting system records the transactions of both operations as if they were those of one business or whether separate complete sets of records are maintained throughout the year.

However, the Department will generally consider certain non-farming activities to be part of the farming operation where:

(i) the taxpayer carries on a bona fide farming operation;

(ii) the activities are related to the taxpayer’s other farming activities;

(iii) the activities are undertaken on a small scale; and

(iv) the income generated by these activities is incidental to the taxpayer’s other farming revenue.

If the taxpayer’s involvement in “non-farming” activities goes beyond the above guidelines, the Department would consider these activities to be a separate business from that of the farming operation.

We trust that these comments will be of assistance.

Yours truly,

R. Albert, C.A.

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

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