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Principal Issues: Does land qualify as qualified farm property under section 110.6 in a particular situation?
Position: Question of fact.
Reasons: General comments.
XXXXXXXXXX 2010-037263
I. Landry, M. Fisc.
September 14, 2010Dear Madam,
Subject: Qualified farm property
This is in response to your correspondence of June 25, 2010, in which you asked us whether land you acquired as a result of your spouse's death in XXXXXXXX 2005 (the "Land") qualifies as qualified farm property as defined in subsection 110.6(1) of the Income Tax Act (the "Act") in the following situation. Also, you wish to know if you will be able to benefit from the capital gains deduction in the event that the Land is left to your children upon your death and if the Land would subsequently qualify as qualified farm property to them.
Briefly, you explained in your correspondence that in XXXXXXXXXXXX, your late husband acquired the Land and other assets from his father in order to continue carrying on the family farm business. In XXXXXXXXXXXX, he ceased to carry on the farming business. However, the Land has continued to be used in the farming business to this day by a farmer who was known to your deceased spouse. That farmer exploits the Land in exchange for the harvest he obtains. Since that time, neither you nor your late husband has received any income from the Land.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the Canada Revenue Agency not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when determining whether a completed transaction has received proper tax treatment, the determination is first made by our tax services offices following a review of all facts and documents, which is usually performed as part of an audit engagement.
However, we can offer the following general comments that we hope may be helpful to you.
Qualified farm property:
An individual who is resident in Canada throughout a particular taxation year and who disposes of qualified farm property in the particular taxation year may deduct, in computing taxable income for the particular taxation year, the amount that the individual is entitled to claim to the extent that the amount does not exceed the limits in paragraphs 110.6(2)(a) to (d). This deduction is commonly referred to as the lifetime capital gains deduction and is limited to a lifetime amount of $375,000.
Qualified farm property as defined in subsection 110.6(1) includes real or immovable property that was 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.
Subsection 110.6(1.3) provides that, for the purposes of the definition "qualified farm property", a property owned by the individual is considered to be used in the course of carrying on the business of farming in Canada only if the conditions set out in subparagraphs 110.6(1.3)(a) to (c) are satisfied.
The condition in paragraph 110.6(1.3)(a) is that the property must have been owned throughout the period of at least 24 months before its disposition by the individual, or a spouse, common-law partner, child or parent of the individual. That condition appears to be satisfied in the situation you described because the Land has been owned for more than 24 months.
The condition in paragraph 110.6(1.3)(b) requires that, in at least two years while the property was owned by the individual, or a spouse, common-law partner, child or parent of the individual, the gross revenue of the individual, or a spouse, common-law partner, child or parent of the individual from the farming business exceeded the income from all other sources for that period and that the property was used during that period principally in a farming business carried on in Canada in which the individual, or a spouse, common-law partner, child or parent of the individual was actively engaged on a regular and continuous basis. We are unable to comment on the application of this condition to the situation you have outlined in your correspondence as it is essentially a question of fact. However, one way in which this condition would be satisfied is if it were shown that, for at least two years during which the Land was owned by your late spouse, the gross revenue derived by your late husband earned from the farming business exceeded his income from all other sources of income and that, for that period, the Land was used principally in a farming business carried on in Canada in which he was actively engaged on a regular and continuous basis.
The condition in paragraph 110.6(1.3)(c) applies to property acquired before June 18, 1987, and is not applicable in the situation you described because you acquired the Land in XXXXXXXX 2005.
Tax consequences upon your death:
If you still own the Land on your death, you will be deemed under paragraph 70(5)(a) to have disposed of it immediately before your death and to have received proceeds of disposition equal to its fair market value. Any person who, as a consequence of your death, acquires the Land will be deemed by virtue of paragraph 70(5)(b) to have acquired it at the time of your death at a cost equal to its fair market value immediately before your death. The capital gain resulting from this deemed disposition may allow you to claim the lifetime capital gains deduction under subsection 110.6(2) if the Land qualifies as qualified farm property.
Furthermore, please note that subsections 70(9) and 70(9.01) may in certain circumstances allow your legal representative to elect in your income tax return for the taxation year of your death to have the transfer of the Land to your children occur at a value between the adjusted cost base and the fair market value of the property immediately before death rather than at fair market value.
Capital gains deduction for your children:
If, as a result of your death, your children acquire the Land, the capital gain from a subsequent disposition of the property may allow them to claim the lifetime capital gains deduction under subsection 110.6(2) if, among other things, the Land qualifies as qualified farm property at the time of disposition.
We hope that our comments will be of assistance.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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