24 April 2002 External T.I. 2002-0127025 - FARMING

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 CCRA.

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

Principal Issues:

1. Does a sharecropping arrangement result in the earning of active business income by a corporation?

2. If the sharecropping arrangement results in the corporation earning rental income, would withdrawals from NISA Fund No. 2. be investment income and taxed as inactive income?

3. Would the sale of breeding hogs by a corporation result in a capital gain or business income?

4. Would a corporation involved in the activities discussed above be considered a farm corporation?

Position TAKEN:

1. Question of fact.

2. No.

3. Business income.

4. Question of fact.

Reasons:

1. Question of fact.

2. Withdrawals from NISA Fund No. 2 are included in income pursuant to subsection 12(10.2). These amounts are included in "income of the corporation for the year from an active business" pursuant to paragraph (b) of the definition in subsection 125(7).

3. Subsection 248(1) defines livestock held in the course of carrying on a farming business to be inventory.

4. Whether a corporation is a farm corporation is a question of fact.

XXXXXXXXXX 2002-012702
T. Young, CA
April 24, 2002

Dear XXXXXXXXXX:

Re: Incorporation of Farming Operations

This is in reply to your letter of February 27, 2002, requesting our interpretation with respect to various situations related to farming.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Therefore, in answer to your questions, we can only provide you with the following general comments.

1. A corporation owns farmland. Under a crop share agreement with a third party, the third party receives a share of the crop for providing seeding and harvesting services. The corporation pays for chemical and pesticides, fuel, property taxes, fertilizer, and building and equipment repairs. Is the income generated under this arrangement by the corporation farm income eligible for the small business deduction with all income considered active?

Our Comments

Income received by a landlord in a sharecropping arrangement is normally considered to be rental income and not income from farming. However, as stated in paragraph 9 of IT-433R, Farming or Fishing - Use of Cash Method, the above reference to "sharecropping arrangement" means an arrangement where a taxpayer or landlord receives from a tenant a share of crop in lieu of rent. There may be other types of sharecrop arrangements where the owner of the land could be in the business of farming. For example, a corporation could be in the business of farming in a situation where the corporation pays a third party a share of the crops in return for seeding and harvesting services.

2. If the income from the sharecropping arrangement were considered rental income instead of farm income, would withdrawals from the corporation's NISA Fund No. 2 be considered investment income and taxed as inactive income?

Our Comments

Subsection 125(1) of the Income Tax Act (the "Act") provides for a corporate tax reduction (commonly referred to as "the small business deduction") in respect of income of a Canadian-controlled private corporation from an active business carried on by it in Canada. Withdrawals from NISA Fund No. 2 are included in income pursuant to subsection 12(10.2) of the Act, and are included in the definition of "income of the corporation for the year from an active business" pursuant to paragraph (b) thereof.

3. A farm corporation owns breeding hogs that were purchased with an expectation that their value would increase. The hogs are being raised by a farmer operating at arm's-length in return for a share of the offspring. Would the sale of the breeding hogs be considered a capital gain rather than active income?

Our Comments

Farming is defined in subsection 248(1) of the Act to include various activities, including livestock raising or exhibiting. Inventory is defined in subsection 248(1) to include all of the livestock held in the course of carrying on the business of farming. Therefore, the sale of the breeding hogs by a corporation in the business of farming would be the sale of inventory resulting in amounts received on account of income.

4. Would a corporation involved in the activities discussed above be considered a farm corporation?

Our Comments

Whether a corporation is a farm corporation is a question of fact and can only be determined by examining all of the facts of the situation.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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