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.
Principal Issues: Is income from leasing farm quota farming income or property income from rent?
Position: Question of fact, dependent upon the circumstances.
Reasons: Where there is no farming business - income would constitute rent. Where there is a farming business carried on, determining considerations include whether the rental activities constitute a separate activity or business, and, whether the leasing income and activity is incidental to the farming income and activity.
2007-025421
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
December 11, 2007
Dear XXXXXXXXXX :
Re: Lease of Quota - Farming or Rental Income
This is in response to your fax of September 27, 2007 inquiring about the characterization of income from the lease of farm quotas. In your correspondence, you describe three hypothetical situations where an individual leases quotas:
1. The individual leases farm quotas to an arm's length party. The individual does not carry on farming operations (except for the leasing of the quotas) and the individual's only other source of income is salary from employment.
2. The individual uses part of the quotas in a farming business and leases the unused excess to an arm's length party.
3. The individual carries on two farming operations, in respect of one of which the individual owns quotas. The individual leases all the quotas in respect of the one farming operation to an arm's length party and continues to carry on the other farming operation.
Your question concerns the characterization of the income earned from the leasing of the quotas in each of the above scenarios and whether such income constitutes farming income. You referred to paragraph 9 of IT-433R Farming or Fishing - Use of Cash Method, which indicates that payments received by farmers for granting other farmers permission to use their marketing quotas are considered to be income from a farming business.
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 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Whether income from the leasing of quotas by an individual in a particular case is considered farming income or property income for tax purposes is a question that can only be resolved after a complete review of the facts and circumstances of the case.
If a taxpayer's farming and the non-farming activities do not constitute separate businesses (see Interpretation Bulletin IT-206R, Separate Businesses), what remains to be resolved is whether the income from the non-farming activities is part of the farming business (i.e., farming income) or constitutes income from a non-business source (e.g., income from property).
Farming income does not normally include rental income, unless the rental activities are incidental to other activities that qualify as farming. The CRA will generally consider income from certain activities that by themselves would be non-farming activities to be from a farming business if the activities are incidental to the taxpayer's farming operations and the income generated by these activities is not material in relation to the taxpayer's other farming revenue. In determining whether the revenue from leasing farm quotas gives rise to income from the business of farming or from property, other factors (e.g., whether the leasing is on an ongoing basis and whether the farming operations to which the quotas relate are discontinued or are simply temporarily suspended) may be relevant. For instance, if an individual leases, for one crop season, farm quotas previously used in farming pending the resumption of farming operations and subsequently in fact uses the quotas again in farming, it would not necessarily be correct in all cases to conclude that the leasing revenue is not farming income, without further investigation of the circumstances leading to the temporary leasing of the quotas.
With respect to the scenarios you described, our general comments follow. In the first situation, the individual is not carrying on any farm activity or business. Therefore, the revenue from the leasing of quotas would likely represent income from property.
In the second situation, the income earned from the leasing of excess quotas would generally be considered income from farming, incidental to the taxpayer's farming operations.
As regards the third situation described, the information is insufficient to reach a conclusion that the leasing revenue is income from property or from the business of farming. However, we would observe that whether or not the quotas are related to the individual's other farming operations (e.g., a farmer leases excess quotas) and whether or not the leasing of the quotas is on an ongoing basis would be factors to be taken into account in reaching such conclusion.
The comments in paragraph 9 of IT-433R Farming or Fishing - Use of Cash Method, to which you referred, specifically address income received by a "farmer", meaning an individual who is, in fact, carrying on a farming business. As such, the comments would not apply to an individual who is not carrying on a farming business.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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