3 August 1995 External T.I. 9510635 - QUALIFIED FARM PROPERTY

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:

1.Whether a farm property inherited by a child in 1993 will qualify as "qualified farm property" where the property was jointly owned by a mother and father and only the father meets the gross revenue test since he was the only one who carried on the business of farming.

2.Whether property that was farmed by the deceased for more than 50% of the time during which it was owned by the deceased will be eligible for the rollover of subsection 70(9) of the Act.

Position TAKEN:

1.Property will qualify as "qualified farm property".

2.It is not necessary that the deceased have farmed the property for more than 50% of the time during which the deceased owned the property.

Reasons FOR POSITION TAKEN:

1.Where property was acquired after June 17, 1987, in order to qualify as "qualified farm property", in at least 2 years while the property was owned by any of the persons described in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property", the gross revenue from the farming business carried on by such a person must have exceeded his or her income from all other sources for the year. In this situation, since one such person, the father, meets the gross revenue test, the entire property will qualify as "qualified farm property", notwithstanding that the father was only a part owner of the property.

2.In order for a property to be eligible for the subsection 70(9) rollover, it must, before the taxpayer's death, have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis. Therefore, all that is required is that one or more of the above-mentioned persons have principally used the property in the business of farming prior to the deceased's death.

		5-951063
XXXXXXXXXX	C. Chouinard

Attention: XXXXXXXXXX

August 3, 1995

Dear Sir:

Re: Qualified Farm Property

We are writing in reply to your letter of April 11, 1995, wherein you requested our comments on the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act") and the application of subsection 70(9) of the Act.

In the first situation you describe, real property owned jointly by a father and mother is used for many years by the father in a farming business. Throughout all of those years, the father's gross revenue from farming exceeds his income from all other sources. On the father's death in 1988, the farm property is leased to an arm's length farmer. The father's interest in the property transfers to the mother on a rollover basis pursuant to the provisions of subsection 70(6) of the Act and, on her death in 1993, the entire property transfers on a rollover basis to a child pursuant to subsection 70(9) of the Act. You inquire whether, in this situation, the child would be entitled to claim the $500,000 capital gains exemption on the subsequent sale of the property. In your opinion, although the property would meet the 24 month holding period test, since it has been owned by the child and the child's mother for a period of at least 24 months, only half of the property would qualify as "qualified farm property" of the child as only one-half of the property has ever been owned by a person who meets the gross revenue test, namely, the father.

The second situation you describe is identical to the first situation, except that the mother dies in 1988 and her one-half interest in the property transfers on a rollover basis to the father pursuant to the provisions of subsection 70(6) and, on the father's death in 1993, the entire property transfers to a child under subsection 70(9) of the Act. You inquire whether, in this situation, the child would be entitled to claim the $500,000 capital gains exemption on the subsequent sale of the property. In your opinion, the property would in this case qualify as "qualified farm property", but only if the father continued farming the property after the mother's death. If, however, the father ceased to farm the property in 1988, in your opinion, only half of the property would qualify as qualified farm property for the same reasons as stated above.

You also ask us to confirm that, for purposes of subsection 70(9) of the Act, provided a property was farmed for more than 50% of the time during which it was owned and the owner, the owner's spouse or the owner's child was actively engaged in the business of farming on a regular and continuous basis, the property will be eligible for the rollover of subsection 70(9) of the Act.

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 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

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 Act, is that the property be used in the course of carrying on the business of farming in Canada. For this purpose, real property acquired after June 17, 1987 must have been owned by the taxpayer, the taxpayer's spouse, any of the taxpayer's children or any of the taxpayer's parents 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 in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property". In addition, with regard to the ownership requirement of "at least 24 months immediately preceding" the time of sale, in our view, it will have been met where the property was owned by any of the persons, or by a combination of any of the persons, mentioned in subparagraph 110.6(1)(a)(vi) of the definition of "qualified farm property" during that 24 month period. For instance, if a child owned a farm property for 8 months prior to the disposition of the property and the child's parent owned it for the previous 16 or more months, the ownership requirement would be met.

Therefore, in the two situations described above, in our view, the property owned by the child would qualify as "qualified farm property". As we indicated above, if the property was owned by the child and the child's parent for a period of at least 24 months prior to the sale of the property, the ownership requirement would be met. Although the mother was never involved in the farming business and presumably had no income from the business, since the gross revenue of the father from the farming business exceeded his income from all other sources in at least 2 years while the property was owned by the father and mother, the gross revenue test would be met. As mentioned above, the person meeting the gross revenue test need not be the person who presently owns the property (in this case, the child) or the person who owned the property in the 2 year period in which the gross revenue test applies (in this case, the father and mother). It must, however, be one of the persons described in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property". Since the father of the child is one such person and since, in at least two years while the property was owned by the child's parents, the father's gross revenue from the farming business in which the property was principally used and in which the father was actively engaged on a regular and continuous basis exceeded his income from all other sources, the gross revenue test would be met and the entire property would qualify as "qualified farm property".

As regards your query relating to subsection 70(9) of the Act, in order for a property to be eligible for the subsection 70(9) rollover, it must, before the taxpayer's death, have been used principally in the business of farming in which the taxpayer, the taxpayer's spouse or any of the taxpayer's children was actively engaged on a regular and continuous basis. In our view, where reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where its use is primarily in the business of farming, that is, more than 50% of the asset's use must be in the business of farming. Therefore, if, prior to the taxpayer's death, more than 50% of the property was used by the taxpayer, the taxpayer's spouse or any of the taxpayer's children in the business of farming, the property can be rolled over to a child under subsection 70(9) of the Act. Accordingly, it is not necessary that the deceased have farmed the property for more than 50% of the time during which the deceased owned the property. However, one or more of the persons mentioned in the preamble of subsection 70(9) of the Act must have so used the property prior to the deceased's death. Therefore, in the situations described above, if the property was used by the father in the business of farming for more than 50% of the time during which the property was owned by the father and then by the mother, that is, from the date of its acquisition until 1993, the property will be eligible for the subsection 70(9) rollover.

We trust that these comments will be of assistance.

Yours truly,

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