Principal Issues: [TaxInterpretations translation] Can the farmland owned by a taxpayer be considered qualified farm property?
Position: Question of fact. It would appear yes.
Reasons: The criteria in subsections 110.6(1) and 110.6(1.3) appear to be satisfied.
XXXXXXXXXX 2011-042130
March 7, 2012
Dear Madam,
Subject: Qualified Farm Property
This is in response to your email of September 15, 2011 in which you asked for our opinion on the above subject. We also relied on additional information that you e-mailed to us on February 13 and March 5, 2012.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
In particular, you presented the following situation:
- Your XXXXXXXXXX owned land that was used to carry on a farming business in Canada, including raising XXXXXXXXXX and harvesting and selling timber;
- In XXXXXXXXXX, they devised by donation the farm land, including buildings, animals, livestock, barns, fodder and farm implements to XXXXXXXXXX ("Mr. A");
- Mr. A continued to carry on the farm business, XXXXXXXXXX, on the land in question until his death in XXXXXXXXXX, the date on which XXXXXXXXXX ("Mr. B") inherited it. Mr. B continued to carry on the farm business until his death, XXXXXXXXXX;
- On the death of Mr. B, XXXXXXXXXX, you inherited the farm land and all the buildings, animals and related tools;
- You continued carrying on the farm business with XXXXXXXXXX. Both take an active and regular part in the farm business;
- Forestry activities that occur on the farm land include harvesting and selling firewood, forest management, tree planting and pruning, and drainage. XXXXXXXXXX.
- You wish to dispose of the farm land to your son.
You wish to know if the farmland, at the time of disposition to your son, is eligible as qualified farm property.
Our Comments
When disposing of qualified farm property, a taxpayer may claim the capital gains deduction up to an amount of $750,000. Several requirements under the definition of "qualified farm property" in subsection 110.6(1) and subsection 110.6(1.3) must be met. The calculation of the capital gains deduction for a particular taxpayer is provided in subsection 110.6(2).
Generally, qualified farm property is defined in subsection 110.6(1) to include, subject to certain conditions, real property or eligible capital property used in the course of carrying on the business of farming in Canada, shares of the capital stock of a family farm corporation or an interest in a family farm partnership. The qualified farm property must have been used by the individual to whom the property belongs, the individual’s spouse, common-law partner, child or parent.
For purposes of the Act, the word "farming" is defined in subsection 248(1) to include a number of activities. Generally, farming contemplates the raising and harvesting of various animals or plants in a controlled environment. It is defined to include tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees. This list is not exhaustive and the word "farming" can include growing trees. In certain factual circumstances, it is considered that farming includes the operation of nurseries and greenhouses. We note that the farmland you own has been used for farming activities as well as forestry.
Whether a woodlot constitutes a farming operation or a logging business or another commercial operation is a question of fact. If the main focus of a business conducted with a reasonable expectation of profit (a commercial woodlot) is not lumbering or logging, but is planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan and significant attention is paid to manage the growth, health, quality and composition of the stands, it is generally considered a farming business (a commercial farm woodlot). If the main focus of a business is logging (a commercial non-farm woodlot), and is not growing, nurturing and harvesting trees, the fact that reforestation activities are carried out would not transform that business into a farming operation.
Determining the nature of your forestry activities as farming is a question of fact. From what you have indicated to us, we would still be of the view that the forestry activities that take place on your farmland are farming. XXXXXXXXXX.
Subsection 110.6(1.3) specifies the requirements that must be met in order for a property to qualify as being used in a farming business in Canada. In general, it is necessary that, throughout the 24-month period preceding the time of disposition of the farm property, the property belonged to an individual or the individual’s spouse, common-law partner, child, or parent. Furthermore, in at least two years while the property was owned by the one of those persons, it is necessary that the gross revenue of one of those persons from the farming business for the period during which the property was owned by one of those persons exceeded that person's income from all other sources for that period. Lastly, it is necessary that, in the same two-year period while the property was owned by one of those persons, the property was used principally in a farming business carried on in Canada in which one of those persons was actively engaged on a regular and continuous basis.
Thus, to the extent that either of your XXXXXXXXXX is satisfying the conditions set out in subsection 110.6(1.3), including the one relating to gross revenue, and that the activities on the farmland are farming, including forestry activities, we are of the view that your farmland would qualify as qualified farm property eligible for the capital gains deduction.
We hope that we have been able to answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate