Principal Issues: Are Milk Quotas considered Qualified Farm Property
Position: Yes if the milk quota otherwise meets the conditions provided in the definition of Qualified farm Property in subsection 110.6(1) of the Act.
XXXXXXXXXX 2011-040073 S. D'Angelo (613)952-5803 April 29, 2011
Dear XXXXXXXXXX :
Re: Milk Quotas - Qualified Farm Property
This is in response to your correspondence of March 24, 2011, inquiring whether the Canada Revenue Agency (CRA) considers milk quota to be "qualified farm property"("QFP") for the purposes of the $750,000 capital gains exemption under section 110.6 of the Income Tax Act (the "Act").
Our comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to 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. Notwithstanding the above, we are prepared to provide the following comments which may be of assistance.
Subsection 110.6(2) of the Act permits an individual (other than a trust) who is resident in Canada throughout a taxation year to claim a capital gains deduction where the individual has disposed of QFP in that year, provided certain conditions are satisfied.
QFP, which is defined in subsection 110.6(1) of the Act, includes property that is real or immovable property used in a farming business, a share of the capital stock of a family farm corporation, an interest in a family farm partnership, or eligible capital property used in a farming business (e.g., milk and egg quotas).
Milk quotas are discussed in paragraph 24 of Interpretation Bulletin IT-143R2, Meaning of Eligible Capital Expenditure.
"Milk quotas issued by provincial milk marketing boards are generally issued at no cost to the producer. However, transfers of quotas for value may generally be made, subject to the terms and approval of the board. The cost of a milk quota purchased after 1971 is an eligible capital expenditure. Similarly, a quota exchange fee (e.g., to increase an existing quota) paid to a milk marketing board is an eligible capital expenditure .The cost of other similar rights or licenses issued under governmental authority is also an eligible capital expenditure."
Milk quotas qualify as an eligible capital property. To qualify as QFP, a property of an individual must be used in the course of carrying on a farming business in Canada. In order for the quotas to be considered to be so used, they must meet one of two general farming-use tests set out in subsection 110.6(1.3) of the Act. The two tests in subsection 110.6(1.3), as proposed to be amended by draft legislation released to the public on November 5, 2010, are described in general terms below.
The first farming-use test is made up of two parts. The first part is that the property of an individual must satisfy an ownership period in that it must have been owned by certain qualifying owners (e.g., the individual, spouse, common-law partner, child or parent of the individual) throughout a period of at least 24 months immediately preceding the disposition. The second part of this farming-use test is that in at least 2 years during the mentioned ownership period, the gross revenue from the farming business that was carried on by the operator (i.e., a person in the list of qualifying owners mentioned above) in which the property was principally used, and in which a person in the list of qualifying owners was actively engaged on a regular and continuous basis, must have exceeded the operator's income from all other sources for the year.
Generally speaking, a property of an individual is expected to qualify as QFP if it is used principally in a farming business in Canada by the individual that carries on the business on a full-time basis and depends on that business for his or her livelihood.
The second farming-use test is a special test that applies only to a property last acquired before June 18, 1987 (or after June 17, 1987, under an agreement in writing entered into before that date). Generally, this second farming-use test is satisfied if the property was used by certain qualifying users (e.g., the individual, spouse, common-law partner, child or parent of the individual) principally in carrying on the business of farming in Canada, either in the year the property is disposed of or in at least five years during which the property was owned by certain qualifying owners, which may include any of the qualifying users referred to above.
We trust our comments will be of assistance.
Yours truly
S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch