Principal Issues: [TaxInterpretations translation] Do the woodlot and the building qualify as a qualified farm property under section 110.6 in a particular situation?
Position: Question of fact
Reasons: General comments
XXXXXXXXXX
2011-041331
Danielle Bouffard
February 24, 2012
Dear Sir,
Subject: Property used in a farming business
This is in response to your request regarding the above subject.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where a taxpayer, Father, acquired a woodlot and a building in 1977. Since their acquisition, this property has been leased to his son who uses it as part of his farming business. In 1994, Father made an election under subsection 110.6(19) in respect of the woodlot and building.
Father having sold the woodlot and the building to his son in 2011, you wish to know if they qualify as qualified farm property for the purposes of the capital gains deduction in subsection 110.6(2).
Our Comments
When it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments. These comments may, however, under certain circumstances, not apply to your particular situation.
In general, subsection 110.6(2) provides individuals, other than a trust, with an exemption of up to $750,000 for capital gains realized on the disposition of qualified farm property. A qualified farm property, which is defined in proposed subsection 110.6(1), includes real or immovable property that was used principally in the course of carrying on the business of farming in Canada by, among others, the individual or the individual’s child.
In the context of previous opinions, the Income Tax Rulings Directorate indicated that cadastral lots are considered for the purposes of the Act to be separate immovable property. Consequently, the determination of the status of a piece of land, as to whether or not it may be considered to be property used principally in the course of carrying on a farming business, must be made on a lot by lot basis. For the purposes of this letter, we have assumed that the woodlot consists of a single cadastral lot.
In addition to the requirement that the property disposed of must be immovable property, the criteria in subsection 110.6(1.3) must also be satisfied in order to qualify for the capital gains deduction. Subsection 110.6(1.3) specifies the circumstances in which a property will be considered to have been used in the course of carrying on the business of farming in Canada.
Under paragraph 14 of Interpretation Bulletin IT-373R2, Woodlots, 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. For more information, we invite you to consult that Interpretation Bulletin which is available on our website at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it373r2-consolid /READ-ME.html.
For the purposes of this letter, we have assumed that the woodland is a commercial farm woodlot. Since the election was made by Father in respect of the woodlot and building on February 22, 1994 under subsection 110.6(19) (subsection 110.6(19) providing a mechanism for the deemed disposition of each capital property and its acquisition by a taxpayer), we are of the view that paragraphs 110.6(1.3)(a) and (b) should apply.
The condition of paragraph 110.6(1.3)(a) is that the property must have been owned by the individual or the individual’s child throughout a period of at least 24 months before the disposition. That condition seems to be satisfied in the situation that you described to us since the woodlot land and the building belonged to Father since 1977.
The condition of paragraph 110.6(1.3)(b) requires that, in at least two years while the property was owned by, inter alia, the individual or the individual’s child, the gross revenue of the individual or the individual’s child from the farming business exceeded income from all other sources for that period and the property was used during that period principally in a farming business carried on in Canada in which the individual or the individual’s child was actively engaged on a regular and continuous basis. It is impossible for us to comment on the application of that condition to the situation you have described, since it is essentially a matter of fact. However, that condition would be satisfied in particular if it were shown that for at least two years when the woodlot and the building belonged to Father, his son's gross revenue from the farming business exceeded his income from all the others sources of income and for that period, the woodlot and the building were used principally in a farming business carried on in Canada in which the son was actively engaged on a regular and continuous basis.
Best regards,
François Bordeleau, Advocate
Manager
Business and Trusts Division
Income Tax Rulings Directorate