Principal Issues: [TaxInterpretations translation] i) Whether land that was inherited by the taxpayer before June 18, 1987 and consists of a single cadastral lot of which 60% was used by the taxpayer's spouse in the course of carrying on the business of farming for at least 5 years was a "qualified farm property" ii) What is the effect of a subdivision of the land in order to sell a parcel?
Position: i) Yes. ii) Question of fact.
Reasons: i) The conditions in subparagraph 110.6(1.3)(c)(i) are satisfied. ii) See comments in IT-218R.
December 9, 2011
Montreal Tax Services Office Income Tax Rulings Directorate Income Tax Technical Interpretation Service Business and Trusts Division Attention: Bruno Bevacqua James Gibbons 2011-039964
Qualified farm property (QFP)
This memo is in response to your email of March 21, 2011, which followed on an earlier request number 2010-037580 (the " first letter") which inquired as to whether a piece of land was a QFP within the meaning of the definition of that term in subsection 110.6(1) of the Income Tax Act (the "Act"). In this case, contrary to the situation described in request 2010-037580, you have made the assumption that the land (the "land") originally consisted of a single cadastral lot.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
You wish to know whether a subdivision of the land for the purpose of selling a parcel would have a tax impact and/or an impact on the QFP exemption for the purposes of section 110.6.
Our Comments
To the best of our knowledge, apart from the assumption that the land originally consisted of a single cadastral lot, all the other facts are identical to those described in the first letter.
In the first letter, it was pointed out that cadastral lots are considered, for the purposes of the Act, to be separate items of real property and, consequently, the determination of the status of the land, as to whether it can be considered as property used principally in the course of carrying on a farming business, must be made on a lot-by-lot basis. However, in the current case, the land consisted of a single cadastral lot such that 60% of that land was used by Ms. X's husband in the course of carrying on the business of farming, that is, market gardening, between 1970 and 1977.
As we indicated in the first letter, since Ms. X inherited the land from her husband before June 18, 1987, we consider that the land was used in a farming business in Canada if one of the two conditions in paragraphs 110.6(1.3)(c)(i) or (ii) are satisfied. With respect to the use test in subparagraph 110.6(1.3)(c)(ii), paragraph 18 of Interpretation Bulletin IT-373R2 -CONSOLID, Woodlots, states that the criterion that an asset must be used "principally" in the course of carrying on the business of farming is satisfied if more than 50% of the asset’s use is actually for that business. Consequently, since Ms. X's husband used 60% of the land in the course of market gardening from 1970 to 1977, it appears that that criterion would be satisfied.
As for your second question, the answer is largely in paragraph 24 of Interpretation Bulletin IT-218R. That paragraph states the following:
Parcels of farming or inherited land referred to in 23 above may be difficult to sell en bloc and the land may be sold by subdividing it and selling the lots individually. It is the Department's view that the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain notwithstanding that such subdivision may enhance the value of such land. A gain on the sale of farming or inherited land will remain a capital gain if an examination of all other facts, both before and after subdivision, establishes this to be so. However, where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to have converted the land from a capital property into a trading property. Where such a conversion occurs see 15 above for treatment of gains or losses arising from the ultimate sale of the property.
Paragraph 15 of that Bulletin states that where land that is capital property has been converted to inventory, capital gains or losses, if any, will be calculated on the basis that a notional disposition of such property occurred on the date of conversion. However, the amount of such notionally determined capital gains or losses will be considered to give rise to taxable capital gains or allowable capital losses for the taxation year during which the actual sale of the real estate occurs and will be required to be so reported in that same year. Also, where there is a capital gain that qualifies as being from a QFP, the taxpayer will be entitled to the capital gains deduction in respect of qualified farm property.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Trusts Section
Income Tax Rulings Directorate