Principal Issues: [TaxInterpretations translation] (1) In the case of a person referred to in paragraph 110.6(1.3)(a), you wish to know whether the capital gains realized by that person must be included in computing that person’s gross revenue pursuant to 110.6(1.3)(b)(i)(A).
(2) Alternatively, in the case of a person referred to in paragraph 110.6(1.3)(a), you wish to know whether the capital gains realized by that person must be included in computing the person’s income.
(3) If the answer to (1) or (2) is yes, you wish to know if the concept of taxable capital gain or gross capital gain should apply.
Position: (1) No.
(2) No.
(3) Not applicable. .
Reasons: The expression "gross revenue ... from the farming business" in subclause 110.6(1.3)(b)(i)(A)(I) of the Act excludes capital amounts. Since a capital gain is not, in our view, income from a source, the term "income ... from all other sources" does not include capital gains.
XXXXXXXXXX 2011-039404
October 18, 2011
Dear Madam,
Subject: Income Test – Property used in the business of farming
This is in response to your email dated January 27, 2011 in which you requested our opinion regarding the gross revenue test and the test of income from all other sources set out in subsection 110.6(1.3) of the Income Tax Act (the "Act"), as well as its interaction with subsection 75(2).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
The Submitted Facts
You referred to Trust A, a personal trust that has been operating a commercial woodlot since 2000, of which Mr. A is the trustee and one of the two beneficiaries. In the same year, Mr. A donated two woodlots (“Lots A1 and A2") to Trust A and Trust A acquired three other woodlots from third parties ("Lots T1, T2 and T3"). In November 2008, Trust A acquired additional woodlands from a third party.
During 2009, Trust A sold two of those woodlots, A1 and T1. The taxable capital gain from the disposition of Lot A1 was attributed to Mr. A under subsection 75(2). You specified that Mr. A declared that taxable capital gain on his tax return for the 2009 taxation year.
With respect to Lot T1, the capital gain from its sale was allocated and paid to the second beneficiary of Trust A, Ms. B. You submitted that that land would otherwise meet the conditions of the definition of qualified farm property within the meaning of subsection 110.6(1) and you added that the resulting capital gain was subject to subsection 104(21.2).
Your Questions
For the purposes of the capital gains exemption, you asked the following questions:
(1) In the case of a person referred to in paragraph 110.6(1.3)(a), you wish to know whether the capital gains realized by that person must be included in the calculation of the person’s gross revenue under clause 110.6(1.3)(b)(i)(A).
(2) Alternatively, in the case of a person described in paragraph 110.6(1.3)(a), you wish to know whether the capital gains realized by that person must be included in computing the person’s income from all sources other than a farming business under clause 110.6(1.3)(b)(i)(A).
(3) If the answer to (1) or (2) is yes, you wish to know if the concept of taxable capital gain or gross capital gain should be applicable.
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute a real situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of the Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you.
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, as defined in 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, for example, the individual or if the individual is a personal trust, a beneficiary of the trust that is entitled to receive directly from the trust any income or capital of the trust.
Subsection 110.6(1.3) provides that for the purposes of the definition of qualified farm property, a property is considered to be used in the course of carrying on the business of farming in Canada only if the conditions set out in 110.6(1.3)(a) and (b) or paragraphs 110.6(1.3)(a) and (c) are satisfied in respect of that property.
In particular, clause 110.6(1.3)(b)(i)(A) requires that, throughout at least two years in which the property was owned by a person referred to in paragraph 110.6(1.3)(a), the gross revenue of that person from the farm business exceeded the income of that person from all other sources for that period.
Whether a gain from the disposition of land by Trust A would be considered business income, income from property or a capital gain, whether Trust A is carrying on a farming business at any particular time, and whether the woodland is used principally in the course of carrying on that business are questions of fact. That determination can only be made after a review of all the facts of the particular situation by the appropriate Tax Services Office.
More specifically, according to 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. We invite you to consult that Interpretation Bulletin, which is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it373r2-consolid/READ-ME. html.
In response to your questions, we are of the view that an individual referred to in paragraph 110.6(1.3)(a) must not include in computing the individual’s gross revenue - under clause 110.6(1.3)(b)(i)(A) - the capital gains the individual realized. Indeed, the term "gross revenue" is defined in subsection 248(1) and excludes amounts received as capital.
Furthermore, we are generally of the view that a capital gain is not income from a source. In that context and in light of the situation you have described to us, any capital gain realized by an individual referred to in paragraph 110.6(1.3)(a) that is not included in the calculation of that individual's gross revenue should also not be included in the calculation of that individual's income from all other sources.
In light of our comments, we do not believe it is necessary to comment on the concepts of taxable capital gains or gross capital gains.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnership Section
Income Tax Rulings Directorate