Principal Issues: [TaxInterpretations translation] 1. Do Father's woodlands qualify as qualified farm property?
2. If a usufruct is constituted by Father, is there disposition at the time of the gift of bare ownership from Father to Child?
Position: 1. Possibly if all conditions in proposed subsection 110.6(1.3) are satisfied.
2. Yes.
Reasons: 1. Definition of qualified farm property for 110.6(1.3) and 110.6(2.1)
2. The gift of bare ownership is the disposition of property within the meaning of the Act.
XXXXXXXXXX 2011-042179 Lucie Allaire, LL.B., CGA, D. Fisc. January 12, 2012
Dear Sir,
Gift of bare ownership of woodlands
This is in response to your email dated September 20, 2011 in which you are asking for our opinion regarding the gift of bare ownership of woodlands and the definition of qualified farm property within the meaning of section 110.6 of the Income Tax Act (the "Act"). You have provided additional information regarding your request during a telephone exchange (XXXXXXXXXX/Allaire).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act, as well as to the proposed amendment to the Act provided for in the Legislative Proposals Relating to Income Tax and Sales and Excise Taxes of November 5, 2010.
The Submitted Facts
You referred to Father, a retired person, who acquired woodlands from his father before 1987. Father wishes to gift the bare ownership of the woodlands to Child, while retaining the usufruct of the woodlands. We understand that the usufruct was not constituted at the time of or as a result of Father's death.
You added that Child will not pay Father any consideration and you specified that the woodlands have already been commercially exploited in the past, but are not currently used principally in the course of carrying on the business of farming. You added that Child does not intend, for the time being, to commercially exploit them.
Your questions
You wish to know if the woodlands are qualified farm property for the purpose of the capital gains deduction. You also asked whether, considering the constitution of a usufruct, a disposition of woodlands took place before the death of Father, that is to say at the time of the gift of their bare ownership.
Our Comments
We have assumed that Father is the creator of the usufruct and that the constitution of the usufruct complies with the provisions of the Civil Code of Quebec.
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 proposed subsection 110.6(1), includes real or immovable property that was used in the course of carrying on the business of farming in Canada by, for example, an individual, the individual’s parent or the individual’s child.
In addition to the requirement that the property disposed of be immovable property, the requirements in proposed subsection 110.6(1.3) must also be satisfied in order to qualify for the capital gains deduction.
First, throughout the period of at least 24 months preceding the disposition in the year in which the individual sold it, the property was owned by the individual or other taxpayer referred to in proposed subparagraph 110.6(1.3)(a)(i).
In addition, where the property was acquired before June 18, 1987, we consider that the property was used in the business of farming in Canada if one of the following two conditions, as set out in subparagraphs 110.6(1.3)(c)(i) and 110.6(1.3)(c)(ii), is satisfied:
- in the year of disposition, the property was used principally in the course of carrying on the business of farming in Canada by any taxpayer referred to in proposed subparagraph 110.6(1.3)(c)(i);
- the property was used principally in the course of carrying on the business of farming in Canada for at least five years during which it was owned by any taxpayer referred to in proposed subparagraph 110.6(1.3)(c)(ii).
First, it must be determined whether the woodlands were exploited in a farming business. 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. 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.
Furthermore, by virtue of paragraph 248(3)(a), a usufruct, which is governed by Quebec civil law, is deemed to be a trust for the purposes of the Act and the property that is the subject of the usufruct is deemed to be have been transferred to and held by the trust, and not otherwise. The usufructuary and the bare owner are also deemed to be beneficially interested in the trust under paragraph 248(3)(d).
In addition, the Civil Code of Québec provides that the maintenance of property subject to the usufruct is the responsibility of the usufructuary in the same way as for ordinary charges affecting the property.
Based on the facts presented, and in light of the foregoing, the constituting of the usufruct in respect of Father's woodlands has the effect of creating a deemed trust for the purposes of the Act. Since Child will not pay consideration to Father, the deemed trust would qualify as a personal trust within the meaning of subsection 248(1).
In addition, Father is deemed to have disposed of the woodlands to the trust in return for which he has received a beneficial interest in the use and enjoyment of the land.
Whether or not a particular property has been “used principally in the course of carrying on the business of farming” is a question of fact to be considered for each of the properties, that is to say for each woodland. Whether a capital gain arising from Father's disposition of woodlands to the deemed trust would be considered business income, property income or capital gain and whether the Father’s woodlands have been used principally in the course of carrying on the business of farming are all questions of fact, and that determination can be made only by the appropriate tax services office.
The disposition of the woodlands by Father to the deemed trust results in the application of subsection 69(1). Although the existence of an arm’s length relationship between the deemed trust and Father is also a question of fact under paragraph 251(1)(b), the application of subsection 69(1) would ensure that Father is deemed to have received consideration equal to the fair market value following the disposition of the woodlands to the deemed trust.
As a usufructuary and a person in control of the property held by the deemed trust (the Civil Code of Québec confers on the usufructuary control of the property to which the usufruct relates), Father will be treated as trustee of the deemed trust under subsection 104(1). Consequently, during the existence of the trust, he will exercise control over the trust and the deemed trust will be a person with whom Father does not deal at arm's length.
Consequently, with respect to your questions, the gift of bare ownership of woodlands is a disposition within the meaning of the Act. Since the woodlands are not operated commercially at the time of disposition, they will qualify as qualified farm property only if the condition in proposed subparagraph 110.6(1.3)(c)(ii) is satisfied.
Best regards,
François Bordeleau, Advocate
Manager
Business and Trusts Section
Income Tax Rulings Directorate