Principal Issues: [TaxInterpretations translation] Do the shares sold by Mr. Y qualify as "shares of the capital stock of a family farm corporation" as defined in subsection 110.6(1) if Mr. Y no longer uses the property in the course of carrying on a farming business at the time of the sale?
Position: To determine whether a property has been used “principally” in the course of carrying on the business of farming in Canada, the use of the property must be considered throughout the period of ownership by the taxpayer.
Reasons: Wording of the definition of share of the capital stock of a family farm corporation in 110.6(1).
XXXXXXXXXX 2010-037486 Anne Dagenais November 22, 2010
Dear Madam,
Subject: Shares of the capital stock of a family farm corporation
This is further to your letter of July 6, 2010, asking whether shares of a corporation are shares of the capital stock of a family farm corporation as defined in subsection 110.6(1) of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Specifically, you described a situation where a corporation ("Farmco") was incorporated in XXXXXXXXXX. Farmco is a "taxable Canadian corporation" as defined in subsection 89(1) and a "Canadian-controlled private corporation" as defined in subsection 125(7). The shares of Farmco were owned equally by Mr. and Mrs. X. From XXXXXXXXXX to XXXXXXXXXX, the only property of Farmco, being farmland and farm equipment, was used principally in the course of the farming business carried on by Mr. and Mrs. X. In XXXXXXXXXX, Mr. and Mrs. X disposed of all of their shares to Mr. Y, an arm's-length third party. From XXXXXXXXXX to XXXXXXXXXX, Farmco's assets, namely the land and farm equipment, were used principally in the course of Mr. Y's farming business. On XXXXXXXXXX , Farmco's assets were leased to a corporation (“Corporation A") pursuant to a long-term lease.
Mr. Y eventually wishes to sell his shares in Farmco. You wish to know if those shares qualify as shares of the capital stock of a family farm corporation. Specifically, you are asking for our interpretation of paragraph (b) of the definition "share of the capital stock of a family farm corporation" in subsection 110.6(1).
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this 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 documentation to the appropriate Tax Services Office ("TSO") for its opinion. However, this can only be resolved by considering all relevant facts. However, we are of the view that we can offer the following general comments that may be helpful to you.
For a share to qualify as a "share of the capital stock of a family farm corporation" as defined in subsection 110.6(1), the criteria in both paragraphs (a) and (b) of that definition must be satisfied.
Paragraph (a) of that definition provides that throughout any 24-month period ending before that time (the time of disposition), more than 50% of the fair market value of the property owned by the corporation was attributable to inter alia property that was used principally in the course of carrying on the business of farming in Canada in which a person described in subparagraph (a)(i) of that definition was actively engaged on a regular and continuous basis. Such a person may be, among others, the individual holding the share, or the individual's spouse or common-law partner. The 24-month period can be any continuous 24-month period ending before the particular time during which the corporation owns the property. It is important to note that to meet the requirements of this paragraph, the corporation must own the property for a continuous period of at least 24 months.
Paragraph (b) of that definition provides that, on the disposition of the shares, all or substantially all of the fair market value of the property, described in subparagraph (a)(iv) of the definition, owned by the corporation, is attributable to inter alia property that was used principally in the course of carrying on the business of farming in Canada by a person or partnership described in subparagraph (a)(i) of that definition.
The question of whether a share is a share of the capital stock of a family farm corporation as defined in subsection 110.6(1) is a question of fact that can only be resolved by considering all the relevant facts.
However, we confirm that the position stated in document E2004-0061271E5 still represents the position of the CRA. Consequently, we confirm that generally, in order to meet the test set out in paragraph (b) of the definition of "share of the capital stock of a family farm corporation", it is necessary to consider the use of the property throughout the period that the taxpayer was the owner.
These comments do not constitute an advance income tax ruling and do not bind the CRA with respect to a particular factual situation.
We hope that the above comments will be of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.