Principal Issues: [TaxInterpretations translation] In two particular scenarios, would subsection 70(9.01) apply? If so, would the capital gains exemption subsequently be available to the transferees? Finally, would subsection 69(11) apply?
Position: Question of fact. We believe that the capital gains exemption may be available to the transferee on a subsequent sale but that subsection 69(11) may also apply. In such a case, the initial transfer -- which would have been at an amount less than fair market value -- would be deemed to be at FMV.
Reasons: Income Tax Act
XXXXXXXXXX 2010-037645
December 2, 2010
Dear Sir,
Subject: Transfer of farm property to children
This is in response to your letter of July 22, 2010, requesting our views on the application of subsections 70(9), 69(11) and section 110.6 of the Income Tax Act (the "Act") to transactions involving the transfer of farm property by a taxpayer to his children.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described the following two scenarios:
Scenario 1
- Mr. X had been carrying on a farming business for XXXXXXXX years in which he was actively engaged;
- He died in XXXXXXXXXX and his farm property was devised to his two children in equal shares;
- The children were not actively engaged in the farming business and subsequently disposed of the inherited property.
Scenario 2
- Mr. X owned farming property for XXXXXXXX years during which we have assumed he was actively engaged;
- During the last XXXXXXXXXX years before his father's death, Son A of Mr. X carried on the farming business;
- Mr. X died in XXXXXXXXXX and his farm property was devised to his two sons - Son A and Son B - in equal shares.
- Son B is XXXXXXXXXX and will never be active in the farming business.
Regarding the above two scenarios, you wish to know if the disposition of the farm property on Mr. X's death can occur pursuant to subsection 70(9). You also wish to know if, in Scenario 1, both children would be able to claim the capital gains exemption when they dispose of the inherited property. In Scenario 2, you wish to know if Son B would be able to claim that exemption when he sells his share of the farm property to his brother, Son A. Finally, you wish to know if subsection 69(11) could apply to these two scenarios.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, 2002, it is not the practice of the Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than through advance income tax rulings. 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 can offer the following general comments that may be helpful to you.
Generally, subsection 70(9.01) provides for the tax-deferred transfer of land or depreciable property of a prescribed class to a child of a taxpayer on or after the death of the taxpayer and as a consequence of that death. Subsection 70(9) sets out the conditions for the application of subsection 70(9.01), which are as follows:
- The property was, before the death of the taxpayer, used principally in a fishing or farming business carried on in Canada;
- The taxpayer, the spouse or common-law partner of the taxpayer or a child or a parent of the taxpayer was actively engaged on a regular and continuous basis in the farming business;
- The child of the taxpayer was resident in Canada immediately before the day on which the taxpayer died;
- As a consequence of the death of the taxpayer, the property is transferred to and becomes vested indefeasibly in the child within the period ending 36 months after the death of the taxpayer or within any longer period that the Minister of National Revenue considers reasonable in the circumstances.
You will note that in our discussion of the application of subsection 70(9.01), we have omitted the question relating to property used in the operation of a woodlot as this is not relevant in the circumstances.
Provided that the conditions for the application of subsection 70(9) are satisfied, we are of the view that, in both Scenario 1 and Scenario 2, the transfer of Mr. X's farm property to his children on his death would be governed by the provisions of subsection 70(9.01).
Capital Gains Exemption
Based on the facts of your two Scenarios, we have reproduced key passages from the definition of "qualified farm property" in subsection 110.6(1). Among other things, the definition provides that
qualified farm property of an individual (other than a trust that is not a personal trust) at any time means a property owned at that time by the individual, the spouse or common-law partner of the individual or a partnership, an interest in which is an interest in a family farm partnership of the individual or the individual’s spouse or common-law partner that is
(a) real or immovable property that was used principally in the course of carrying on the business of farming in Canada by,
(i) the individual,
[…]
(iii) a spouse, common-law partner, child or parent of a person referred to in subparagraph (i) … .
Subsection 110.6(1.3) sets out the requirements for property used in a farming business in Canada. Throughout the period of at least 24 months immediately preceding that time, the property or property for which the property was substituted was owned by the individual, or a spouse, common-law partner, child or parent of the individual.
Second, throughout a period of at least 24 months while the property was owned by one or more of the above persons, the gross revenue of one of those persons from the farming business for the period during which the property was owned by one of those persons exceeded the income of that person from all other sources for that period.
If the conditions listed above are satisfied, we are of the view that Mr. X's sons -- in both Scenarios -- could benefit from the capital gains exemption for qualified farm property.
Application of Subsection 69(11)
It appears to us that, in order for subsection 69(11) to be applicable in the Scenarios as described above in respect of the transfer by Mr. X of qualified farm property, that a person’s deduction (other than a person that would be affiliated with the taxpayer immediately before the series of transactions began, if section 251.1 were read without reference to the definition “controlled” in subsection 251.1(3)) in computing the taxpayer's taxable income would, among other things, be required to be in respect of a subsequent disposition of the qualified farm property transferred by Mr. X.
The test in subsection 69(11) is whether one of the main purposes of a series of transactions or events is to obtain the benefit of a deduction or exemption as described in paragraphs 69(11)(a) and (b). Although the application of subsection 69(11) is a question of fact, it is possible that this provision will apply in the two Scenarios you have described. Specifically, in Scenario 1, it is possible that this provision applies because of the subsequent sale by both sons, while in Scenario 2, it could apply because of the subsequent disposition by Son B. Of course, subsection 69(11) will only apply if the subsequent disposition of the qualified farm property occurs before the day that is 3 years after the date Mr. X transfers the qualified farm property to his sons.
Where subsection 69(11) applies, the initial transfer -- which would have been made for an amount less than the fair market value ("FMV") -- would be deemed to have occurred at FMV.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Ruling Directorate.