Principal Issues: [TaxInterpretations translation] In two scenarios, does the land qualify as "qualified farm property" for the purposes of section 110.6?
Position: Only the market gardening plots used in carrying on the farming business qualified.
January 12, 2011
Montreal Tax Services Office Income Tax Rulings Directorate Tax Technical Interpretation Service Business and Partnerships Division Attention: Bruno Bevacqua Danielle Bouffard 2010-037580
Qualified farm property ("QFP")
This memorandum is in response to your email dated July 22, 2010, in which you requested our comments on whether, for the purposes of the facts of the two scenarios described below, land is QFP within the meaning of the definition of that expression in subsection 110.6(1) of the Income Tax Act (the "Act"). We have taken into account the additional information that you provided to us by email on September 9, 2010. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Specifically, you described the following two scenarios:
Scenario 1
Mr. X engaged in market gardening from 1970 to 1977 in the course of carrying on a farming business on land he owned in Canada. During this period, the land consisted of two parts: 60% of the total area was used for market gardening as part of his farming business; and 40% of the area was a non-commercial woodlot. The taxpayer died in 1977 and the land was devised to his wife, Mrs. X. From 1978 to 2007, Mrs. X did not carry on the farming business.
At the beginning of the 2000s, a portion of the land previously used for market gardening on Mr. X's farm was sold by Mrs. X. In 2007, Mrs. X passed away. At the time of her death, the remaining land was made up of the non-commercial woodlot, which represented more than 50% of the remaining area of the land, and a portion previously used for market gardening.
Scenario 2
The facts are similar to those in Scenario 1, except that in 2000, Mrs. X did not sell any portion of the land and in 2007, Mrs. X sold the non-commercial woodlot portion (i.e., 40%).
Questions
With respect to the above two scenarios, you wish to know whether, in 2007, the conditions of subparagraph 110.6(1.3)(c)(ii) were met such that the land disposed of qualified as QFP. In Scenario 1, you wish to know whether the test in subparagraph 110.6(1.3)(c)(ii) applies to the original land at the time of its use by Mr. X or to the residual land at the time of the deemed disposition in 2007. In the case of Scenario 2, was the woodlot portion by itself a QFP?
Our Comments
Subsection 110.6(1) provides the following definition of QFP. The following are the portions of that definition that are relevant to the facts of this case:
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 per son referred to in subparagraph (i) or (ii),
[…]
Subsection 110.6(1.3) sets out the requirements that must be satisfied in order for a property to be considered to be used in a farming business in Canada. The following are the relevant portions of that subsection, having regard to the scenarios provided:
(a) throughout the period of at least 24 months immediately preceding that time, the property or property for which the property was substituted (in this paragraph referred to as “the property”) was owned, by any one or more of
(i) the individual, or a spouse, common-law partner, child or parent of the individual,
[...]
(c) if the property or property for which the property was substituted was last acquired by the individual or partnership before June 18, 1987 or after June 17, 1987 under an agreement in writing entered into before that date,
(i) in the year the property was disposed of by the individual, the property was used principally in the course of carrying on the business of farming in Canada by
(A) the individual, or a spouse, common-law partner, child or parent of the individual,
[...]
As to determinng whether real property has been used principally in the course of carrying on the business of farming, paragraph 18 of Interpretation Bulletin IT-373R2-CONSOLID, Woodlots, states:
[...]
When reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where more than 50% of the asset's use is in the business of farming. Whether or not particular assets are "used principally in the business of farming" is a question of fact to be determined on a property by property basis (i.e., this test would have to be satisfied for each legal parcel of land).
[...]
The test in subparagraph 110.6(1.3)(c)(ii) applies on a property-by-property basis. Consequently, the result of this test varies depending on whether the land consists of one, or more than one, separate properties.
For the purposes of our response, we have assumed that the land was divided into cadastral lots: 60% of the cadastral lots were used in carrying on market gardening as part of Mr. X's farming business (the "market gardening lots") and 40% of the cadastral lots are non-commercial woodlots (the "non-commercial woodlots").
In previous opinions, the ITRD has stated that cadastral lots are considered, for the purposes of the Act, to be separate real property (footnote 1). Consequently, the determination of the status of the land, i.e., whether or not they can be considered to be property used principally in the business of farming, must be made on a lot-by-lot basis.
Since Mrs. X inherited the land from her husband before June 18, 1987, we consider the land to have been used in a farming business in Canada if either of the two conditions in paragraph 110.6(1.3)(c)(i) or (ii) is satisfied. Subparagraph 110.6(1.3)(c)(ii) states that a property is QFP if it was used by Mrs. X or her spouse principally in the business of farming for at least five years during which the property was held by Mrs. X or her spouse. Based on the facts of this case, Mrs. X's husband satisfied the test for use of the property in the business of farming (i.e., for at least 5 years) as set out in subparagraph 110.6(1.3)(c)(ii) for the market gardening lots. None of the non-commercial woodlots qualified as QFP.
In Scenario 1, at the time of Mrs. X's death in 2007, Mrs. X was deemed to have disposed of the remaining land, which consisted of non-commercial woodlots and market garden lots. Since, for each market garden lot, Mrs. X's husband satisfied the test for use in the business of farming in subparagraph 110.6(1.3)(c)(ii) for a period of at least 5 years, the market garden lots that were deemed to have been disposed of in 2007 were QFP.
In Scenario 2, 40% of the lots were non-commercial woodlots that were not used in the farming business carried on by Mrs. X's husband. Consequently, in our view, those lots did not qualify as QFP.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.
FOOTNOTES
1 2002-0141415, 9714425 and 9512495