Principal Issues: Can farm property previously owned by a third-party (ineligible owner for purposes of subsection 110.6(1) of the Income Tax Act), even though the property was owned before the third-party by the great-grandfather (an eligible owner for purposes of subsection 110.6(1)), qualify as "qualified farm property" under subsection 110.6(1)?
Position: No.
Reasons: The period of continuous ownership of the property by the great-grandfather and the taxpayer was interrupted by the acquisition of the property by the third-party.
October 7, 2009
XXXXXXXXXX Tax Services Office HEADQUARTERS Audit Division André Gallant (613) 957-8961 Attention: XXXXXXXXXX 2009-033287
Qualified Farm Property
This is in response to your email of June 5, 2009 concerning the definition of "qualified farm property" ("QFP") in subsection 110.6(1) of the Income Tax Act (the "Act") and the application of the farming-use test in subsection 110.6(1.3) of the Act. We apologise for the delay in responding.
Our understanding of the situation is as follows:
The taxpayer's great-grandfather owned a parcel of land and used it in the farming business on a full-time basis. The land qualified as QFP when the great-grandfather sold the land in an arm's length transaction to a third-party. The taxpayer (i.e., the great-grandson) acquired the same property from the third-party after XXXXXXXXXX . The taxpayer held the land for over XXXXXXXXXX years but did not use it in the business of farming. The taxpayer sold the land realizing a capital gain of $XXXXXXXXXX.
You asked whether the land would be considered a QFP for the taxpayer so that the taxpayer can claim the capital gains deduction under subsection 110.6(2) of the Act. In particular, your question concerns whether the land qualifies as QFP in the hands of the taxpayer on the basis that it was used in a farming business in Canada by the taxpayer's great-grandfather.
OUR COMMENTS
The short answer to your question is that the land does not qualify as QFP in the taxpayer's hands at the time of disposition, which is the time when the determination is to be made. This is because the land was not used in the business of farming in Canada by the taxpayer or another eligible user referred to in paragraph 110.6(1.3)(b) of the Act "throughout the period of at least 24 months immediately preceding that time" during which the land was owned by the taxpayer or another eligible owner referred to in paragraph 110.6(1.3)(a) of the Act.
The wording "throughout the period of at least 24 months immediately preceding that time" that is found in paragraph 110.6(1.3) (a) requires that the farming use occur during an uninterrupted period of ownership by eligible owners. An eligible user and an eligible owner include a taxpayer's "parent" and "child" by virtue of the definition of "child" in subsection 110.6(1), which has the meaning assigned by subsection 70(10) of the Act, and its interaction with subparagraph 252(2)(a)(i) of the Act. We presume that your description of an arm's length third party from whom the taxpayer acquired the land is meant to indicate that the third party is not an eligible owner or eligible user mentioned in paragraphs 110.6(1.3)(a) and (b), respectively.
Although a great-grandfather may be an eligible user for the purpose of determining whether land is QFP in the hands of a great-grandson, in the case at hand the taxpayer's great-grandfather's farming use of the taxpayer's land occurred during an ownership period that is separated from the ownership period of at least 24 months preceding the time of disposition by the taxpayer. These two periods are separated by a period of ownership by the third party who is not an eligible owner. In view of this, the taxpayer's land does not qualify as QFP on its disposition.
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch