Principal Issues: Is a capital gain arising from the application of subsection 49(1) to the granting of an option (expired) in respect of QFP eligible for the capital gains exemption?
Position: No.
Reasons: Under subsection 49(1), the property considered to be disposed of is a generic property that is distinct from the real property in respect of which the option is granted.
2006-019189 XXXXXXXXXX S. Lewis (613) 941-7239 May 16, 2007
Dear XXXXXXXXXX:
Re: Options on Real Estate and the Capital Gains Exemption
This is in response to your letter of June 8, 2006, inquiring about whether options in respect of real property that is "qualified farm property" ("QFP") as defined in section 110.6(1) of the Income Tax Act (the "Act") also constitute QFP for the purposes of the capital gains exemption. We apologize for the delay in responding.
You described a situation where a taxpayer grants an option to purchase land that is QFP for the purposes of section 110.6 of the Act and the option expires. The taxpayer realizes a capital gain as a result of the granting of the option being considered a disposition of a property under subsection 49(1) of the Act.
Your question concerns whether the capital gain resulting from the property under subsection 49(1) of the Act can be considered eligible for the capital gains deduction for QFP under subsection 110.6(2) of the Act.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The definition of QFP in subsection 110.6(1) of the Act (as amended pursuant to Bill C-28) provides, inter alia, that QFP is real or immovable property that was used by certain qualifying individuals in the course of business in farming in Canada. The farming use tests in respect of real property are set out in subparagraphs 110.6(1.3)(b) or 110.6(1.3)(c) of the Act. Which test is applicable depends on when the taxpayer last acquired the real property.
Real property is not defined in the Act, but under the common law, real property is comprised of interests in real property.
Subsection 49(1) of the Act requires that the granting of an option (if an option expires) is to be treated as a disposition of a property with an adjusted cost base to the grantor of nil. The property envisaged in subsection 49(1) is a generic property that is distinct from the property in respect of which the option was granted. Such generic property, being generic, does not have the nature of the real property, in respect of which the option was granted, as a result of the application of subsection 49(1). Consequently, it is our view that a taxable capital gain derived, pursuant to the application of subsection 49(1) of the Act, from the granting of an option (expired) in respect of real property will not be eligible for a deduction under subsection 110.6(2) of the Act.
If however, the option to purchase is exercised and the grantor disposes of the real property that constitutes QFP, it is our view that, pursuant to subsection 49(3) of the Act, the consideration received by the grantor for the option will become part of the proceeds of disposition of the real property. As such the consideration for the option may be eligible for the capital gains exemption under section 110.6 of the Act by virtue of being reflected in any taxable capital gains arising from the disposition of the real property.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch