Principal Issues: [TaxInterpretations translation]
1. Is a deceased person who was widowed deemed to have disposed of her property at fair market value?
2. The taxpayer's residence is uninhabited because the taxpayer had to be housed in a nursing home. Does the residence meet the definition of principal residence in section 54 for the years it is uninhabited?
3. At the time of death, will the farm be considered a qualified farm property as defined in subsection 110.6(1) if the farm was operated from XXXXXXXXXX to XXXXXXXXXX?
4. What is the adjusted cost base used to calculate the capital gain on the farm?
Position:
1. Yes.
2. No.
3. Question of fact.
4. General comments.
Reasons:
1. Application of section 70(5).
2. Under the definition of principal residence in section 54, the residence must be ordinarily inhabited by the taxpayer, the taxpayer's spouse or a child of the taxpayer.
3. Definition of qualified farm property in 110.6(1) and under 110.6(1.3).
4. The facts submitted do not provide a clear answer to the question.
XXXXXXXXXX 2006-020027 Lucie Allaire, LL.B., CGA May 30, 2007
Dear Sir,
Subject: Deemed disposition following death
This is in response to your letter of July 20, 2006, requesting our views on various tax implications arising from the deemed disposition of a principal residence and farm by a deceased individual in the situation described below. We apologize for the delay in responding to your questions.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
Your mother died in XXXXXXXXXX and, in her will, she left all her property to her children. Immediately before her death, she owned a farm with buildings that included a residence. The farm was purchased in XXXXXXXXXX, after your parents married. Your father and mother operated the farm as a farming business until approximately XXXXXXXXXX, which was more than five years, as their principal source of income. You have indicated that they were both actively engaged in the farming business on a regular and continuous basis. You also informed us that your parents were married in community of property and you believe that they were joint owners of the farm from XXXXXXXXXX.
Your mother was widowed in XXXXXXXXXX. However, you are unable to confirm whether there was a rollover of your father's property to your mother following your father's death.
You have told us that your mother lived in the residence until XXXXXXXXXX. From XXXXXXXXXX until her death, she had to be accommodated in a residential and long-term care facility and during this period the residence was uninhabited. In XXXXXXXXXX, your mother made an election to keep her home as her residence, citing subsection 45(3). The residence was not used to earn income at any time.
An election to have a deemed disposition pursuant to subsection 110.6(19) to recognize a capital gain on the residence or farm does not appear to have been made in 1994.
Questions
1. Is a deceased person deemed to have disposed of the deceased’s property at fair market value ("FMV")?
2. Is the capital gain realized on the deemed disposition of the residence including an acre of land eligible for the principal residence exemption?
3. Is the farm a "qualified farm property" eligible for the qualified farm property capital gains deduction?
4. What is the cost used to calculate the capital gain on the farm?
Our Comments
The situation you have indicated in your submission appears to relate to an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, the determination of whether a completed transaction has received appropriate tax treatment is first made by our Tax Services Offices following a review of all the facts and documentation, which is generally done as part of an audit engagement. We are, however, prepared to provide the following general comments, which you may find helpful. These comments may not, however, apply to your particular circumstances in certain circumstances.
Despite the fact that property can legally be held jointly by both spouses, property in the regime of community of property and acquests is deemed to be owned by the spouse who manages it under paragraph 248(22)(b) and thus the other spouse is deemed not to own the property.
For the purposes of our response, we have assumed that at the time of your father's death, the residence and farm were owned by your father until XXXXXXXXXX and that, in accordance with subsection 70(6), those assets were transferred to your mother tax-free.
With respect to your first question, paragraph 70(5)(a) deems an individual who dies in a taxation year to have disposed of all such capital property immediately before death and to have received proceeds equal to the FMV immediately before death.
As to your second question, the principal residence capital gains exemption can be claimed pursuant to paragraph 40(2)(b), or pursuant to paragraph 40(2)(c) where land is used in a farming business carried on by the taxpayer that includes property that was the taxpayer's principal residence. Detailed information on the principal residence exemption can be found in Interpretation Bulletin IT-120R6, which is available on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/tax/technical/incometax/current-e.html.
Under the definition of "principal residence" in section 54, the principal residence of a taxpayer for a taxation year means a housing unit owned, whether jointly with another person or otherwise, in the year by the taxpayer. In addition, under that definition, where the taxpayer is an individual other than a personal trust, the housing unit must be ordinarily inhabited in the year by the taxpayer, the taxpayer's spouse or a child of the taxpayer, who must designate the housing unit as their principal residence. For the years after XXXXXXXXXX, no other property should be designated by a member of the family unit for the year.
Under paragraph (e) of the definition of "principal residence" in section 54, a taxpayer's principal residence for a taxation year is deemed to include the subjacent land of one-half hectare (1.24 acres) together with such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. Where the total area of the subjacent land and of that portion exceeds 1/2 hectare, the taxpayer must demonstrate that the excess contributes to the use of the housing unit as a residence.
Generally, subsection 40(4) provides that where a taxpayer has, after 1971, disposed of property to an individual in circumstances where, inter alia, subsection 70(6) is applicable, certain rules apply for the purpose of calculating the individual's gain from the disposition of the property pursuant to paragraph 40(2)(b) or (c), as the case may be. Paragraph 40(4)(a) deems the individual to have owned the property throughout the period during which the taxpayer owned it. Subparagraph 40(4)(b)(i) deems the property to have been the individual's principal residence for a taxation year for which it would have been the taxpayer's principal residence if the taxpayer had designated it as the taxpayer’s principal residence.
Thus, your mother could designate the residence as a principal residence for all the years for which your father could have designated the residence as his principal residence.
According to the facts submitted, your mother did not ordinarily inhabit the residence during the years XXXXXXXXXX to XXXXXXXXXX. Consequently, the residence cannot be her principal residence during those years. In that regard, you have indicated that she made an election to keep the residence as her principal residence under subsection 45(3).
Subparagraph 45(1)(a)(ii) provides that there is a disposition at FMV where a property, acquired for the purpose of earning income, is subsequently used for another purpose (for example, as a taxpayer's residence). This deemed disposition may therefore give rise to a taxable capital gain unless the taxpayer has elected under subsection 45(3) to avoid this deemed disposition. The subsection 45(3) election is therefore limited to deferring the capital gain accrued during the period where the property was used to earn income.
In this case, since the facts do not show that there was a change of use, that election could not be made. Furthermore, no other election would have allowed your mother to designate her residence as her principal residence for the years XXXXXXXXXX to XXXXXXXXXX.
Thus, since, according to the facts submitted, your mother personally carried on the farming business, it appears that she could use the rule in paragraph 40(2)(c), which applies only to a principal residence and land used in the business of farming, thus excluding, for example, depreciable property used in the business of farming. That paragraph provides that any gain from the disposition of land may be calculated using one of two methods. In that regard, paragraphs 20 to 24 of IT-120R6 describe these two methods in detail.
With respect to your third question, subsection 110.6(2) provides that an individual resident in Canada who disposed of qualified farm property may deduct from taxable income up to $250,000, which is equivalent to $500,000 of capital gains.
To qualify for the capital gains deduction pursuant to subsection 110.6(2), the property deemed disposed of at death must be qualified farm property as defined in subsection 110.6(1). Under that definition, qualified farm property includes, inter alia, real or immovable property held by an individual that was used principally in the course of carrying on the business of farming in Canada either by that individual or by that individual's spouse.
It should be noted that any farm property, other than real property, is not "qualified farm property" and does not qualify for the capital gains deduction under subsection 110.6(2).
Subsection 110.6(1.3) provides, inter alia, that property owned by an individual will not be considered to have been used in the course of carrying on the business of farming in Canada unless the following conditions are satisfied.
The first condition is that throughout the period of at least 24 months immediately preceding the disposition, the property was owned by, inter alia, the individual or the individual’s spouse. The second condition that applies in your situation requires that, for at least two years while the property was owned by the individual or the individual’s spouse, the gross income of one of those persons from the farming business carried on in Canada, for the period during which the property was owned by one of those persons, exceeded the income of the operator from all other sources. In addition, the property had to be used principally in that farming business and in which one of those individuals was actively engaged on a regular and continuous basis.
On the facts of this case, the first condition appears to be satisfied since the farmland was owned by your mother for the entire 24-month period preceding the deemed disposition.
With respect to the other conditions, it is a question of fact whether real property is used principally in the business of farming in Canada. In determining whether an asset is used principally in the business of farming, it is our view that that requirement is met where more than 50% of the use of the property is in the business of farming.
Consequently, if the real property on the farm satisfies all the conditions, it could be qualified farm property for your mother for the purposes of section 110.6.
Finally, you wish to know what cost should be used to calculate the capital gain. In that regard, you will find detailed information on all the rules that may apply to your situation in Interpretation Bulletin IT-132R2, which you can consult on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/tax/technical/incometax/current-e.html.
These comments are not advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding.
Best regards,
Louise J. Roy, CGA
Interim Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.