Principal Issues:
(1) Whether an undivided interest in farmland could be considered qualified farm property as defined in subsection 110.6(1)?
(2) Whether an undivided interest in farmland could qualify as replacement property for purposes of section 44(1) as defined in subsection 44(5)?
Position:
(1) It is our view that the definition of property in subsection 248(1), as used in the definition of qualified farm property in subsection 110.6(1) is broad enough to include an undivided interest in farmland. This interpretation represents a change in position. The question of whether an undivided interest in farmland is principally used is a business of farming is a question of fact that needs to be examined is light of all relevant facts and documentation specific to the situation.
2) Yes, that is possible.
2006-020532 XXXXXXXXXX Anne Dagenais, Advocate, M. Fisc. February 18, 2008
Dear Sir,
Subject: Definition of "qualified farm property" - subsection 110.6(1)
Replacement property - section 44
This is further to your letter of September 3, 2006, requesting our interpretations regarding the definition of qualified farm property in subsection 110.6(1) of the Income Tax Act (the "Act") as well as the acquisition of replacement property for the purpose of subsection 44(1) on a partitioning land so as to defer the recognition of a capital gain.
Your letter addresses two separate issues of concern to you, which relate to the division of several pieces of farmland between two brothers ("B1" and "B2"). The basic facts are as follows. B1 and B2 acquired joint ownership of several pieces of farmland which they farmed for field crops such as XXXXXXXXXX. Both brothers are approximately XXXXXXXXXX years old, are married and have children. Some of their children are actively involved in the farming business. Although B1 and B2 have been farming full-time for more than XXXXXXXXXX years, B1 currently has been renting his undivided share of the land to XXXXXXXXXX of his children since XXXXXXXXXX. B1 and B2 propose to divide the land equally so that each can plan their affairs with their children. The current market value of the land is approximately $XXXXXXXXXX while the total adjusted cost base is approximately $XXXXXXXXXX. B1 would exchange his undivided portion (50%) of some land for B2's undivided portion (50%) in some land. To the extent possible, the value of the property transferred by each will be the same as the value of the property acquired.
You wish to know whether, in dividing the land, B1 and B2 can defer the recognition of a capital gain.
(1) Specifically, you wish to know if land held in undivided joint tenancy could be considered a qualified farm property for the purposes of subsection 110.6(1).
(2) Further, would the partition of an undivided share establish a replacement property, as defined in subsection 44(5), for the purposes of subsection 44(1)?
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that may not fully apply to the situation you have submitted to us.
(1) Whether a property is used principally in the course of carrying on a farming business is a question of fact that can only be resolved after a full analysis of the facts of a particular situation. Previously, we were of the view that a 50% undivided share in a property could not be considered to be a property that was used principally in the course of carrying on the business of farming in Canada, as this test was not satisfied. We are writing to advise you of our change of position.
To qualify for the capital gains deduction pursuant to subsection 110.6(2), the property must be qualified farm property as defined in subsection 110.6(1). Qualified farm property is defined to include, 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. Generally, a property is considered to be used principally in the course of carrying on the business of farming if it is used more than 50% in the course of carrying on the business of farming.
In the Act, the term "property" is defined very broadly in subsection 248(1) and we are of the view that it includes an undivided interest of a co-owner in an immovable. Furthermore, this interpretation is consistent with the principles applicable to undivided co-ownership in Quebec, under the rules of the Civil Code of Quebec and in the common law provinces. Consequently, in our view, it is possible to take the position that an undivided interest in an immovable is, for the purposes of the Act, included in the expression real or immovable property in subsection 110.6(1). In order for the property, which in our view could include an undivided interest of a co-owner of real property, to qualify as qualified farm property, it follows that it must then be determined whether it is reasonable, on the facts, to say that the undivided co-owner used his or her undivided share principally in the course of carrying on the business of farming.
Whether an undivided interest of B1 and B2 is used primarily in the course of carrying on the business of farming is a question of fact that can only be resolved after examining all the facts and documents relevant to a particular situation.
(2) Where a former business property has been disposed of, subsection 44(1) allows a taxpayer, in certain circumstances, to defer the capital gain on the disposition of the property. Subsection 248(1) defines former business property as a capital property of the taxpayer that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property of the taxpayer or an interest of the taxpayer in real property, but does not include a rental property of the taxpayer, land subjacent to a rental property of the taxpayer, land contiguous to land in certain circumstances, and a leasehold interest in any property described above.
Paragraph 44(1)(b) requires that a property be a former business property immediately before it is disposed of. In light of the preceding comments that a property may include an undivided interest of a co-owner in real property, it is our view that, if the other requirements of the definition of former business property in subsection 248(1) are satisfied, the undivided interest acquired by B2 from B1 could be a replacement property for purposes of subsection 44(1) as defined in subsection 44(5). The same is true for the undivided interest acquired by B1 from B2 where B1's children use the property for the purpose of earning business income. The determination as to a replacement property is essentially a question of fact on which we cannot rule in a technical interpretation.
We hope that the above comments will be of assistance.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.