Principal Issues: [TaxInterpretations translation] Are shares held by an individual shares of the capital stock of a family farm corporation as defined in subsection 70(10) of the Act where the corporation's only property is an interest in a partnership (the assets of which are property used in its farming business and shares of the capital stock of a family farm corporation of the individual)?
Would the answer be the same if the partnership assets consisted of an interest in a second partnership and the shares of the capital stock of a family farm corporation of the individual?
Position: The value of the shares is attributable to property used in the partnership's farming business and to shares of the capital stock of a family farm corporation of the individual. The corporation carries on the partnership's farming business. In this situation, the property to which the value of the shares is attributable is property described in subparagraph (a)(i) and paragraph (b) of the definition of share of the capital stock of a family farm corporation. Therefore, the individual's shares meet the definition of subsection 70(10).
Our answer would be the same if the property were held and used in the farming business of a partnership that is owned by the first partnership owned by the corporation. The corporation would be considered to be carrying on the farming business of the second partnership and the property used in the farming business would fall within subparagraph (a)(i) of the definition of share of the capital stock of a family farm corporation.
Reasons: The value of the partnership interest is attributable to the partnership property. Under the relevant partnership legislation and case law, the business of a partnership is carried on by the members of the partnership. Previous position taken where there are two tiers of partnerships.
XXXXXXXXXX 2005-015493 Sylvie Labarre, CA April 25, 2006
Dear Sir,
Subject: Share in the capital stock of a family farm corporation
This is in response to your email of October 18, 2005, in which you requested our opinion regarding the characterization of corporate shares as shares of the capital stock of a family farm corporation within the meaning of subsection 70(10) of the Income Tax Act (the "Act").
In this regard, you presented us with the following hypothetical situation.
Facts
1. Mr. X and Mr. Y are unrelated persons for the purposes of the Act.
2. Mr. X is the sole shareholder of Holdco X.
3. Mr. Y is the sole shareholder of Holdco Y.
4. Holdco X and Holdco Y hold 50% of the shares of the general partnership S.E.N.C.
5. The only asset of Holdco X and Holdco Y is the interest in S.E.N.C.
6. S.E.N.C. owns land, equipment and buildings used in the operation of a field crop farm. It also owns rollover preferred shares of the capital stock of Farmco.
7. Mr. X and Mr. Y are actively involved in S.E.N.C. on a regular and continuous basis.
8. Mr. X, Son X, Mr. Y and Son Y each own 25% of the voting and participating shares of Farmco.
9. Farmco owns land, equipment and buildings used in the operation of a field crop farm.
10. All four shareholders of Farmco are actively involved on a regular and continuous basis in carrying on the business.
11. The year end of all entities is December 31.
Questions
You wish to know whether, in the hypothetical situation described above, the shares of Holdco X held by Mr. X and the shares of Holdco Y held by Mr. Y are shares of the capital stock of a family farm corporation, as defined in subsection 70(10), and how we regard the holding of the assets of S.E.N.C. in making that determination
Furthermore, if the answer to the first question is no, you asked whether issuing interests to Mr. X and Mr. Y in S.E.N.C. would make the shares of Holdco X held by Mr. X and the shares of Holdco Y held by Mr. Y shares of the capital stock of a family farm corporation, as defined in subsection 70(10).
Alternatively, the following transaction could be added: S.E.N.C. transfers, in consideration for an interest, all of its assets to a new partnership in which Son X and Son Y are active and continuous partners. As a result of such a transaction, you wish to know whether the shares of Holdco X held by Mr. X and the shares of Holdco Y held by Mr. Y are shares of the capital stock of a family farm corporation, as defined in subsection 70(10).
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through 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 we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Hypothetical situation described in the Facts
In the hypothetical situation described in the Facts, we are of the view that all or substantially all of the fair market value of the property owned by Holdco X and Holdco Y, i.e., their interest in S.E.N.C., is attributable to the partnership property, i.e., the property used in the partnership's farming business and the preferred shares of Farmco. It must be determined whether these properties are properties described in paragraphs (a) and (b) of the definition of "share of the capital stock of a family farm corporation" in subsection 70(10) (the "Definition"). If this is the case, the condition listed in paragraph (c) of the Definition would be satisfied.
The property used in the partnership's farming business must therefore be property described in paragraph (a) of the Definition. That will be the case if the property is property used by the corporation (subparagraph (i)) or by the partnership provided that the partnership is a partnership an interest in which is an interest in a family farm partnership of Mr. X or Mr. Y, as the case may be (or their spouse or common-law partner, child, parent) (subparagraph (iv)).
In the hypothetical situation referred to in the Facts, with the interests being wholly owned by the holding corporations, we would not be able to conclude that the partnership is a partnership an interest in which is an interest in a family farm partnership (subparagraph (a)(iv) of the Definition would not be satisfied). On the other hand, subparagraph (a)(i) of the Definition could be satisfied since we are of the view that a corporation that is a member of a partnership would be considered to be carrying on the same business as that carried on by the partnership. Thus, the property used in the farming operation of S.E.N.C. would be property used in the farming business of Holdco X and Holdco Y and would be property described in paragraph (a) of the Definition.
If the property so used in the farming business represents 90% or more of the fair market value of the partnership property, the shares held by Mr. X in Holdco X and the shares held by Mr. Y in Holdco Y would be shares of the capital stock of a family farm corporation as defined in subsection 70(10).
Otherwise, further analysis would be required to determine whether the Farmco shares held by S.E.N.C. fall within paragraph (b) of the Definition. When we conduct the analysis to determine the status of a share of Mr. X in Holdco X, the Farmco shares held by S.E.N.C. will qualify as property described in paragraph (b) of the Definition if they are shares of the capital stock of a corporation all or substantially all of the fair market value of the property of which is attributable to property used by a corporation, a share of the capital stock of which is a share of the capital stock of a family farm corporation of Mr. X or his spouse or common-law partner, child, parent. Mr. X holds shares in the capital stock of Farmco. The issue, therefore, is whether a share held by Mr. X in the capital stock of Farmco is a share of the capital stock of a family farm corporation. On the facts set out herein, all or substantially all of the property owned by Farmco is attributable to property that was used by Farmco principally in the course of carrying on a farming business in Canada in which Mr. X or his child was actively engaged on a regular and continuous basis. Consequently, the shares held by S.E.N.C. would be property described in paragraph (b) of the Definition.
The same analysis can be made for the purpose of characterizing the shares of Holdco Y with respect to the shares of Mr. Y in the capital stock of Farmco. We reach the same conclusion.
Consequently, the fair market value of the property of Holdco X or Holdco Y would be attributable to property described in paragraph (c) of the Definition. The shares of Holdco X or Holdco Y would be shares of the capital stock of a family farm corporation. Therefore, for the situation presented in the facts, it would not be necessary for Mr. X or Mr. Y, as the case may be, to hold a unit in S.E.N.C.
Alternative Transaction
Based on our understanding of the alternative transaction, S.E.N.C. owns an interest in the second partnership and shares of the capital stock of Farmco. The second partnership now owns the property used in the second partnership's farming business. In that situation, we are of the view that the fair market value of the property owned by Holdco X or Holdco Y, as the case may be, is attributable to the shares of the capital stock of Farmco held in S.E.N.C. and the property used in the second partnership's farming business. We consider Holdco X and Holdco Y and Son X and Son Y to carry on the farming business of the second partnership. Consequently, as with the situation described in the Facts, we are of the view that the property used in the second partnership's farming business will be property described in paragraph (a) of the Definition for the purpose of characterizing Mr. X's shares in Holdco X and Mr. Y's shares in Holdco Y as shares of the capital stock of a family farm corporation. Furthermore, it is our understanding that the facts of the alternative transaction have not changed with respect to the holding of the shares of the capital stock of Farmco. Consequently, for the same reasons set out in response to the situation described in the Facts, the shares of the capital stock of Farmco held by the first partnership will fall within paragraph (b) of the Definition. Since the property of Holdco X or Holdco Y, as the case may be, is attributable to property described in paragraph (a) or (b), a share of Holdco X held by Mr. X or a share of Holdco Y held by Mr. Y, as the case may be, would be a share of the capital stock of a family farm corporation as defined in subsection 70(10).
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch