Principal Issues:
Using an example, CRA is mainly asked:
1) Are the land and the dwelling a single property for the purposes of the capital gains exemption for qualified farm property under section 110.6 when located on the same lot?
2) if yes, is this property considered to be used principally in the course of carrying on a farming business?
Position:
(1) The CRA is of the opinion that an immovable referred to in paragraph (a) of the expression "qualified farm or fishing property" in subsection 110.6 (1) or "property" in the definition of "interest in a family farm or fishing partnership" in subsection 110.6 (1) includes the building and land on which the building is situated and that they are one and the same property.
2) The CRA is of the view that the test of an asset being used “principally” in the business of farming is met where more than 50% of the asset’s use is in the business of farming.
Reasons:
1) Previous positions.
2) Wording of the Act.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 16
Principal residence on farming land
Mr. X and Ms. X each hold 50% of the interest in a farming general partnership (SENC). SENC holds a single asset, which is land 80% of whose area is used for farming purposes. A residence was built on the other 20%.
The residence has a FMV of $200,000 and the land has a FMV of $1,000,000. The residence cannot be severed because there is no entitlement to do so by virtue of the Act respecting the preservation of agricultural land and agricultural activities. The residence, viewed separately, does not constitute a property that is used principally in the course of carrying on a farming business for the purposes of section 110.6. The land, viewed separately, is a property that is used principally in the course of carrying on a farming business for the purposes of section 110.6.
Mr. and Ms. X have held their interest in SENC for 10 years. SENC has also owned the land for 10 years and it was SENC's only asset for the 10 years. Mr and Mrs X’s principal revenue for the 10 years has been from farming.
Questions to the CRA
- For the purpose of the analysis of eligibility for the capital gains deduction (110.6) in a land sale transaction (including of the residence), should the land together with the residence be viewed as a single property since they are located on the same lot? Thus, if it is a single property, would it be possible to consider that the property is used principally in the course of carrying on a farming business (80% farming, thus greater than 50%)?
- Would the CRA's response be different respecting the qualification of the interests in SENC, rather than of the land, for the purposes of the capital gains deduction (110.6)?
- If the residence and land cannot be considered as one property, would the partnership interests and the land qualify for the capital gains deduction?
- Would the CRA's answers to the above questions be different if the residence could be severed?
- If the residence was disposed of immediately before the sale, could the partnership interests qualify for the capital gains deduction?
- If the residence was disposed of immediately before the sale, could the land qualify for the capital gains deduction?
CRA Response
Given that this question only summarizes a particular hypothetical situation, we cannot provide definitive answers or comment specifically on each of your questions. However, we can offer you the following general comments.
When a property is disposed of, an individual may claim the capital gains deduction inter alia where the property is "qualified farm or fishing property" as defined in subsection 110.6(1).
Under paragraph (a) of that definition, a qualified farm property of an individual refers, in particular, to real or immovable property that, at the time of its sale, belongs to the individual or to a family farm or fishing partnership in which the individual holds an interest and that was used in the course of carrying on a farming or fishing business by the individual or a family farm or fishing partnership in which the individual holds an interest.
The CRA is of the view that an immovable referred to in paragraph (a) of the expression "qualified farm or fishing property" includes the building and the land on which the building is situated as one and the same property. Under Article 948 of the Civil Code of Québec, the ownership of property gives a right to what it produces and to what is united to it, naturally or artificially, from the time of union. This right is called a right of accession. An owner of an immovable (for example, a piece of land) is the owner by accession to all structures and works located on the immovable.
This position also applies to the term "property" used in the definition of "interest in a family farm or family fishing partnership" under subsection 110.6(1).
In addition, the CRA considers that each cadastral lot is a separate real property. Consequently, the entire property, in this case the entire lot, must be considered in determining whether a property was used primarily in the course of carrying on a farming business. If the lot is subdivided, then this determination will be made on a lot-by-lot basis.
Finally, with respect to the determination of whether or not property was used principally in the carrying on of a farming business, we refer to paragraph 18 of Interpretation Bulletin IT-373R2-CONSOLIDATED, Woodlots, which states:
When reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where more than 50% of the asset's use is in the business of farming. Whether or not particular assets are "used principally in the business of farming" is a question of fact to be determined on a property by property basis (i.e., this test would have to be satisfied for each legal parcel of land). …
Isabelle Landry
2017-070916
Le 6 octobre 2017
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-373R2 - CONSOLIDATED, "Woodlots", archived, February 21, 2001.