| September 25, 1989 | |
| Mrs. P. McNally | Legislative Affairs |
| Director | Directorate |
| Enquiries and Taxpayer | D.W. Joy / 957-2083 |
| Assistance Division | |
| Attention: K. Meathrell | F-3161 |
1989 Farming Income Tax Guide
This is in reply to the T782 request of August 1, 1989 prepared by K. Meathrell concerning the annual review of the above guide.
We have the following comments with respect to changes needed to reflect changes to the legislation:
1) Form T2041 - CCA schedule
Refer to comments made in the August 17 memo with respect to the 1989 Fishing Income Guide.
2) The terms "fiscal period", "year" and "taxation year" appear to be used indiscriminately. This seems to be inappropriate for the 1989 guide since some adjustments to farm income (concerning the mandatory inventory adjustment and the optional value of livestock election, for example) are relevant for fiscal periods rather than taxation years. (Details of those adjustments are discussed later.)
In addition, the term "fiscal year-end" is also used, but its meaning is not clear.
3) Page 9 - Drought-induced sales of breeding herd
(a) Where a farmer lives is not relevant; what is relevant is whether the farming business is carried on in an area that is, at some time during a fiscal period that ends after 1987, a prescribed drought region.
(b) The deferral is optional. The farmer may defer any amount up to the maximum permitted by the formula (like CCA).
(c) The deferral is available only for dispositions that occurred in the fiscal period for which the claim (for deferral) is made; i.e., deferral is not available for proceeds received in respect of sales that occurred in a prior fiscal period.
(d) It is not yet known whether any region will be prescribed for any part of 1989. Where a farmer claimed a deferral under subsection 80.3(4) for 1988 and no part of his farming business was carried on in a prescribed drought region during his 1989 FISCAL PERIOD, the 1988 deferral must be included in 1989 income,. Where a farmer carried on a farming business in a region that was prescribed for at least part of his 1988 and 1989 fiscal periods (e.g., in Manitoba, with a November 30 fiscal period), then none of the 1988 deferral has to be included in 1989 income, but the farmer may choose to include part or all of the deferral in 1989 income.
Where a farmer claimed a deferral under subsection 80.3(4) for 1988 and died in 1989, the deferral must be included in 1989 income whether or not the relevant prescribed drought region (for part or all of his 1988 fiscal period) is prescribed for any of his 1989 fiscal period.
(e) As a consequence of the Bill C-28 amendment to subsection 11(2), that subsection will apply in respect of section 80.3.
4) Page 12 -
The "Code 510" item in the 1988 guide (Optional Inclusion of value of livestock on hand) is still relevant for 1989 fiscal periods that commenced before 1989. The upcoming Technical Bill will change the coming-into-force for the Bill C-139 changes to section 28 and 30 from "taxation years commencing after 1988" to "fiscal periods commencing after 1988". This change is public information (see attached copy of December 1988 letters between 19(1) and Finance, and the coming-into-force provision for the Bill C-28 changes to section 28(1)).
5) Pages 15 to 18 - Motor Vehicle Expenses
The various amounts ($8.33/day for interest, $20,000 cost of passenger vehicles, $600/30 day period for lease costs) apply only for passenger vehicles leased or acquired before September 1989. Finance Release #89-083, dated August 14, 1989, advises that the values will change "on September 1, 1989". Actually, the new amounts will apply for acquisitions made after August 1989 and for leases entered into, renewed or extended after August 1989.
6) Page 19 - Note re: new leasing rules
You might consider clarifying that these new rules will not apply to automobiles. Perhaps the note should also be relocated (they would be relevant to the leasing of e.g., combines).
7) 21(1)(b)
8) Page 31 - T2041
(a) Should readers be advised to list each class 10.1 property separately?
(b) Since the rules for determining what is to be included in class 10.1 are to be changed as of the inception of the class, readers should be advised to re-do the class 10 and 10.1 portions of the 1988 CCA schedule under the new rules.
This would be easier (less confusing) than using subsection 13(5.1) to re-transfer inappropriate class 10.1 properties back to class 10 and would be the technically correct route/procedure since it would eliminate inappropriate recaptures and terminal losses for 1988 in respect of class 10 properties. If this is done, the "Note" at the bottom of page 32 may have to be revised.
9) Page 42 - Cumulative eligible capital account
As discussed (Burnett/Meathrell), the description of the proceeds to be credited to the pool in respect of eligible capital property dispositions needs to be amended. For dispositions that occurred before June 18, 1987 (or after June 17 but grandfathered) the proceeds are credited as they become due. For dispositions (not grandfathered) that occur after June 17, 1987, the proceeds are credited at the time of the disposition.
The rate of inclusion is 50% for proceeds included in fiscal periods that commence before 1988, and 75% for proceeds included in fiscal periods that commence after 1987.
10) Page 43 - Proceeds of disposition
Shouldn't the discussion under this heading indicate the significance of the result; i.e., that the deemed taxable capital gain in respect of the disposition of eligible capital property used to earn income from a farming business will qualify for the $500,000 life-time capital gains deduction?
21(1)(b)
12) Chapter 7 - pages 54 and following
We understand that the reference to "qualified expenditures" was dropped deliberately because of the unlikelihood of individuals incurring R & D costs. If that is correct, the text of the chapter should be examined to delete irrelevant references to "or expenditures made". Some of those references have been indicated on attached photocopies of the draft 1989 guide.
13) Pages 56 and 57 - ITC's
There doesn't seem to be clear information that unused ITCs for properties acquired (or R & D expenditures made) before April 20, 1983 is not available in 1989. Such a statement would be useful in the guide. Also, form T2038 for 1989 should have box (1) "Balance of credits carried forward" starred to indicate this fact. Also, although not submitted with the draft guide, form T2038 also needs to be revised to at least change the 60% "specified percentage" for approved project property to 45%, for acquisitions after 1988.
14) Page 58 - Partnership information return
You should check this material with Audit (Al Smith) since we understand they have prepared a News Release on the subject which exempts five person partnerships from the reporting requirements.
In addition to the foregoing, the attached copy of various pages of the draft guide have comments of a minor nature that you may wish to consider.
B.J. Bryson Acting Director Current Amendments and Regulations Division
c.c.: Mr. A. Cockell
DWJ/jab