Dear Sirs:
Re: Subsection 110.6(1) Definition of Qualified Farm Property
This is in reply to your letter of March 7, 1991 requesting clarification of the definition of Qualified Farm Property as it relates to the following hypothetical situations:
Situation A
1. Mr. A, a Canadian resident individual, owns a 100 acre parcel of land which was acquired in 1980 and Mr. A has carried on a farming business on the property for at least a five year period during that time.
2. In 1989, Mr. A dies and leaves the farm property to his spouse.
3. During 1990, the property is not farmed.
4. Near the end of 1990, Mrs. A disposes of the property.
Situation B
1. Mr. B, a Canadian resident individual, owns a 100 acre parcel of land which was acquired in 1980. Mr. B has carried on a farming business on the property for at least a five year period during that time.
2. In January 1989, Mr. B transferred the farm property to his children at the adjusted cost base pursuant to Section 73(3)(b) of the Income Tax Act.
3. During 1989, Mr. B continued carrying on his farming operation.
4. During 1990, Mr. B retired and the property was not farmed.
5. The property was sold in the fall of 1990.
You inquired if the property, would be considered to be Qualified Farm Property under each scenario outlined above. In addition you requested clarification of paragraph 6 of the draft technical amendments.
Our Comments
The definition of qualified farm property under subsection 110.6(1) of the Income Tax Act (the Act) requires that the real property in question be used in carrying on a farming business in Canada by the taxpayer, his spouse, any of his children, or any of his parents. In addition real property acquired after June 18, 1987 must have been owned by the taxpayer, his spouse, any of his children or his parents throughout the 24 months preceding the sale. Furthermore, in at least 2 years while the property was so owned (by any one of the persons previously mentioned), gross revenue from the farming business carried on by the taxpayer must have exceeded his income from all other sources for the year.
It appears that the properties described in both situation A and situation B would be qualified farm properties provided each criteria specified above has been met. In situation A, while the ownership criteria has been met, Mrs. A would be allowed to claim the enhanced capital gains exemption only if gross revenue from the farming business carried on by Mr. A exceeded his income from all other sources for at least 2 years while he owned the property.
Similarly, in situation B, Mr. B's children would be entitled to the qualified farm property capital gains exemption upon their disposition of the property, provided Mr. B's gross revenue from farming exceeded his revenue from all other sources for at least two years of his five year ownership period.
Therefore in both the current and the draft legislation, the gross revenue test is not applied solely to the person disposing of the property. This test may be applied to any one of the persons described in subparagraphs (a)(i) to (iii) however it is applied to only one such person while the property in question was so owned by such person.
We trust our comments will be of assistance to you. Yours truly,
for DirectorBusiness and GeneralLegislative and Intergovernmental Affairs Branch