Dear Sirs:
Re: Definition of Family Farm Corporation
This is in reply to your letter dated April 3, 1991, requesting our interpretation of the terms "actively engaged" and "actively engaged on a regular and continuous basis", as those terms are used in paragraph 70(10)(b) and subsection 110.6(1) of the Income Tax Act in the following hypothetical situation.
Mr X is the President, sole director, and sole shareholder of Farmco Limited (Farmco). Mr. X has never received salary or wages from Farmco, however he has always been responsible for its Management and operating decisions. He maintains a full-time job separate and apart from Farmco. In a typical week, Mr X spends approximately 1 hour per day from Monday to Friday, 2 to 3 hours on Saturday, and 5 to 6 hours on Sunday, on business relating to Farmco. The time, labour, and attention provided to the farming business of Farmco by Mr. X contribute to its operating results. Farmco employs several full-time employees to carry out its farming activities.
Our Comments
In our view the words "actively engaged" in subparagraph 70(10)(b)(i) refer to a person who in his capacity as shareholder or employee was actively involved in the management and/or day to day activities of the farming business carried on by the corporation. The person would ordinarily be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determined in the successful operation of the business This is in contrast to a passive shareholder or investor who would not be considered to be "actively engaged"
As for the phrase "actively involved on a regular and continuous basis", the regularity and frequency of involvement in the management and/or day to day activities of the farming business will depend on the nature of the farming operation and is determined on the facts of the situation. Paragraph 3 of Interpretation Bulletin IT-514 provides comments on the interpretation of "regular and continuous" as it relates to work space in the home. By analogy to this interpretation, activities in respect of a farming business which normally require infrequent actions or frequent action at irregular intervals would not meet the requirement.
Whether or not the extent of Mr. X's involvement would constitute being "actively engaged" or "actively engaged on a regular and continuous basis" in the business of farming, is a question of fact. Determinations of this nature are best made by officials of the local District Taxation Office after a thorough review of all the facts involved.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch