| July 10, 1991 | ||
| TO: | FROM: | |
| SASKATOON DISTRICT OFFICE | HEAD OFFICE | |
| F. Metanchuk | C. Tremblay | |
| Business Audit | (613) 952-1361 | |
| FILE | 911491 | |
| SUBJECT: Definition of Share of the Capital Stock of a Family Farm Corporation" |
This is in reply to your memorandum of May 15, 1991 addressed to Audit Applications Division who asked us to respond to you. You requested whether or not an individual who qualified for a rollover pursuant to subsection 70(9.2) of the Income Tax Act (the "Act") subject to 70(10)(b) of the Act but failed to meet the 24 month requirement in the definition of "share of the capital stock of the family farm corporation" as defined in subsection 110.6(1) of the Act would be entitled to the $500,000 Capital Gain Exemption pursuant to subsection 110.6(2)of the Act.
Our Comments
In order for a share to qualify as a share of the capital stock of a family farm corporation for the capital gain exemption as described in subsection 110.6(1) of the Act at the time the share is sold, all or substantially all (90 per cent or more) of the fair market value of the corporation's property must be used in carrying on a farming business in Canada. Throughout any 24 month period before the disposition, 50 percent of the fair market value of the corporation's property must be attributable to property used principally in the course of carrying on a farming business in Canada.
A "rollover"' which defers the realization of capital gains is available pursuant to subsection 70(9.2) of the Act in respect of certain transfers to the child of a taxpayer of shares of the capital stock of a family farm corporation. Such property may be deemed to have been disposed of by the taxpayer and acquired by his child at its adjusted cost base to the taxpayer at that time. Paragraph 28 of Interpretation Bulletin IT-349R2 explains the requirements of the Act in this regard. Alternatively, an election can be made to have the shares disposed of at any amount which is between fair market value and adjusted cost base. The determination of whether or not a share of a corporation qualifies as a "share of the capital stock of a family farm corporation", as defined in paragraph 70(10)(b) of the Act, must be made at a particular point in time at which the above-mentioned phrase becomes relevant and involves a number of questions of fact.
However, unless the property was used in the business of farming by a qualified user throughout a period of at least 24 months before the disposal time, the individual may not utilize the provisions of subsection 110.6(1) of the Act.
Accordingly, in our view, and confirmed by the Department of Finance, this is the intent of the legislation and unless the 24 month period requirement is met, the individual would not be entitled to the $500,000 Capital Gain Exemption.
We trust our comments are of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch