| 24(1) | File No. 5-9580 |
| C. Tremblay | |
| (613) 957-2095 |
Attention: 19(1)
June 19, 1990
Dear Sirs:
Re: Subsection 45(1) and 110.6 of the Income Tax Act (the "Act")
This is in reply to your letter of February 6, 1990, and further to our telephone conversation (Tremblay 19(1) on May 4, 1990, concerning a hypothetical situation. We apologize for the delay in our response.
The hypothetical facts given are:
1. A farmer has carried on an active farming business for at least five years.
2. The farmer subsequently decides to take up employment outside the farm and cease the farm business.
3. In the meantime he retains the farm property, part of which is his principal residence.
4. In the future, assume two to five years, the taxpayer decides to sell the property.
You question whether a change in use occurs for the purpose of subsection 45(1) of the Act and whether if a change in use does apply, does it apply for the purposes of the definition of qualified farm property in subsection 110.6(1) of the Act.
Our Comments
Whether there has been a change in use, within the meaning of subsection 45(1) of the Act, in respect of the taxpayer's "farming business", is a question of fact and can only be determined with full knowledge of all of the particulars of the situation. However, it is our opinion that none of the facts included in the hypothetical fact situation would cause us to determine that such a change in use has taken place.
In order for a change in use to have occurred, within the meaning of subsection 45(1) of the Act, it is not sufficient that a property that was acquired for the purpose of gaining or producing income from a farming business, or for the purpose of producing income therefrom, is simply no longer used for those purposes. For that subsection to apply, the taxpayer must have commenced to use the property for some other purpose other than gaining or producing income therefrom. Based on the facts you have provided us, no use has been made of the property after the cessation of the business. In this regard, we refer you to paragraph 6 of Interpretation Bulletin IT-478. Thus, in our opinion, the change in use rules would not apply and the individual would be entitled to the enhanced capital gains deduction, pursuant to subsection 110.6(2) of the Act, when he sells the property a few years down the road.
If, however, the facts are such that there is a change in use, the individual will be deemed to have disposed of the property at fair market value and reacquired it at that same amount. As suggested, assuming the property qualifies for the enhanced capital gains deduction, then this deduction may be utilized to the extent it was not previously utilized. Later, when the individual sells the property, he would be entitled to any remaining deduction not previously, utilized because he would have actually acquired the property prior to June 17, 1987.
In answer to your secondary question, when a farmer ceased farming on a full time basis and continues farming on a reduced scale, the change in use rules would generally not apply. However, the expenses would only be deductible depending on whether or not there is any expectation of profit. The enhanced capital gain deduction would be available to the individual farmer when he eventually sells the property if the property meets the definition of qualified farm property as described in subsection 110.6(1) of the Act.
The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical examples and as such should not be construed as an advance income tax rulings, nor are they binding on the Department.
We trust our comments are of assistance.
Yours truly,
for DirectorBusiness and General DivisionLegislative and Intergovernmental Affairs Branch