| 19(1) | File No. 5-8498 |
| Bill Guglich | |
| Tel. (613) 957-2102 |
November 21, 1989
Dear Sirs:
This is in reply to your letter of August 8, 1989 concerning "qualified farm property" as defined in subsection 110.6(1) of the Income Tax Act (the "Act").
You described the following hypothetical situation:
1. Mr. and Mrs. X, a husband and wife, own a parcel of land in excess of ten acres including attached buildings (the "property"). The Property is located in Canada and was purchased 15 years ago.
2. Mr. and Mrs. X own all the outstanding share capital of Y Co.
3. Since the date of acquisition, the Property has been rented to Y Co.
4. Y Co. has continuously used the Property in its business of growing and selling nursery plants which consists of the following activities:
i) cultivation and growing of plants and shrubs for sale at the wholesale and retail level;
ii) purchase of potted plants and shrubs for resale at the wholesale or retail level; and
iii) sale of gardening supplies.
All activities are conducted on the Property, including the storage of potted plants bought for resale. There is no specific area set aside for this latter activity as different sections of the land are rotated between being cultivated and being used for storage. However, the majority of the land is under cultivation at any time. The storage of bought, potted plants usually involves placing the potted plant partially in the ground and covering the pot with soil.
The sales activities are conducted in a building located on the property.
5. A residence located on the Property was inhabited by Mr. and Mrs. X for a portion of the time that they have owned the Property. Otherwise, the residence has been inhabited by other employees of Y Co. for security reasons.
6. Mr. and Mrs. X have operated and managed Y Co.'s nursery business since incorporation.
7. Y Co. has generally been profitable and represents Mr. and Mrs. X's main source of income.
8. Y Co. does not hold any assets that are not used directly in the nursery business.
9. Mr. and Mrs. X also own the shares of another corporation, Z Co., which has acquired the assets of another identical nursery business within the last 12 months. Z Co. was incorporated just prior to this acquisition.
Our comments respecting your questions are as follows:
A. The cultivation and growing of plants and shrubs for sale at the wholesale and retail level would be considered "carrying on the business of farming". However, the purchase of potted plants and shrubs for sale at the wholesale and retail level and the sale of gardening supplies would not be considered "carrying on the business of farming".
B. Generally, buildings that are attached to the land would be considered real property for purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act.
C. Whether the property owned by Mr. and Mrs. X would qualify as a "qualified farm property" is dependent on Y Co. qualifying as a "corporation, a share of the capital stock of which is a share of the capital stock of a family corporation".
The definition of "share of the capital stock of a family farm corporation" requires that all or substantially all of the property owned by the corporation was used by the corporation throughout a period of at least 24 months before that time in the course of carrying on the business of farming. The Department has taken the position that "all or substantially all" means not less than 90%
The determination as to whether Y Co. used at least 90% of the property it owned in the course of carrying on the business of farming is a question of fact to be determined on the basis of the facts and details in the case.
D. In respect of the five year test contained in the definition of "qualified farm property" the corporation using the property to carry on a farming business must qualify as a family farm corporation in each year of the five year period to which the test is applied. As a practical matter the interaction of the 24 month period referred to in the definition of "share of the capital stock of a family farm corporation" and the five year period referred to in clause (a)(vi)(B) of the definition of "qualified farm property" will require the family farm corporation to qualify as such throughout the period, inasmuch as a corporation which failed to meet the 24 month test at any time throughout the period would not be a family farm corporation at all relevant times.
E. If Y Co. acquires the assets of Z Co., it is possible that the shares of Y Co. could qualify as "shares of a family farm corporation". In our view the reference in the definition to "throughout a period of at least 24 months" does not require each qualifying property to be owned for at least 24 months before that time. The Department's position is that the definition requires that at any point in the 24 month period the corporation must not own more than 10% non- qualifying property.
F. Assuming the shares of Z Co. are acquired by Y Co., Z Co. would be required to meet the 24 month test respecting its qualifying property in order that the shares of Z Co. The comments in paragraph E above respecting the 24 month test would apply.
We trust our comments will be of assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch