| 24(1) | 5-902095 |
| L. Holloway | |
| (613) 957-2104 | |
| 19(1) | EACC9647 |
September 19, 1990
Dear Sirs:
Re: Subsection 110.6(1) of the Income Tax Act (the "Act")
We are writing in reply to your letter dated August 15, 1990, wherein you requested our interpretation of the definition of a qualified farm property under Subsection 110.6(1) of the Income Tax Act as applied to a particular hypothetical situation.
Our understanding of the hypothetical facts and transactions, as described in your letter, follows:
1. A Canadian resident individual and his spouse co-owned and farmed a capital property since 1985.
2. The taxpayer's chief source of income is farming.
3. The taxpayers would subdivide the capital property into residential housing lots.
4. The taxpayers would subsequently sell the subdivided lots to a wholly owned corporation taking back a note equal to the fair market value of the property. Farming of the land would continue to the date of sale to the corporation (expected date - summer 1991).
5. The corporation would build residential housing on these lots and sell these homes on the open market.
With respect to the above transactions you have requested our interpretation as to whether the property described above is a qualified farm property as defined by subsection 110.6(1) of the Act. You have also requested our opinion on the nature of income resulting from the gain on sale of the farm property to the corporation after the subdivision has taken place.
Our Comments
Based on the information provided to us the property described above would appear to be qualified farm property within the meaning of subsection 110.6(1) of the Act, however this is a question of fact to be determined from an examination of all the facts.
In response to your second question, we agree that the position set out in paragraph 24 of Interpretation Bulletin IT-218R would apply in that "the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain". The act of subdividing alone would not alter the nature of the gain, however one must examine all the facts, both before and after the subdivision in order to determine whether or not the gain is indeed capital in nature. Based on the information provided, and given that the intention of the taxpayer is to develop the property into a residential housing project, he could be considered to have converted the land from a capital property to a trading property upon subdividing the land, and paragraph 15 of the Bulletin would have application. It is the date of conversion and not the date of transfer to the corporation that would be relevant in this case.
The taxpayer would have a notional capital gain on the date of conversion. However this notional capital gain would not be considered to give rise to taxable capital gains until the taxation year in which the actual sale of the lots with houses occurs. Such capital gains must be reported in the year of sale. Where the property is a qualified farm property as defined in subsection 110.6(1), the taxpayer would be entitled to claim the qualified farm property capital gains deduction in the year in which the capital gains are reported.
The increase in value of the property between the date of conversion and the date of transfer to the corporation would be reported as an inventory gain.
The foregoing represents our understanding of the law as it applies generally. As this is not an advance income tax ruling, it is not binding on the Department and our views might differ in an actual fact situation.
We hope these comments are of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch