TO - VANCOUVER DISTRICT OFFICE Audit Review 148 - 14 W.F. Hannemann
FROM - Head Office Specialty Rulings Directorate R.B. Day (613) 957-2136
SUBJECT: Qualified Farm Property
We are writing in reply to your memorandum of March 16, 1989, wherein you requested our views regarding the application of subparagraphs 110.6(1)(a)(vi) and (vii) with respect to the following two situations.
(1) Property Acquired Prior to June 18, 1987
A taxpayer entered into a ten year agricultural "lease-to-purchase" agreement with the Province of British Columbia prior to June 18, 1987. To date, the taxpayer does not hold title to the land and has not yet cultivated 25% of the taxable portion of the land which is a condition precedent to the taxpayer being eligible to exercise the purchase option in the lease.
Specifically you have requested our views as to whether or not the taxpayer could be said to have "owned" the property for purposes of clause 110.6(1)(a)(vi)(B) or "acquired" the property pursuant to an agreement in writing entered into before June 18, 1987, for purposes of subparagraph 110.6(1)(a)(vii), as a consequence of having signed the lease agreement prior to June 18, 1987.
Our Comments
Without having access to an actual lease-purchase agreement between the taxpayer and the province we are unable to say definitively whether or not there exists a genuine lease agreement or agreement of purchase and sale. However, taking the commentary regarding the lease-to- purchase program at its face value, it is our opinion that the taxpayer does not own the property nor has he acquired the property, nor will he ever be considered to have acquired the property, pursuant an agreement in writing entered into before June 18, 1987.
The reasons for this view are as follows:
At the inception of the lease, the taxpayer has at best a conditional right to exercise an option to purchase the land at some future date. Until such time as the taxpayer has cultivated 25% of the taxable land he cannot exercise the option to purchase the land let alone claim the existence of an enforceable agreement of purchase and sale between himself and the province.
Paragraph 9 of IT-17 OR makes the following comments regarding sales of real property:
"In the case of sales of real property ... a purchaser acquires an equitable interest in the property upon execution of a binding agreement for sale or an accepted offer to purchase".
Since an enforceable agreement of purchase and sale could only be executed subsequent to the taxpayer fulfilling the conditions under the lease and subsequent to his exercising the offer to purchase, it is our view that the property would not be qualified farm property of the taxpayer.
In this regard we also draw your attention to the comments in paragraph 3 of IT-233R , regarding whether a lease-option agreement evidences a sale or lease of property.
2) Property Acquired After June 17, 1987
A taxpayer's principal residence is in Fort St. John, British Columbia. He owns 5 sections of grain farmland in the Peace River region of B.C. In the spring he drives up to the property, prepares the ground, puts the seed down and returns home. He pursues other activities during the summer months. In early fall he does the harvesting. During the winter he spends at least 2-3 months in Arizona.
This is the established pattern. In some years there are crop failures. The provincial crop insurance program covers only part of the loss. Therefore, his other activities may result in greater gross revenue than from farming, which is contrary to clause 110.6(1)(a) (vii)(A).
You have requested our views as to the meaning of "was actively engaged on a regular and continuous basis" in clause 110.6(1)(a)(vii)(A) as it relates to the carrying on of the farming business by this taxpayer.
Our Comments
In the absence of definitions of "regular" and "continuous" in the Act we look to the ordinary meaning of these words. Webster's Dictionary defines these terms as follows:
"Regular - recurring, attending or functioning at fixed or uniform intervals.
Continuous - marked by uninterrupted extension in space and time."
In the context of the illustration set out above, it would appear that the taxpayer is undertaking his farming operations on a "regular" basis. Although it might be argued that the interruption between spring planting and the fall harvest would not be considered "continuous" farming, it is our view that the nature of grain farming is such that the taxpayer could be considered to be farming on a continuous basis when he is actually seeding and harvesting his crops.
Subparagraph 110.6(l)(a)(vii) states that "qualified farm property of an individual ... at any particular time means a property owned at that time by the individual ... that is
(a) real property used by
(i) the individual ... in the course of carrying on the business of farming in Canada and, ...
(vii) where the property is a property acquired by the individual ... after June 17, 1987, ... the property ... was owned ... throughout the period of at least 24 months immediately preceeding that time and
(A) in at least 2 years while the property was so owned, the gross revenue of an individual ... from the farming business carried on in Canada in which he used the property and in which he ... was actively engaged on a regular and continuous basis exceeded his income from all sources for the year ...".
As can be seen from the above, in order for the individual to be able to claim the capital gains exemption on qualified farm property he must be able to pass the gross revenue test and be actively engaged on a regular and continuous basis in the business of farming.
From the limited information set out in your example, it would appear that the taxpayer would meet the requirement of having farmed on a regular and continuous basis, but would not fulfill the gross revenue requirement of this subparagraph. Since all three requirements must be met at any given time, it would appear that the property would not be qualified farm property of the taxpayer at this time.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch