The taxpayers, spouses, bought a farm in 2003 to start a tree farming business. Following the discovery of gravel deposits, and before the business generated revenue, the taxpayers sold the land in 2008 and claimed the capital gains exemption under s. 110.6(2). The taxpayers rented approximately 50% of the acreage, on which they had not planted trees, to a hay farmer.
Hogan J concluded that the portion of the property that was never rented to a third party was "qualified farm property."
First, he found that although the property was owned by the taxpayers directly, it was used by a partnership the interests in which were a farm partnership, so as to satisfy (a)(v) of the definition (see summary under s. 96(1)).
Second, the land "was used in the course of carrying on the business of farming in Canada," which Hogan J found did not entail a requirement that the land be used in a farming business at the time of disposition (para. 49), so that it was irrelevant that the taxpayers had sold their equipment by then. In particular, as the business was carried on through a partnership, the "50% income" requirement in clause (i)(A) (now (ii)(I)) of s. 110.6(1.3)(a), and the 24-month regular and continuous business requirement in s. (b)(ii) (now (a)(ii)(B)) was satisfied, as the evidence showed that the taxpayers were both actively involved in the tree-farming business.
Third, the taxpayers' partnership interests were "interests in a family farm partnership," as defined in s. 110.6(1). The "50%" threshold in para. (a) of that definition must be satisfied throughout the 24-month period, while no such requirement applies to the "all or substantially all" threshold in para (b) (para. 56). Based on Hogan J's finding that taxpayers were involved in the tree-farming business, the partnership interests were interests in a family farm partnership. The taxpayers' renting part of the land to a third party was irrelevant, given the finding below that the rented land was not used in the partnership business.
The rented portion of the lands was not qualified farm property. Hogan J found (at para. 61) that there was nothing in the definition that would imply that land be treated indivisibly for the purpose of determining what constituted qualified farm property ("otherwise land that has been legally subdivided would be preferred to land that has not been.") He excluded a percentage of the land based on the greatest number of acres rented in any of the years coinciding with the tree-farming business (para. 63).