2014-0535661R3 73(3) Rollover of Farm Property to Child

Principal Issues: Whether the specified property is QFP and whether the family farm rollover rules in 73(3) will apply on the Taxpayer’s inter vivos transfer of the property to her adult children.

Position: Favourable ruling for the fact scenario provided.

Reasons: Based on the facts provided, the specified property appears to meet the definition of qualified farm property in 110.6(1) as well as the conditions of 73(3).

Author: XXXXXXXXXX
Section: 110.6(1) and (2); 110.6(1.3); 73(3); 73(3.1); 69(1)(b); 69(11)

XXXXXXXXXX
                                                                                                                                                          2014-053566

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
        XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers.  We also acknowledge the additional information provided in your subsequent emails as well as during our telephone conversations (XXXXXXXXXX) concerning the facts and the proposed transactions described in your original letter.  Any information you have provided to us forms part of this ruling only to the extent it is expressly referred to or described herein.

You have advised that to the best of your knowledge, and that of the above-referenced taxpayers involved, none of the issues contained herein is:

(i)   dealt with in an earlier tax return of the taxpayers or a related person;

(ii)  being considered by a tax services office or taxation centre in connection with any tax return previously filed by the taxpayers or a related person;

(iii) under objection by the taxpayers, or a related person;

(iv)  before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the above-referenced taxpayers, the proposed transactions will not result in any of the taxpayers being unable to pay their existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a)   “Act” means the Income Tax Act (Canada), R.S.C.  1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;

(b)   “adjusted cost base” (“ACB”)  has the meaning assigned by section 54;

(c)   “capital gains deduction” (“CGD”) means the amount available to be deducted against taxable income, as described in subsection 110.6(2);

(d)   “Child A” means XXXXXXXXXX, residing at XXXXXXXXXX;

(e)   “Child B” means XXXXXXXXXX, residing at XXXXXXXXXX;

(f)   “Child C” means XXXXXXXXXX, residing at XXXXXXXXXX;

(g)   “Child D” means XXXXXXXXXX, residing at XXXXXXXXXX;

(h)   “CRA” means the Canada Revenue Agency;

(i)   “disposition” has the meaning assigned by subsection 248(1);

(j)   “fair market value” (“FMV”) means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash;

(k)   “Mr. X” means Mrs. X’s late husband, XXXXXXXXXX;

(l)   “Mrs. X” means XXXXXXXXXX, residing at XXXXXXXXXX;

(m)   “Paragraph” refers to a numbered paragraph in this letter;

(n)   “proceeds of disposition” (“POD”) has the meaning assigned by section 54;

(o)   “Property” means the XXXXXXXXXX acre parcel of land located in XXXXXXXXXX, and that is legally and beneficially owned by Mrs. X and Child B as tenants in common with each having a 50 percent undivided interest;

(p)   “proposed transactions” means the transactions described in Paragraph 16 and 17;

(q)   “qualified farm property” (“QFP”) has the meaning assigned in subsection 110.6(1); and

(r)   “Subject Property” means Mrs. X’s 50 percent undivided interest in the Property.

Our understanding of the Facts, Proposed Transactions, and Purpose of the Proposed Transactions is as follows:

FACTS

1)    Mrs. X is currently the legal and beneficial owner of the Subject Property.  Mrs. X acquired the Subject Property as a consequence of Mr. X’s death in XXXXXXXXXX.  Up to the time of his death, Mr. X was married to Mrs. X and together they are the natural parents of Child A, Child B, Child C and Child D.  Mrs. X is currently a resident of XXXXXXXXXX and files her income tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

2)    The Property originally formed part of farmlands settled by Mr. X’s mother and father in XXXXXXXXXX and was used by his mother and father in their farming business.  The farming business carried on in Canada focused mainly on XXXXXXXXXX production.  Income from the farming business carried on by Mr. X’s father and/or mother was their primary source of income.

3)    Mr. X’s father died in XXXXXXXXXX, and his ownership in all farmlands, including the Property, was transferred to his surviving spouse, Mr. X’s mother.  Mr. X’s mother continued the farming business with the help of their two children; Mr. X and Mr. X’s brother.

4)    Mr. X married Mrs. X in XXXXXXXXXX.  Mr. X and Mrs. X were both active in the family farm operation as were their own children.

5)    Mr. X’s mother died in XXXXXXXXXX and ownership of all farmlands, including the Property, was transferred to Mr. X and Mr. X’s brother on an equitable basis (i.e., each brother received a 50 percent undivided interest in the Property as tenants in common).

6)    The farmlands, including the Property, were farmed by Mr. X and Mr. X’s brother and they shared in the profits equally.  Farming was Mr. X’s primary source of income from approximately XXXXXXXXXX until he substantially retired from full-time farming in XXXXXXXXXX.

7)    During XXXXXXXXXX, substantially all of the farmlands owned by Mr. X were sold except his 50 percent interest in the Property.  The other 50 percent interest in the Property continued to be held by Mr. X’s brother.

8)    From XXXXXXXXXX until XXXXXXXXXX, the Property was farmed mainly by Mr. X’s brother.  While Mr. X was still involved in the decision making for the farming operation and some of the farm work, income from the farm business was no longer Mr. X’s primary source of income.

9)    Mr. X died in XXXXXXXXXX and his 50 percent interest in the Property was transferred to his surviving spouse, Mrs. X, as a consequence of his death.  The FMV of Mr. X’s 50 percent interest in the Property at that time was $XXXXXXXXXX.

10)   Mrs. X and Mr. X’s brother continued with the previous arrangement and farmed the Property together from XXXXXXXXXX to XXXXXXXXXX, splitting the profits on an equitable basis.  The farm income received by Mrs. X was not her main source of income during this time.

11)   Sometime in XXXXXXXXXX, Mrs. X and Mr. X’s brother ceased comprehensive farming operations and leased the Property to a neighbour for agricultural purposes.

12)   Mr. X’s brother died in XXXXXXXXXX and left his 50 percent interest in the Property to Child B.

13)   The Property continues to be leased to a neighbour for agricultural purposes.

14)   The Subject Property is currently estimated to have a FMV of $XXXXXXXXXX based on a recent independent appraisal.

15)   The ACB of the Subject Property is $XXXXXXXXXX.

PROPOSED TRANSACTIONS

16)   Mrs. X proposes to transfer the Subject Property, on an equitable basis, to each of Child A, Child B, Child C and Child D such that immediately thereafter each of Child A, Child B, Child C and Child D will own 1/4 of the Subject Property.

17)   As sole consideration for the transfer of the Subject Property described in Paragraph 16, each of Child A, Child B, Child C and Child D, as the case may be, will provide a promissory note having a principal amount and FMV of $XXXXXXXXXX each.  Each promissory note will bear interest at XXXXXXXXXX% and will be repayable on demand after the earlier of: (a) XXXXXXXXXX years, or (b) the date proceeds are received by the transferee on a subsequent sale. For greater certainty, the aggregate of the principal amounts and FMVs of the promissory notes will not exceed the FMV of the Subject Property nor will it be less than the ACB of the Subject Property to Mrs. X.

PURPOSE OF THE PROPOSED TRANSACTIONS

18)   The purpose of the proposed transactions is to allow Mrs. X to utilize her CGD for QFP and to allow greater flexibility for inter-generational tax planning, which includes the equitable transfer of the Subject Property to each of Child A, Child B, Child C and Child D as described in Paragraph 16.

ADDITIONAL INFORMATION

19)   Child A, Child B, Child C and Child D are currently residents of Canada, and will be residents of Canada at the time of the proposed transactions described in Paragraph 16 and 17.

20)   Each of Child A, Child B, Child C and Child D, as the case may be, intend to hold their respective interest in the Subject Property for at least XXXXXXXXXX years after the proposed transactions described in Paragraph 16 and 17 take place.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

(A)   Immediately before the time of the proposed transfer of the Subject Property described in Paragraph 16 such property will be QFP for the purposes of the CGD.

(B)   Subject to the application of subsection 69(11), provided that each child is resident in Canada and the Subject Property has been used principally in a farming business carried on by Mrs. X or another person in relation to Mrs. X who is described in paragraph (c) of subsection 73(3) before the transfer of such property described in Paragraph 16 for POD described in Paragraph 17, the provisions of subsection 73(3) and (3.1) will apply such that:

(i)   Mrs. X will be deemed to dispose of the Subject Property for POD equal to the amount determined in paragraph 73(3.1)(b)(i); and

(ii)  Child A, Child B, Child C and Child D, as the case may be, will be deemed to have acquired their proportionate interest in the Subject Property at a cost equal to their respective proportionate interest in Mrs. X’s deemed POD determined in (i) above, pursuant to paragraph 73(3.1)(e).

The above Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on the CRA provided that the proposed transactions are implemented prior to XXXXXXXXXX.

The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Income Tax Regulations which, if enacted, could have an effect on the Rulings provided herein.

COMMENTS

The CRA does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions unless otherwise confirmed in the above Rulings.  In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly that:

(i)   Child A, Child B, Child C and Child D are residents of Canada immediately before the time of transfer;

(ii)  Any individual described in this letter used the Property and/or the Subject Property principally in a farming business carried on in Canada in which one or more of these individuals, as the case may be, were actively engaged on a regular and continuous basis;

(iii) The income earned by any individual referred to in (ii) from that farming business was that individual’s primary source of income at any particular time;

(iv)  the determination of the FMV, ACB or the capital cost of any property referred to in this letter; and any other tax consequences relating to the facts and proposed transactions described herein or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not.

Notwithstanding the rulings provided, it is primarily a question of fact as to whether the Subject Property would be QFP.  In addition, in order for Mrs. X to claim a CGD on the proposed disposition of the Subject Property described in Paragraph 16, all of the other requirements as set out in section 110.6 of the Act must also be met at that time.  Therefore, notwithstanding any factual representations that have been made by you and as described in this letter, the determination of these issues remain the sole responsibility of the CRA’s Compliance Programs Branch, which would normally take place during the course of an audit or a review of the particular income tax return once such a return has been filed.

Yours truly,

XXXXXXXXXX
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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