2015-0567231E5 Qualified farm or fishing property

Principal Issues: Whether property is qualified farm or fishing property.

Position: Question of fact.

Reasons: See below.

Author: Robinson, Katie
Section: 110.6

XXXXXXXXXX                                                                                                                      2015-056723
                                                                                                                                              K. Robinson
February 3, 2015

Dear XXXXXXXXXX:

Re: “Qualified farm or fishing property” (“QFFP”) (footnote 1)

We are writing in response to your letter of November 18, 2014, wherein you requested our views on whether certain land you inherited would be eligible for the lifetime capital gains exemption under subsection 110.6(2) of the Income Tax Act (“Act”).

Briefly, you indicated that your husband passed away in 2014 and you inherited certain land that was farmed by your husband and son.  Neither you nor your son are able to continue the farming operation and you want to know if renting the land, either for cash or under a sharecropping arrangement will affect your ability to claim the lifetime capital gains exemption on a subsequent sale of the land.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation.  It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination.  The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, “Advance Income Tax Rulings”.

Generally speaking, subsection 110.6(2) of the Act permits an individual (other than a trust) who is resident in Canada throughout the taxation year to claim a lifetime capital gains exemption of up to $800,000 where that individual has disposed of property that is QFFP.  The $800,000 lifetime capital gains exemption will be indexed for tax years after 2014.  QFFP includes, inter alia, property that is real or immovable property that was used by you or certain “qualifying persons” in a farming or fishing business carried on in Canada.  To be a QFFP, the property must also meet certain conditions as set out in subsection 110.6(1.3) the Act.  The lifetime capital gains exemption rules are fairly complicated and we caution that you should consult with your own tax advisor before acting on the information contained in this letter.

Notwithstanding the above, we will attempt to summarize the rules as they may pertain to you on the assumption that the land was acquired by you in 2014 from your husband’s estate and that you did not carry on any farming business on the land.

Very generally speaking, the first condition that must be met is that the land must have been owned by you, your husband and/or your husband’s estate throughout a period of at least 24 months immediately preceding any subsequent sale of the land by you.  The second condition that must be met is that in at least 2 years while the land was owned by your husband, the gross revenue from the farming or fishing business carried on in Canada by him must exceed his income from all other sources during that period.  In addition, the land must have been used principally (i.e., more than 50%) in the farming or fishing business in which your husband was actively engaged on a regular and continuous basis for that same 2 year period.

As long as the above requirements are met prior to the disposition of the land, the fact that the land was not used by you in any farming business would not prevent such land from being considered as QFFP.

With respect to the proposed “sharecropping arrangement”, it is generally our view, as indicated in paragraph 9 of IT-433R, “Farming or Fishing - Use of Cash Method”, that the crop share received by a landlord in a sharecropping arrangement is rental income and not income from farming.  A “sharecropping arrangement” in that context means an arrangement where a taxpayer or landlord receives from a tenant a share of a crop in lieu of rent.  We consider that a lessor of farm property does not use such property in the business of farming.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  The Act has recently been amended to replace the reference to “qualified farm property” with a reference to “qualified farm or fishing property”.  These amendments are applicable to dispositions and transfers that occur in the 2014 and subsequent tax years.

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