2015-0576961R3 Inter vivos transfer of farm land to adult children

Principal Issues: Whether the family farm rollover rules in 73(3) and (3.1) will apply on a parent’s inter vivos gift of the certain farm lands to her adult children.

Position: Favourable ruling given.

Reasons: Based on the facts provided, the proposed transfer appears to meet the conditions for subsection 73(3) and 73(3.1) to apply.

Author: XXXXXXXXXX
Section: 73(1); 73(3.1); 69(11)

XXXXXXXXXX
                                          2015-057696

XXXXXXXXXX, 2015

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 submission of XXXXXXXXXX, as well as our telephone conversations (XXXXXXXXXX) concerning the facts and the proposed transactions described in your 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)    “arm’s length” has the meaning assigned by subsection 251(1);

d)    “Child A” means XXXXXXXXXX;

e)    “Child B” means XXXXXXXXXX;

f)    “Child C” means XXXXXXXXXX;

g)    “CRA” means the Canada Revenue Agency;

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

i)    “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;

j)    “Mr. X” means Parent’s late father, XXXXXXXXXX;

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

l)    “Parent” means XXXXXXXXXX;

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

n)    “Property1” means that parcel of land legally and beneficially owned by Parent that is situate in the Province of XXXXXXXXXX, excepting all mines and minerals and the right to work the same;

o)    “Property2” means that parcel of land legally and beneficially owned by Parent that is situate in the Province of XXXXXXXXXX, excepting all mines and minerals and the right to work the same;

p)    “Property3” means that parcel of land legally and beneficially owned by Parent that is situate in the Province of XXXXXXXXXX, excepting all mines and minerals and the right to work the same;

q)    “proposed transaction” means the transaction described in Paragraph 9; and

r)    “Subject Properties” means collectively Property1, Property2 and Property3.

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

FACTS

1.    Parent is the legal and beneficial owner of the Subject Properties.  As described in more detail in Paragraph 3, Parent purchased the Subject Properties from Mr. X in XXXXXXXXXX.  Parent is a resident of Canada for the purposes of the Act.  Parent files her income tax returns at the XXXXXXXXXX Tax Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

2.    The Subject Properties originally formed part of the total farmlands that were owned and used by Mr. X in his farming business in Canada, and which was Mr. X’s primary source of income from XXXXXXXXXX to XXXXXXXXXX, when he retired.  Mr. X died in XXXXXXXXXX.

3.    In XXXXXXXXXX, Mr. X sold the Subject Properties to Parent for the aggregate sale price of $XXXXXXXXXX, which was the aggregate FMV of the Subject Properties at that time.  Parent’s aggregate adjusted cost base (“ACB”) of the Subject Properties is $XXXXXXXXXX.  However, pursuant to a lease agreement between Mr. X and Parent, Mr. X continued to use the Subject Properties in his farming business in which he was actively engaged on a regular and continuous basis until he retired in XXXXXXXXXX.

4.    Following Mr. X’s retirement, in XXXXXXXXXX, Parent leased the Subject Properties to an arm’s-length neighbour.  The neighbour uses the Subject Properties for farming.

5.    Parent has never carried on a farming business on the Subject Properties.

6.    Mr. X acquired Property1 and Property2 on XXXXXXXXXX and Property 3 on XXXXXXXXXX.  Mr. X used all of Property1 and Property2 principally in his farming business in Canada for XXXXXXXXXX years out of XXXXXXXXXX years, or approximately XXXXXXXXXX% of the combined period of ownership by Mr. X and Parent.  Mr. X used all of Property3 principally in his farming business in Canada for XXXXXXXXXX years out of XXXXXXXXXX years or approximately XXXXXXXXXX% of the combined period of ownership by Mr. X and Parent.

7.    The aggregate FMV of the Subject Properties is currently estimated to be approximately $XXXXXXXXXX.  In each case, the FMV of Property1, Property2, and Property3, as the case may be, will exceed its ACB.

8.    Child A, Child B, and Child C are the adult children of Parent (collectively referred to as the “Adult Children”, where appropriate).  Each of Child A, Child B, and Child C is a resident of Canada for the purposes of the Act.  The Adult Children file their respective income tax returns at the XXXXXXXXXX Tax Centre and otherwise deal with the XXXXXXXXXX Tax Services Office.

PROPOSED TRANSACTION

9.    Parent will transfer Property1, Property2 and Property3 by way of gift inter vivos, on an equitable basis, to each of Child A, Child B, Child C such that, immediately thereafter each of the Adult Children will own a XXXXXXXXXX undivided interest in each of the Subject Properties as tenants-in-common.  For greater certainty, Parent will receive no consideration for the transfer of the Subject Properties.

PURPOSE OF THE PROPOSED TRANSACTION

10.   The purpose of the proposed transaction is to transfer the Subject Properties to Parent’s Adult Children on a rollover basis using the provisions of subsections 73(3) and (3.1) in accordance with Parent’s overall estate planning objectives.

ADDITIONAL INFORMATION

11.   Each of Child A, Child B, and Child C, as the case may be, will be a resident of Canada for the purposes of the Act at the time immediately before the proposed transaction described in Paragraph 9 is completed.

12.   Each of Child A, Child B, and Child C, as the case may be, intend to hold their respective XXXXXXXXXX undivided interest in each of the Subject Properties for at least XXXXXXXXXX years after the proposed transaction described in Paragraph 9 is completed.

RULING GIVEN

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

Subject to the application of subsection 69(11), provided that each of Child A, Child B, and Child C, as the case may be, is resident in Canada immediately before the transfer of the Subject Properties as described in Paragraph 9 and provided each of Property1, Property2 and Property3, as the case may be, has been used principally in a farming business carried on by Parent, Mr. X, or another person in relation to Parent who is described in paragraph (c) in subsection 73(3) before the transfer of such property, the provisions of subsection 73(3) and (3.1) will apply such that:

(i)   Parent will be deemed to dispose of Property1, Property2 and Property3, or such proportionate interest therein, as the case may be, for POD equal to the amount determined in paragraph 73(3.1)(b)(iii) for each such transfer of property described in Paragraph 9; and,

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

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

The above Ruling is 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 Ruling provided herein.

COMMENTS

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

(i)   Child A, Child B, and Child C is a resident of Canada for the purposes of the Act immediately before the time of the transfer of Subject Properties described in Paragraph 9;

(ii)  Any individual described in this letter has used the Subject Properties 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. For greater certainty, the phrase “used principally” for these purposes means that during the total period of ownership, the particular property must have been used by eligible users more than 50% (on a total land area basis and on a total ownership period basis) for eligible farming activities;

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

(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 the proposed transaction described herein or any transaction or event taking place either prior to the proposed transaction or subsequent to the proposed transaction, whether described in this letter or not.

Notwithstanding any factual representations that have been made by you and as described in this letter, the determination of questions of fact 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 after such a return has already been filed and initially assessed.

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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