2020-0863671E5 73(3) rollover property farmed but not owned

Principal Issues: Whether the time that a farm property was not owned by a taxpayer but was used in a farming business in which the taxpayer was actively engaged on a regular and continuous basis can be considered in determining whether the property was “before the transfer used principally in the business of farming in which the taxpayer, the taxpayer's spouse (or common-law partner), the taxpayer's child, or a parent of the taxpayer was actively engaged on a regular and continuous basis”.

Position: Yes.

Reasons: Wording of subsection 73(3). There is no requirement that the farm property must be owned by a taxpayer in those years where it is considered to be used principally in the business of farming in which the taxpayer, the taxpayer’s spouse (or common-law partner), the taxpayer’s child, or a parent of the taxpayer was actively engaged on a regular and continuous basis.

Author: D'Angelo, Sandro
Section: 73(3), 73(3.1)

XXXXXXXXXX                                                                 2020-086367
                                                                                         S. D’Angelo

September 12, 2022

Dear XXXXXXXXXX:

Re: 73(3) Rollover – Property farmed but not owned and the used principally condition

This is in reply to your correspondence of September 17, 2020, wherein you requested our views concerning the application of subsection 73(3) of the Income Tax Act (“Act”).

In particular, you are requesting the CRA’s interpretation related to calculating the principal use test in paragraph 73(3)(c) of the Act in a situation where farmland was rented from eligible and non-eligible persons prior to the farmland being owned by the taxpayer. You have provided the following two scenarios and have asked if we agree with your interpretation:

Scenario 1

* Mr. A and Mrs. A jointly own a parcel of land in Canada.

* Mr. A’s father purchased the parcel of land in 1943 from his wife’s aunt (the aunt of Mr. A’s mother) and Mr. A’s father used the parcel of land in a farming business in which he was actively engaged on a regular and continuous basis.

* Mr. A started farming this land with his father in 1972. In 1980, Mr. A’s father retired from farming and Mr. A. started renting the parcel of land from his father and used it in his own farming business in which he was actively engaged on a regular and continuous basis.

* Following the passing of Mr. A’s father and mother, in 1997 the parcel of land was transferred to Mr. A’s brother, who was not a farmer. Mr. A continued to rent the parcel of land from his brother and continued to actively farm the property without any break in Mr. A’s use of the property in his farming business. (Mr. A’s brother is a non-eligible person in respect of Mr. and Mrs. A for the purpose of paragraph 73(3)(c) of the Act)

* In 1999, Mr. and Mrs. A purchased the parcel of land from Mr. A’s brother and Mr. A continued to actively farm it until 2004. In 2004, Mr. and Mrs. A started renting the land to non-eligible persons (for the purpose of paragraph 73(3)(c) of the Act) and this continued until 2020.

Mr. and Mrs. A would like to transfer the parcel of land to a Canadian resident child in 2020 under the inter-vivos provisions in subsections 73(3) and (3.1) of the Act. It is your view that since the parcel of land was actively used in a farming business by an eligible person in respect of Mr. and Mrs. A for more years (i.e., 61 years from 1943 to 2004) than it was not actively used in a farming business (i.e., 16 years from 2004 – 2020) the principle use test in paragraph 73(3)(c) of the Act would be met.

Scenario 2

* Mr. A and Mrs. A jointly own a parcel of land in Canada.

* Mr. A started renting this parcel of land from an unrelated person in 1987 and used the land in a farming business in which he was actively engaged on a regular and continuous basis.

* In 2000, Mr. and Mrs. A purchased the parcel of land from the unrelated person and Mr. A continued to actively farm the parcel of land until 2004.

* In 2004, Mr. and Mrs. A started renting the parcel of land to non-eligible persons (for the purpose of paragraph 73(3)(c) of the Act) and this continued until 2020.

It is your view that during the time that the land had been continuously owned or rented by an eligible person (the “ownership period”) in respect of Mr. and Mrs. A (i.e., 33 years from 1987 – 2020), the land was actively used in a farming business by an eligible person in respect of Mr. and Mrs. A for 17 years (from 1987 – 2004) and was not used actively in a farming business by an eligible person for 16 years (from 2004 – 2020). As a result, the parcel of land was used principally (>50%) in a farming business by an eligible person and the principle use test in paragraph 73(3)(c) of the Act would be met.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Generally, when a taxpayer transfers ownership (including beneficial ownership) of property to another individual, such as the mother and children, the taxpayer is considered to have a disposition and to have received proceeds equal to the fair market value of the property under subparagraph 69(b)(ii) of the Act. A taxpayer who acquires a property by way of gift, bequest or inheritance (or because of a disposition that does not result in a change in beneficial ownership of the property) is deemed to acquire the property at its FMV under paragraph 69(1)(c).

However, there are special tax rules (subsections 73(3) and (3.1) of the Act) that essentially provide for the deferral of the tax consequences (rollover) on the transfer of certain properties, including land used in a fishing or farming business, from a parent to a child during the parent’s lifetime. If the conditions for the application of these special tax rules are satisfied, the parent is generally able to transfer such property at an amount between the cost and its fair market value (depending of the amount paid). These special tax rules are discussed in Interpretation Bulletin IT-268R4, “Inter Vivos Transfer of Farm Property to Child”.

In general terms, in order for land to be eligible for this rollover, the following conditions, among others, must be met:

* the land must be in Canada;

* the land must be transferred by the taxpayer to a child of the taxpayer who was resident in Canada immediately before the transfer; and

* the land must have been used principally in the business of farming or fishing in which the taxpayer, the taxpayer’s spouse (or common-law partner), any of the taxpayer’s children or a parent of the taxpayer, was actively engaged on a regular and continuous basis.

The determination of whether real property is used principally by a taxpayer in carrying on a farming or fishing business and whether a particular farming or fishing operation constitutes a farming or fishing business at any particular time are questions of fact. Accordingly, such a determination requires a review of all of the facts surrounding a situation including which portions of the farm or fishing property were utilised throughout the period of ownership. Where reference is made to an asset being used “principally” in the business of farming or fishing, the asset will generally meet this requirement if more than 50% of the asset’s use is in the business of farming or fishing. Such a determination must be made on a property-by-property basis.. Accordingly, the “principally” test would generally be met where the farming or fishing use is more than 50% of the years while the test would generally not be met where the farming or fishing use is less than 50% of the years.

In our view subsection 73(3) of the Act does not include a requirement that property must be owned by a taxpayer in those years where it is considered to be used principally in the business of farming or fishing in which the taxpayer, the taxpayer’s spouse (or common law partner), the taxpayer’s child, or a parent of the taxpayer was actively engaged on a regular and continuous basis. In other words, it is our view that for purposes of the “used principally” requirement in paragraph 73(3)(c) of the Act the period of active farming or fishing by one or more eligible persons (i.e., the taxpayer, the taxpayer’s spouse (or common-law partner), a child of the taxpayer, or a parent of the taxpayer), does not have to coincide with the period of ownership of the particular property by the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo
Acting Manager
For Division Director
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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