2021-0891701E5 Property used principally in a farming business

Principal Issues: Can the “used principally” requirement in sub-clause 110.6(1.3)(a)(ii)(A)(II) be met is a situation where an individual owns a 70 acre parcel of land of which 25 acres is workable farmland and 45 acres is forest.

Position: Depends on the facts of the particular situation. Where in a particular year, more than 50% of a particular property is being used for some purpose other than farming or fishing or is otherwise vacant or idle, generally speaking, such “non-farming use” would result in the entire property not being considered as being used principally in the business of farming in Canada for the year. However, if the unusable portion is not suitable for any use then it may be excluded from the “used principally” determination.

Reasons: Previous positions.

Author: D'Angelo, Sandro
Section: 110.6(1), 110.6(1.3), 110.6(2), 110.6(2.2)

XXXXXXXXXX                                                                                    2021-089170

                                                                                                              S. D’Angelo

June 13, 2023

Dear XXXXXXXXXX:

Re: Subsection 110.6(1.3) – Property used principally in a farming business

We are writing in response to your email of April 18, 2021, wherein you requested our views on the phrase “used principally” in sub-clause 110.6(1.3)(a)(ii)(A)(II) of the Income Tax Act (“Act”) in a situation where a portion of farmland is not used for farming. We apologize for the delay in responding to your request.

You have provided an example whereby a taxpayer owns a farming property (the “Property”) that is zoned agricultural and that consists of a total of 70 acres of land of which 25 acres is workable farmland and 45 acres is forest. The forest portion of the Property has never been used for farming. You have referred to comments that were made in the Tax Court of Canada decision in Otteson et al v. The Queen 2014 TCC 250 (footnote 1) (“Otteson”) and have asked for clarification of our position on the application of the “used principally” condition for purposes of meeting the farming-use test in sub-clause 110.6(1.3)(a)(ii)(A)(II) of the Act.

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.

Subsections 110.6(2) and 110.6(2.2) of the Act permit a capital gain deduction of up to $500,000 (50% of the $1,000,000 lifetime capital gains exemption) for “qualified farm or fishing property” (“QFFP”) disposed of after April 20, 2015, by an individual (other than a trust) who was resident in Canada throughout the year. QFFP of an individual is defined in subsection 110.6(1) of the Act and includes property that is real or immovable property that was owned by, among others, an individual and that was used by the individual or certain qualifying persons (such as, a parent, child or spouse of the individual) in a farming or fishing business in Canada.

In addition, subsection 110.6(1.3) of the Act provides that for the purposes of applying the definition of QFFP, a particular property that was last acquired after June 17, 1987, will not be considered to have been used in the course of carrying on the business of farming or fishing in Canada unless the ownership test described in subparagraph 110.6(1.3)(a)(i) of the Act is met and one of the farming use tests described in clause 110.6(1.3)(a)(ii)(A) or clause 110.6(1.3)(a)(ii)(B) (footnote 2) of the Act is met. For purposes of meeting the farming use test in clause 110.6(1.3)(a)(ii)(A) of the Act, sub-clause 110.6(1.3)(a)(ii)(A)(II) of the Act requires that the property was used principally in a farming or fishing business carried on in Canada in which an eligible individual was actively engaged on a regular and continuous basis. Note that this test needs to be met in at least two years while the property was owned by one or more persons referred to in subparagraph 110.6(1.3)(a)(i) of the Act.

Notwithstanding the comments made in Otteson, it is our view that the determination of whether a property is being used principally by a taxpayer in carrying on a farming or fishing business in Canada for purposes of subsection 110.6(1.3) of the Act must be made on a property-by-property basis. Once so determined, the entire property would either qualify or not, as the case may be.

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. Accordingly, in order to meet the farming or fishing use requirements described in sub-clause 110.6(1.3)(a)(ii)(A)(II) of the Act, in at least two years while the Property was owned by one or more persons referred to in subparagraph 110.6(1.3)(a)(i) of the Act, more than 50% of the Property must have been used more than 50% of the time in farming or fishing. Where in a particular year, more than 50% of a particular property is being used for some purpose other than farming or fishing or is otherwise vacant or idle, generally speaking, such non-farming or fishing use would result in the entire property not being considered as being used principally in the business of farming or fishing in Canada for the year. For example, land which is not used for farming due only to the presence of trees would generally not be excluded in determining whether more than 50% of the property is used in farming or fishing.

However, it may be the case that a portion of the total area of a particular parcel of land is not be suitable for any use (i.e., a portion may be absolutely useless for any purpose). While the conclusion in any particular case would necessarily depend on all the facts of the case, generally, in such a situation, it is our view that the unusable portion could be excluded in determining whether more than 50% of the property is used in farming or fishing for purposes of meeting the farming-use test in sub-clause 110.6(1.3)(a)(ii)(A)(II) of the Act.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette, CPA, CA

Manager

Business Income and Capital Transactions Section II

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 In Otteson, the court allowed a portion of a capital gain on a single parcel of land to qualify for the capital gain deduction under subsection 110.6(2) of the Act.

2 The test in clause 110.6(1.3)(a)(ii)(B) is only applicable where the farm or fishing property that is owned by one or more persons or partnerships referred to in subparagraph 110.6(1.3)(a)(i) was used by a family farm or fishing corporation or a family farm or fishing partnership.

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