2023-0963801C6 STEP 2023 - Q15 - Interpretation of clause 110.6(1.3)(a)(ii)(A)

Principal Issues: 1. In the situation where the heirs do not use the property in a farming or fishing business, can a property only meet the conditions to be considered qualified farming or fishing property for a period of up to 24-months after the taxpayer’s death? 2. More specifically, and in the context of the scenario presented, if the daughter (“Daughter”) sells the farmland (“Property”) more than 24 months after her father’s (“Father”) death, can Father still meet the farming-use tests in clause 110.6(1.3)(a)(ii)(A)?

Position: 1. No. 2. Yes.

Reasons: 1. Wording of the legislation and previous positions of ITRD; 2. The fact that Father is not the person that owns the property at the disposition time or in the 24-month period immediately preceding the disposition would not preclude him from meeting the farming-use condition in clause 110.6(1.3)(a)(ii)(A) of the Act.

Author: Foggia, Christina
Section: 69(11); 70(5); 70(9); 70(9.01); 110.6(1); 110.6(1.3); 110.6(2); 110.6(2.2)

2023 STEP CRA Roundtable – June 20, 2023
QUESTION 15. Interpretation of clause 110.6(1.3)(a)(ii)(A)

Subsection 110.6(1.3) of the Act provides rules for determining whether a property is considered to have been used in the course of carrying on a farming or fishing business in Canada for purposes of the definition of qualified farm or fishing property in subsection 110.6(1). Under paragraph 110.6(1.3)(a), there are two tests that have to be met.

Subparagraph 110.6(1.3)(a)(i) is an ownership test, which requires the property to be owned by one or more specified persons or partnerships (eligible entity or eligible entities hereinafter) listed in clauses 110.6(1.3)(a)(i)(A) to (D) throughout the period of at least 24 months immediately prior to the determination time. Subparagraph 110.6(1.3)(a)(ii) provides two farming-use tests (clauses (A) or (B)) where only one has to be met.

Under clause 110.6(1.3)(a)(ii)(A), in at least two years while the property was owned by one or more eligible entities:

1. the gross revenue of an eligible entity (i.e., the “operator”) from the farming or fishing business in which the property was principally used must exceed the income of the operator from all other sources (subclause 110.6(1.3)(a)(ii)(A)(I)), and

2. an eligible entity that is an individual, or the beneficiary of a personal trust (if the eligible entity is a personal trust), is actively engaged on a regular and continuous basis in the farming or fishing business in which the property is principally used. (subclause 110.6(1.3)(a)(ii)(A)(II)).

In a post-mortem context, does the reference in the farming-use test to eligible entities mean that in the situation where the heirs do not use the property in a farming or fishing business, a property can only meet the conditions to be considered qualified farming or fishing property for a period of up to 24 months after the taxpayer’s death, since after this time, the deceased taxpayer can no longer be an eligible entity that meets the ownership condition in subparagraph 110.6(1.3)(a)(i)? In other words, does the reference in subclauses 110.6(1.3)(a)(ii)(A)(I) and (II) to “a person referred to in subparagraph (i)” or “an individual referred to in subparagraph (i)” include the ownership condition in the preamble in subparagraph 110.6(1.3)(a)(i)? Consider the following hypothetical situation:

Mr. A owns farmland and he operates a farming business as a sole proprietor for all years up to his demise. Farming has always been Mr. A’s chief source of income. According to Mr. A’s Will, the farmland is bequeathed to his daughter who does not farm. If the daughter sells the farmland within 24 months after Mr. A’s death, the tests in subparagraph 110.6(1.3)(a)(i) and clause 110.6(1.3)(a)(ii)(A) should be met. However, if the daughter sells the farmland more than 24 months after Mr. A’s death, the only “operator” in subclause 110.6(1.3)(a)(ii)(A)(I) would be Mr. A but he would cease to be an eligible entity that meets the ownership condition in subparagraph 110.6(1.3)(a)(i)), because he is not a person that owned the property for 24 months immediately before determination time.

Can the CRA confirm if their interpretation is consistent with the above or if they have a different interpretation?

CRA Response

Qualified farm or fishing property (“QFFP”) of an individual is defined in subsection 110.6(1) of the Act (footnote 1) 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 the course of carrying on a farming or fishing business in Canada.

A particular property will not be considered to have been used in the course of carrying on a farming or fishing business in Canada unless the conditions in subsection 110.6(1.3) are met. For property acquired after June 17,1987, this includes an ownership condition outlined in subparagraph 110.6(1.3)(a)(i), and one of two farming-use conditions described in clause 110.6(1.3)(a)(ii)(A) or clause 110.6(1.3)(a)(ii)(B). (footnote 2) Whether these conditions are met in a given situation is a question of fact.

The ownership condition in subparagraph 110.6(1.3)(a)(i) requires the property to be owned throughout the period of at least 24 months immediately preceding the determination time by one or more specified persons or partnerships which include, among others, the individual, the individual’s spouse or common-law-partner, or the individual’s child or parent.

Where the farming-use condition in clause 110.6(1.3)(a)(ii)(A) is applicable, this will be met if,

(A) in at least two years while the property was owned by one or more persons or partnerships referred to in subparagraph (i),

(I) the gross revenue of a person (in this subclause referred to as the “operator”) referred to in subparagraph (i) from the farming or fishing business referred to in subclause (II) for the period during which the property was owned by a person or partnership described in subparagraph (i) exceeded the income of the operator from all other sources for that period, and

(II)   the property was used principally in a farming or fishing business carried on in Canada in which an individual referred to in subparagraph (i), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis.

For purposes of the ownership condition, the eligible period of ownership of the individual is not simply the 24-month period immediately preceding the determination time. Rather, it is the period of at least 24 months immediately preceding that time during which one or more of the specified persons or partnerships owned the property.

Therefore, in both scenarios presented, since the farmland (“Property”) has been owned continuously by Mr. A (“Father”) and thereafter his daughter (“Daughter”) for a period of at least 24 months immediately preceding the determination time (i.e.,. the disposition time), the ownership requirement appears to be met. In other words, Father does not need to be the person that owned the property 24 months immediately preceding the determination time in order to be a person referred to in subparagraph 110.6(1.3)(a)(i).

For purposes of the farming-use condition in clause 110.6(1.3)(a)(ii)(A), the person or individual that meets this condition need not be the person who owns the property at the determination time or in the 24 months immediately preceding that time.

Accordingly, in both scenarios presented, if, in at least two years while Father owned the Property, it was used principally in a farming or fishing business carried on in Canada in which he was actively engaged on a regular and continuous basis and his gross revenue from the farming or fishing business exceeded his income from all other sources, the farming-use condition may be met. The fact that Father is not the person who owns the Property at the determination time (i.e., the disposition time) or for the 24 months immediately preceding that time would not preclude him from meeting the farming-use condition in clause 110.6(1.3)(a)(ii)(A) of the Act.

Christina Foggia
2023-096380

FOOTNOTES

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

1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision 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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