Tax Strategy
Fruits of the Earth
Descendants of farmers may reap the rewards of their ancestors' labours when they sell their family's land.
FROM: MAY-JUN 2003 ISSUE | BY FRANCINE ST-ONGE
Some taxpayers may not be aware that they own farm property that qualifies for the $500,000 capital gains deduction (CGD). According to the Income Tax Act definition of qualified farm property [paragraph 110.6(1)], the descendants of farmers can, in some cases, claim the CGD for land that they have never used for agricultural purposes.
After June 17, 1987
If the land was acquired after June 17, 1987, it qualifies as farm property if the following two conditions are met:
i) The land must belong to the individual or the individual's spouse, common-law partner, child or parent for a period of at least 24 months preceding the sale.
and
ii) For at least two years while the land is owned by the individual or his or her spouse, common-law partner, child or parent,
- the gross income earned by this person from the farming business in which the property is principally used exceeds the person's income from other sources, and
- this person must have been actively engaged on a regular and continuous basis in the business of farming.
According to the Canada Customs and Revenue Agency (CCRA), the word "parent" includes a grandparent and a great-grandparent (technical interpretations 9618765and 2002-0117805). It also includes the parents of a spouse or common-law partner, provided that the relationship precedes the period in question (technical interpretation 2000-0052385).
For example, an individual may claim the CGD in the following situation. In 1990, a man acquired land from his mother, who had inherited it from her father in 1972. The man's grandfather farmed the land, which was his principal source of income from 1947 to 1951. When the grandson sells the land, he can claim the CGD on any capital gain even though he and his mother never used the land for farming purposes.
You can also claim the CGD when you have owned the land for 24 months and have leased it to a family farm corporation or a family farm partnership that has principally used it for a farming business on a regular and continuous basis throughout a 24-month period.
Before June 18, 1987
If the land was acquired before June 18, 1987, it will be considered qualified farm property if one of the following three conditions is met:
i) The land was principally used for farming in Canada by the individual or his or her spouse, common-law partner, child, parent, grandparent or great-grandparent (according to the expanded meaning of "parent" described above), a family farm corporation or a family farm partnership, in the year the property was disposed of;
ii) During at least five years, which need not be consecutive, the land was principally used for farming by the individual or his or her spouse, common-law partner, child, parent, grandparent or great-grandparent, a family farm corporation or a family farm partnership; or
iii) The conditions required for land acquired after June 17, 1987, are met. [Emphasis added.]
To meet the first two conditions, it is not necessary to meet the test of gross income or of being actively engaged on a regular and continuous basis. Therefore, the land may qualify as farm property if, for example, the individual's grandfather principally used the land for farming for at least five years, say from 1937to 1942, even though that business was not the grandfather's principal source of income during those years. Also, the fact that the land has not been used for agricultural purposes since 1942 does not prevent it from qualifying for the CGD, even if the land now lies within an urban area.
Even if the land acquired before June 18, 1987, has not been held continuously by family members, it may still qualify as farm property. Say, for example, someone operated a farm from 1955to 1970. Following an illness, she stopped farming and sold the land to an unrelated person. In 1983, her daughter bought the land from the unrelated person. The land qualifies as farm property for the daughter, and she will be able to claim the CGD when she sells it.
If an individual who acquired the land before June 18, 1987, has made the February 22, 1994 election for that land, it is considered to have been transferred and taken back in 1994. Consequently, it is the criteria for property acquired after June 17, 1987 (technical interpretation 2002-0161625) that will determine whether the land qualifies as farm property.
Proof of Farming
In order for the land to qualify as farm property, it must have been used at some point and for a certain period principally in the course of carrying on the business of farming in Canada. The CCRA's position is that the property must be used more than 50 per cent for farming purposes.
As time passes, it will be difficult to prove that a parent or grandparent carried on the business of farming. It will therefore be necessary to search for documents that establish this, for example, contracts, tax returns or records of membership in a farmers' association.
It is always difficult to show that a person is actively engaged on a regular and continuous basis in the business of farming. According to the CCRA, the person must be actively engaged in the daily activities of the business, and the time, effort and attention that the person gives to the business must contribute significantly to its success. The CCRA stipulates that the activities of the person should normally be frequent and regular. People whose principal source of income is not farming may find it difficult to show that they are engaged on a regular and continuous basis in the business of farming (technical interpretation 2001-0064035).
When an individual sells, for profit, land acquired by gift, inheritance or purchase from a parent, it is wise to check whether the property qualifies for the CGD. Some will be surprised to learn that the capital gain realized is not taxable since the land was once used as a farm.
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Francine St-Onge, BBA, BCL, LLB, FCGA, practises tax and corporate law in Sutton, Quebec. She is co-author of the CGA-Canada course Taxation 2.
"Tax Strategy" is co-ordinated by J. ThomasMcCallum, CBV, FCGA, a business valuation and income tax consultant based in Whitby, Ontario, and author of several CGA-Canada professional development courses. E-mail jtmc@jthomasmccallum.com.
The information appearing in "Tax Strategy" is provided for the interest of the readers. Neither CGA Magazinenor the column authors and co-ordinator assumes any responsibility or liability to any persons relying on the information in the article to perform tax planning and/or compliance of any kind.