What Counts as Qualified Farm Property for purposes of the Farming Capital Gains Exemption
Otterson v The Queen, 2014 TCC 250
The Taxpayers, in response to unsolicited offers, sold property they had purchased and were preparing for tree farm operations. They claimed the maximum capital gains exemption on the basis of the property being a Qualified Farm Property, but the MNR reassessed them for failing to meet the qualification requirements. The TCC allowed the taxpayers’ appeal.
NOTE that the criteria are complex and the summary here only covers some of the criteria. You must refer to the relevant provisions.
The Appellants purchased land for purposes of a tree farm operation, bought equipment for a tree farm operation, had a business plan for a tree farm operation, and had begun preparing for the operation on the basis of those plans. During the periods they owned the land they made only a small amount of revenue from hay sales (lease to another farmer). An aerial geological survey discovered significant grave deposits on the land, leading to a number of unsolicited offers to purchase, and finally resulting in the sale of the land for significant gains.
One problem the appellants faces was their inconsistent positions as to who owned the farm – whether it was owned directly by the individuals to be used in the tree farm operation, or owned by the partnership to be used in the tree farm operation. This is because the who owns the property and who uses the property for what affect the eligibility for the exemption.
Where individuals own the land and engage directly in a farming business, subsection 110.6(1.3) mandates that, among other things, in the last two years while the land was owned the gross revenues from farming must exceed the individuals’ income from all other sources. No such requirement exists for the business run through a partnership.
The court held, as a fact, that the land was not transferred to a partnership. The court then considered the Alberta Partnership Act definition of “partnership” and the enumerated factors that cannot be considered in determining whether there was a partnership. This is a fact-specific determination, and the “criteria applied to determine the existence of a partnership include the contribution by the parties of money, property, effort, knowledge, skills or other assets to a common undertaking, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts” (para 43): referring to Continental Bank Leasing Corp. v. Canada,  2 S.C.R. 298, paras 23-24. The Courts must take a pragmatic approach: referring to Backman v. Canada, 2001 SCC 10 at para. 26.
The court referred to decisions that indicate a cautious approach to finding spouses to be partners ( Sedelnick Estate v. Minister of National Revenue,  2 C.T.C. 2102, 86 DTC 1563; Franklin v. The Queen,  3 C.T.C. 2914, 97 DTC 1485), but these cases were held to stand for the proposition that the subjective declaration of intent of parties must be supported by evidence of actual conduct (para 45).
In this case, the evidence was held to establish the existence of tree farming operations in partnership, and the full engagement on a regular and continuous basis of the parties in that partnership.
To be “qualified farm property” as defined in subsection 110.6(1), the property must be property (i) owned by an individual, or spouse or common-law partner of that individual, or a partnership, (ii) the interest in the partnership must be an interest in a “family farm partnership” of the individual, or the individual’s spouse or common-law partner, (iii) that is, inter alia, real or immovable property used in the course of carrying on the business of farming in Canada by, inter aliai, the individual, a partnership (an interest in which is an interest in a family farm partnership of the individual, his/her spouse or common-law partner).
The provision refers to how the property was used, and the actual use at the time of the disposition is not relevant (para 49). The provision was also amended in 2006 to delete the more onerous concept of “principal use” to the wider concept of “use” (para 49). Subsection 110.6(1.3) supplements the ownership and use requirements, setting out mandatory criteria before a property can be considered to have been used in the course of carrying on the business of farming in Canada. These criteria include ownership requirements for a period of at least 24 months prior to the relevant time, and gross revenue requirements for the last two years of ownership if the property was not used by a partnership or corporation actively engaged on a regular or continuous basis in the farming operation.
In short, where an individual is engaged in farming operations, there is a gross revenue requirement (gross revenue from farming business in past 2 years must exceed the income of that person from all other sources), but if the operations are conducted through a corporation or partnership there is no such requirement and only the need for the operator to have been engaged in the farming business on a continuous and regular basis during that period (see 110.6(1.3)(b)(i) and (ii)).
The court then referred to the definition of “interest in a family farm partnership” in subsection 110.6(1), which contains a requirement of more than 50% of the FMV of the property being attributable to property used principally in the course of carrying on the business of Farming in which the individual, the individual’s spouse or common-law partner or child or parent or of beneficiaries of a personal trust were actively engaged in a regular and continuous basis (para 53). There is also a requirement that at the relevant time, all or substantially all of the FMV of the property of the partnership be attributable to property that was used in the family farming operation (para 54).
The court noted that in the case of this appeal, it was unclear when the asset threshold requirements had to be met. The court held that the “more than majority threshold” must be met throughout the relevant use period, during which the partnership interest must qualify as an “interest in a family farm partnership”, AND that the “all or substantially all threshold” must NOT be met at the time immediately before the disposition but throughout the use period (paras 55-56).
The court, however, noted that only part of the land was used by the partnership and the other part was leased to another farmer directly by the taxpayers (and not by the partnership). (para 58). This portion of the land was used to earn rental income, and not used by the partnership to earn farming income. The property is NOT to be considered as a whole, and the use of smaller sub-parts of the land must be considered (paras 60-61). Therefore , in this case, only part of the land qualified for the exemption.
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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