TRANSFERRING FAMILY FARM

by

AUDREY A. WAKELING

of

MacPHERSON, LESLIE & TYERMAN

Barristers & Solicitors

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- - - - - - - - - - - - - - - - - - - - - - - - - - - - - Substantial portions of this paper are based on exerpts from “Estate Planning for Farmers” by

Audrey A. Wakeling, which appears in the Canada Estate Planning Service (DeBoo Limited.)

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TABLE OF CONTENTS

Content

INTRODUCTION

ARM'S LENGTH DISPOSITIONS

Deferring Capital Gain

Other Uses of Income Averaging Annuity Contracts

Capital Cost Allowance Considerations

Sale of Unharvested Crops

TRANSFERS WITHIN THE FAMILY

Basic Rule in Non-Arm's Length Transaction

Inter Vivos Rellovers

Transfers to a spouse or Spouse Trust Transfers to Children Attribution

Rolievers at Death

Transfers to a Spouse Transfers of Farm Property to Children Vesting Indefeasibly Within Fifteen Months

INTERPRETATION BULLETINS (Income Tax Act)

IT-236R - Reserves - Disposition of Capital Property

IT-313R - Eligible Capital Property - Ceasing to Carryon Business

yCIT-349 - Transfer of Farm Property to Child on Death

IT-425 - Miscellaneous Farm Income

IT-449 - Meaning of "Vested Indefeasibly"

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INCOME TAX CONSIDERATIONS

ON TRANSFERRING THE FAMILY FARM

INTRODUCTION

The purpose of this paper is to discuss the income tax impli­

cations of transferring the family farm both within the family and

to someone outside the family. Very little consideration will be

given to basic tax principles applying to non-farmers as well as to

farmers. Thus, it will be assumed that the reader is familiar, at

least in a general wa~with such concepts as capital gains, capital

cost allowance, adjusted cost base, and the difference between cap­

ital assets and inventory. There will be a heavy emphasis on the

rollovers which are available to defer recognition of capital gain

when certain farm assets are transferred to other members of" one I s

family.

ARMiS LENGTH DISPOSITIONS

Deferring Capital Gain

When capital assets such as farmland or farm machinery are

disposed of for an amount which is greater than their adjusted cost

base (which for purposes of simplicity can be equated with their

value at the end of 1971, if they were acquired before 1972, or their

cost) there will be a capital gain, one-half of which is added to

income. The effect of such a disposition, especially in the case of

farmland, can be to increase the taxpayer's income for the year of

disposition dramatically, driving him into an uncharacteristically

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high tax bracket. Because we have progressive income tax rates it

would be preferable if the burden of that income could be spread

over a number of years so that there is not such a gross distortion

of income in anyone year and so that the taxpayer does not pay tax

at such high marginal rates. Even where there is no rollover avail-

able there are a couple of ways of accomplishing this objective.

The first is to sell -the asset on instalments and in calculating

income to claim a reserve under section 40 (1) (a)(iii) of the Income Tax

Act. That section provides that a reasonable amount can be claimed

as a reserve in respect of such portion of the proceeds of disposition

of the properties that are not due until after the end of the year.

Revenue Canada has indicated in- Interpretation Bulletin IT-236R

than normally a reserve will be -reasonable if it equals that propor-

tion of the amount not due to the taxpayer until after the end of

the taxation year that the original capital gain (before the re-

serve) bears to the proceeds of disposition of the property:

Capital gain

Proceeds of disposition x Amount not due until after

the end of the year

ReserveS claimed in one taxation year are included in computing the

taxpayer's capital gain in the next year and a new reserve will then

be claimed in accordance with the proceeds of disposition which are

still not due until after the latter year. Revenue ·Canada I s example

of how a reasonable reserve would be calculated in the year of dis]?osi-

tion of a capital property and its following two years is as fo-llows:

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Assumptions Capital Property sold for

Adjusted cost base Outlays and expenses

Capital gain (before reserve)

Amount not due until after the end of the sale end of year 2 end of year 3

Reserve Calculations

$6.600 400

Year of sale $ 3,000 X $6,000"" $1,800 $10,000

Year 2 - $ 3,000 X $4,000 ". $1,200 $10,000

Year 3 - $ 3,OOOX$2,OOO = $ 600 S10,000

$10,000

7,000

• 3,000

• 6,000 $ 4,000 $ 2,000

It should be noted that an amount which has become due hut

has not been paid before the end of the year does not qualify for

a reserve under section 40(1) (a) (iii). Revenue Canada does, however,

currently allow an instalment reserve where the debt taken back on

sale is payable at a specified date after demand1 e.g. thirty days

after demand. The reasoning here is that if a demand is not made

by the last day of the year the debt is not due in that year.

Certain circumstances in which the reserve cannot be claimed

are outlined in section 40(2) of the Income Tax Act:

1. The taxpayer was not resident in Canada or was exempt

from tax at the end of the year or at any time in the

immediately following year,

2. The sale was to a corporation that, immediately after

the sale, was controlled by the taxpayer or by a per-

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son or group of persons by whom the taxpayer was

controlled; or

3. The purchaser controls the vendor and both are cor-

porations.

Thus, it is of no use when one wants to transfer assets to one's

corporation, and one must rely on a section 85 rollover, when avail­

able, instead.

The second way of deferring tax on capital gain when farm

assets are disposed of is to purchase an income averaging annuity

contract under section 61 of the Income Tax Act. The annuity must

be purchased within sixty days after the end of the year in which

the qualifying income is received. Only living residents of Canada

are eligible. The first payment must be made to the purchaser

within ten months of the purchase. An income averaging annuity

contract allows one to spread qualifying types of income over a

guaranteed term of up to fifteen years ot for life. One gets a

deduction from income equal to the premium paid for the income

averaging annuity contract, and brings into income the annuity

payments (including capital and interest) as they are received.

There are three basic types of plans:

1. For a guaranteed term, which cannot exceed fifteen

years nor extend beyond the individual's eighty­

fifth birthday. Such a contract can be purchased

from a trust company or life insurance company.

2. For life. This type can only be purchased from a life

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insurance company.

3. For life with a guaranteed term. This type can only

be pUrchased from a life insurance company. It

usually has the lowest rate of return, but if the

annuitant dies prematurely the payments will continue

to be made to his estate.or beneficiaries.

Other Uses of Income AVeraging Annuity Contracts

A number of kinds of income, besides the taxable portion of

capital gain, qualify for the purchase of an income averaging con­

tract, including the following:

1. Income from the sale of inventory (e.g. grain, cattle)

upon disposing of or ceasing to carryon the farming

business or a part thereof" (where the farmer calculates

his income by the accrual method the qualifying amount

is the proceeds of sale received or receivable minus

the cost of that inventory, and where he uses the cash

method the qualifying amount is the total proceeds of

sale received);

2. Recaptured capital cost allowance for depreciable

assets on the declining balance method;

3. The taxable portion of the proceeds of sale. of

eligible capital property such as milk quotas; and

4. Accounts receivable of a cash basis farmer upon ter­

mination of farming (e.g. deferred grain tickets,

Canada Wheat Board payments).

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Capital Cost Allowance Considerations

There are two basic methods by which a farmer may claim cap­

ital cost allowance on his depreciable assets. Under Part XI of the

Income Tax Regulations depreciable assets are divided into a number

of classes. When an asset of a certain class is acquired for use in

one's business its cost is added to the balance in the pool for that

class, and when an asset of that class is disposed of the proceeds

of disposition are deducted from the balance in the pool. One claims

capital cost allowance on a diminishing balance basis according to

the appropriate percentage of the balance in the pool for that class

at the end of the year, and the amount of capital cost allowance

claimed is itself deducted from the balance so that the following

year, unless there -are additions to the pool in the meantime, the

capital cost allowance will be a percentage of a smaller balance

(thus, the description "diminishing balance basis"). If the pro­

ceeds of disposition of an asset exceed the balance in the pool the

balance will be reduced to zero and the excess will be added to

income as recaptured capital cost allowance •.

Farmers and fishermen have the option with respect to depre­

ciable assets acquired before 1972 to claim capital cost allowance

under Part XVII of the Regulations on a straightline basis, provided

they have done so continuously. Under the straightline method the

permitted capital cost allowance claim is equal each year until

the asset is fully depreciated, and there is no recapture if proceeds

of disposition exceed the asset's undepreciated balance.

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Where a farmer has been claiming capital cost allowance un­

der Part XVII he may switch to Part XI capital cost allowance merely

by indicating on his income tax return that the claim is made under

Part XI. He then becomes subject to recapture, or entitled to a

terminal loss deduction if the asset is subsequently disposed of for

proceeds of disposition which are less than the remaining balance

in the pool (provided there are no other assets in the pool at the

end of the year). This gives rise to some interesting planning pos­

sibilities. For example, .where assets which.have been depreciated under

Part XVII are to be sold for a price in excess of their -4epreciated

value, care should be taken to ensure that the assets are not

employed in a use other than farming I such as renting the assets,

prior to the aale, since this would nece.ssitate a cha~ge to the

Part XI method and expose the taxpayer to recapture. If the assets

are to be sold for an amount less than the depreciated value such

a change to the Part XI should be made prior to the sale so that

the taxpayer will be able to deduct the terminal loss. Where some

of the assets to.be sold are worth more than their depreciated value

while others are worth less it may be possible to switch to the

Part XI method only with respect to those assets which are worth

less than their depreciated value, for instance by renting out the

assets prior to sale. This would not seem to offend Regulation

1704, which generally requires a switch from Part XVII to Part XI

to include all assets, since as soon as the asset is leased rather

than used in farming or fishing a Part XVII claim is not available

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w.ith respect to that asset. Where, the farming business will be

discontinued but the farm assets will be rented rather than sold a

conversion to the Part XI method should be made so that continued

capital cost allowance claims may be made. Under Part XI a capital

cost allowance claim can be made in computing income from a business

or property, whereas under Part XVII the asset must be used for the

purpose of gaining or producing income from farming or fishing.

Sale of Unharvested Crops

At common law a growing crop is considered part of the real

estate, and it is not necessary on a sale to specify that the crop

is being sold. Revenue Canada has indicated in Interpretation Bul­

letin IT-425 tha.~ the sale of an unharvested crop is not income,

provided that the sale document is silent about the crop being sold.

Where the agreement for the sale of farmland specifies the amount

payable for the standing crop, the amount so specified is income to

the vendor and an allowable deduction to the pu.rchaser.

As pointed out by John T. Ramsay in a paper entitled "Trans­

fer _of the Family Farm l'lithin the Family" prepared in October, 1979,

for the Legal Education Society of Alberta, this position has the

result that the value of crops which would otherwise be income can

be recovered in the form of a capital gain when the farm is sold,

despite the fact that the expenses involved in getting the crop in

place were deducted from income.

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TRANSFERS WITHIN THE FAMILY

Basic Rule in Non-Arm's Length Transactions

Section 69 of the Income Tax Act provides that where pro­

perty is transferred by way of gift the transaction is deemed to

take place at fair market value. Thus, there may be a capital gain

or a recapture of capital cost allowance even though no actual pro­

ceeds of disposition have been received. In a non-arm's length

sale for inadequate consideration section 69 establishes a one-sided

rule. That is, the transferor calculates his capital gain and

recapture as though he had received fair market value, but the pur­

chaser can use as his cost base only the amount actually paid. If

the transfer is for an amount greater than fair market value the

transferor calculates his capital gain and recapture according to

the actual proceeds of disposition, while the purchaser must use

fair market value as his cost base. These rules create the possi­

bility of double taxation of capital gain and every effort should

be made to avoid them. The rollovers which will be described are

exceptions to the fair market value rule in section 69.

Inter Vivos Rollovers

Transfers to a Spouse or Spouse Trust:

On transfers of capital proper:ty to a spouse or spouse trust

there is a complete rollover of capital gain and recapture. The

transferor is deemed to have received proceeds of disposition equal

to undepreciated capital cost (the undepreciated balance for a class),

in the case of assets depreciated on the diminishing" balance basis

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(or a proportionate part thereof if not all assets in the class are

transferred), or adjusted cost base in the case of all other capital

property including depreciable property under the straightline method

of depreciation: section 73(1), The spouse or trust is" deemed to

acquire .the capital property at a cost equal to the transferor·s

deemed proceeds of disposition. Thus, no capital gain or recapture

will be taxed until such time as the spouse or trust disposes of the

property. The spouse effectively takes over the tax position of the

transferor, except in the case of assets depreciated on a straight­

line basis for which the spouse gets a step-up in the depreciation

base. Both the transferor and the transferee must be resident in

canada for the rollover to apply.

A spouse trust is a trust created by t.he taxpayer under

which his spouse is entitled to receive all of the income of the

trust that arises before the spouse's death and under which no per­

son except the spouse, may, before the spouse's death, receive or

otherwise obtain the use of any of the income or capital of the

trust. Transfers to such a trust, as well as trans£ers to a former

spouse of the taxpayer in settlement of rights arising out of their

marriage, qualify for the rollover.

Under recent amendments to the Income Tax Act, which be­

came law on February 26, 1981, it will be possible for the spouses

to elect not to have the rollover apply. This might be done if the

transferor has substantial capital losses to offset the capital gain.

The rollover does not apply to inventory (e.g. grain. live-

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stock) nor to accounts receivable (e.g. resulting from the sale of

inventory). When assets of those types are being transferred to a

spouse the fair market value rules in section 69 will apply and the

transferor may suffer tax consequences on the transfer.

In the case of transfers to a spouse of eligible capital

property (such as goodwill or marketing quotas connected with the

business) a rollover is in some cases available under section 24.

Where a farmer ceases to carryon business he is allowed a terminal

deduction of cumulative eligible capital (the balance in the eligible

capital property amortization pool). However, if his spouse or a

corporation controlled directly or indirectly by him carries on the

business which he ceases to carryon the balance of his cumulative

eligible capital is t~ansferred to the spouse or controlled corpor­

ation rather than being available to him for a terminal deduction:

section 24(2). In such a case, the fact that he has undeducted

cumulative eligible capital on the cessation of business has no tax

effect on him. In the year of the transfer neither the individual

who ceased to carryon business nor the spouse or controlled corpor­

ation can claim a section 20(1) (b) deduction with respect to cumu­

lative eligible capital. Revenue Canada's position on such trans­

fers is set out in Interpretation Bulletin IT-3l3R.

If eligible capital property is transferred to the spouse

or controlled corporation but they do not carryon the business then

the rules in ~ection 69 will apply to deem the disposition to have

been at fair market value. One-half of the fair market value will

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be deducted from cumulative eligible capital of the'taxpayer, and

any negative balance will be added to his income: section 14(1).

This result is similar to that which would be reached if the eli­

gible capital property were sold to an arm's length party, except

that one-half of the deemed fair market value proceeds rather than

one-half of the actual proceeds of disposition will be deducted

from the cumulative eligible capital of the taxpayer. TO the extent

that the deduction creates a negative balance the transferor can

defer taxation of that income amount by purchasing an income aver­

aging annuity contract.

Transfers to Children:

While the spousal rollover applies to virtually all kinds

of property except inventory and accounts receivable, rollovers of

property to children are much more limited. There are now provisions

in the Income Tax Act for a rollover when farmland, depreciable farm

property of a prescribed class, or eligible capital property in res­

pect of the farming business carried on in Canada is transferred by

a farmer to his child, or when shares in a family farm corporation

or an interest in a family farm partnership are transferred by a farmer

to his child: sections 74(3) and (4). The rollover does not cover

inventory or assets which have been depreciated on a straight-line

basis. Where they apply, the rollovers allow deferral of an unlimi­

ted amount of capital gain, but the rollover will be complete only

if the transfer price does not exceed the tax value of the property

transferred. The availability of an unlimited rollover with respect

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to farmiand and depreciable farm property of a prescribed class

should be contrasted with the limited ability to defer capital gain

to a maximum of $200,000 on the transfer of shares of a small busi­

ness corporation to one's child under section 73(5). Furthermore,

there are no provisions for a rollover of non-farm business property

owned personally rather than through a corporation. Thus, where a

non-farm business is carried on as a sale proprietorship or partner­

ship there will be no rollover if the businessman wants to transfer

assets to his child.

A number of conditions must be met before the inter vivos

rollover of farm property to one's children will apply. In the case

of farm property owned personally by the farmer,

1. The property must be land in Canada, depreciable pro­

perty in Canada of a prescribed class, or eligible cap­

ital property in respect of the farming business carried

on in Canada;

2. The property must have been used immediately before

the transfer by the farmer, his spouse, or any of his

children in the business of farming; and

3. The child to whom_ the property is transferred must

have been resident in Canada immediately before the

transfer.

In the case of shares or partnership interests, the corporation or

partnership must qualify as a family farm corporation or a family

farm partnership within the meaning assigned by section 70(10). The·

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requirement on direct transfers of farm property that the property

was used immediately before the transfer in the business of farming

by the farmer, his spouse, or one of his children means that the

rollover will not be available if the property was rented at that

time to someone other than the farmer's spouse or one of his child­

ren, whether on a share crop basis or for a cash rent. The Department

does not consider rental to constitute use in the business of farm­

ing. The farmer or soma member of his family should be "at risk"

with respect to the farming property in order to be in the business

of farming, and in this regard it :LS probably sufficient if the land

is farmed on a custom basis and there is liability to pay expenses

whether or not a crop is harvested. Where a transfer to the client's

children is contemplated he should be advised to arrange his af­

fairs so that the land will qualify as being used in the business

of farming.

The term "ahild" is defined by section 70 (10) Cal to include grand­

children and great grandchildren. The extended meaning of "child" in

section 252 (1) further includes illegitimate children, adopted child­

ren, children of the taxpayer's spouse, certain other dependants of whom

the taxpayer has custody and control, daughters-in-law and sons-in-law.

The inter vivos rollovers of farm property to children are

mandatory to the extent that proceeds of disposition to the child

are less than the fair market value of the property. If the farmer

gives the property to his child, or sells it for proceeds of dispos­

ition which are less than the lesser of its tax value and its fair

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market value, the transfer is deemed to take place at the lesser of

those amounts so there will be no capital gain or recapture. If the

actual proceeds of disposition fall between the tax value of the pro­

perty and its fair market value. then the actual transfer price will

be used for tax purposes, such that a farmer might realize some cap­

ital gain or recapture. If the transfer price is greater than both

the tax value of the property and· its fair market value then the

transaction will be deemed to take place at the greater of those

amounts, again with the possibility of recognition of capital gain

or, recapture. The child is deemed to have acquired the p~operty

for an amount equal to the proceeds of d.isposition deemed to have

been received by the farmer. For capital cost allowance purposes

the child steps into the shoes of the farmer where his deemed cost

is less than the capital cost to the farmer. In that case his

deemed cost is the base from which he claims capital cost allowance,

but he is deemed to have already claimed capital cost allowance

equal to the difference between that deemed cost and the capital

cost to the farmer. Thus, on a subsequent disposition by the child

he will be subject to recapture of capital cost allowance which

was previously claimed by the farmer.

Because the rollover on transfers to a child of farm pro­

perty, shares in a family farm corporation, and interests in a

family farm partnership may not be complete, depending on the actual

transfer price, it may sometimes be advantageous to make use of

th~ limited $200,000 capital gain deferral in section 73(5) which

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applies to transfers of shares of a small business corporation. A

corporation which qualifies as a family farm corporation will also

qualify as a small business corporation, and Revenue Canada has indi­

cated that if shares of a family farm corporation are transferred,

the transferor may choose to use the rules relating to small busi­

ness corporations, allowing a maximum deferral of $200,000. The

shares or partnership interest could be sold to the child for an

amount_exceeding their adjusted cost base without recognition of any

capital gain as long as the capital gain sought to be deferred dOeS not

exceed $200,000. The $200,000 limit is a lifetime limit, so pre­

vious transfers will be relevant in determining .how much of it is

still available. Furthermore, the rollover does not apply where

there was an inter vivos transfer to a spouse, who then transfers

the shares to a child while the original transferor is still alive.

The purpose of this restriction is to prevent a doubling up of the

$200,000 limit by first transferring shares to one's spouse on a

tax-free basis and then having the spouse roll the shares over to

the child under section 73(5),

If farm property which has been depreciated under Part XVII

was given by a farmer to his child the rollovers in section 70(9)

and 73(3) would not apply since the property would not be "depreci­

able property of a prescribed class". The "proceeds of disposition

otherwise determined" referred to in ITAR 20(1) (a) would be fair

market value at the time of transfer, as determined by section 69.

ITAR 20(1) (b) deems the child for capital cost allowance purposes to

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have acquired the property at capital cost equal to the proceeds of

disposition deemed to have been received by the farmer under ITAR

20{1) (a) - that is, its capital cost to the farmer plus any increase

in value since Valuation Day. Though the farmer may already have

claimed capital cost allowance equal to the full purchase price to

him, the child may claim capital cost allowance using the deemed

proceeds as determined above. Assuming that the assets have in­

creased in value, the total capital cost allowance claimable by the

farmer and his child will far exceed the actual capital cost to the

farmer, and only the portion of the capital cost allowance claimed

by the child (under Part XI) is subject to recapture. Furthermore,

the child will only be subject to capital gains tax on the transfer

to the child if the fair market value at the time of the transfer

exceeds both the capital cost of the asset and its fair market value

on Valuation Day. For capital gains purposes the child is placed

by ITAR 20(1) (b) (ii) in the same position as the transferor, giving

him the protection of the tax-free zone if he subsequently disposes

of the assets in an armIs length transaction. If the property has

decreased in value since it was acquired by the transferor section

69 will govern the transfer price and the tax-free zone ~dll protect

the transferor from capital gain liability. For capital cost allow­

ance purposes, the benefit available as a result of the parent

depreciating under Part XVII will decrease as the market value at

the date of transfer decreases below capital cost, and a disadvantage

(due to the absence of terminal loss) will exist where the market

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value at the date of transfer is less than the undepreciated balance

in the parent's hands.

Attribution:

Section 74 provides that where there is an inter vivos

transfer of property to one's spouse or to a minor child (even some­

one else's child) the income earned on that property during the

lifetime of the transfero~while he is resident in Canada and the

transferee is his spouse, or the transferee is under the age of

eighteen in the case of a transfer to a child, will be attributed

back to the transferor and taxed in his hands. There is also capi­

tal gain attribution if the spouse disposes of the capital property

at a profit under similar conditions, or if the minor child,. having

received the property under rollover conditions, disposes of the

property. Losses are also attributed to the transferor_ in circum­

stances where income or capital gain could have been attributed to

him.

The rollovers which have been described do nothing to avoid

the attribution rules, whicn will apply if there is a direct inter

vivos transfer to a spouse or minor child rather than a tr~nsfer to

a holding company of which the spouse or child is a shareholder.

Nor do they do anything to avoid capital gain attribution, which in

the case of a child applies only if the farm property was transfer­

red to him on an inter vivos basis for less than its fair market

value and he disposes of it while still a minor. However, despite

the fact that there is a rollover for inter vivos transfers of

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shares in family farm corporations and small business corporations

or interests in family farm partnerships there is no attribution of

the capital gain or capital loss which might be realized by the

child if he disposes of the shares or partnership interest while he

is under the age of eighteen. Thus, if estate freezing rather than

income splitting is onels objective there may be some merit in

transferring shares or partnership interests rather than hard assets

such as land to a child, as long as the shares or partnership int­

erest reflect the appreciation of the underlying asset.

Rollovers at Death

Transfers to a Spouse:

Under section 70(6) there.is a rollover to a spouse or spouse

trust of capital property at death on terms very similar to the

inter vivos rollover under section 73(1), with the added require­

ment that the property must vest indefeasibly in the spouse or trust

within fifteen months after the death of the taxpayer or such longer

period as is reasonable in the circumstances. The transfer is deem­

ed to take place at undepreciated capital cost, in the case of dep­

preciable property of a prescribed class, and at adjusted cost base,

in the case of other capital property:.including depreciable property

depreciated on the straightline basis. Again, the rollover does not

apply to inventory or eligible capital property, but the section 24

(2) rollover of eligible capital property to a spouse which was

discussed under inter vivos transfers to a spouse applies on death

as welL

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In the case of inventory, the inventory of a cash basis

farmer is considered a right or thing under section 70(2) of the

Income Tax Act, so there is in effect a rollover if the personal

representative 6£ the deceased makes an election under section 70

(3) to have the right or things transferred to a beneficiary and

taxed in the beneficiary's hands.

The personal representative of the deceased may elect under

section 70(6.2) not to have the section 70(6) rollover apply. This

might be done where the deceased has substantial unclaimed capital

loss to offset the capital gain. In the year of death the deceased

can set an unlimited amount of allowable capital loss- "against income

from other sources for the year of death and the immediately pre­

ceding year I "but if the capital losses are so great as to fully uti­

lize his income for those years it would be desirable to generate

capital gain in order to utilize them and at the same time give the

spouse a stepped-up cost base. The election can be made with respect

to some or all of the property which is transferred to the spouse.

Transfers of Farm Property to Childrens

The conditions which must be met for there to be a rollover

of property to one's child at death are similar to those which

apply on "inter vivos transfers, with the addition of a vesting re­

quirement. In the case of farm property owned personally by the

farmer I

L The property must be land in Canada or depreciable

property in Canada of a prescribed class (assets

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)

)

....... ~ ___ .... _ ....... _ ... _ ... ,_ .... ~ .... _ ............ , _ ~.+... _. __ ....... _. _ ... '~_' ... _ ... _ ...... __ .... _ .... " " . v _. __ ........... ~ __ .•• '_.~. __ ,_._ •••••

depreciated.on the straightline basis do not qualify);

2. The property must have been used immediately before

the death of the farmer by himself, his spouse, or any

of his children in the business of farming;

3. The property must be transferr~d as a consequence of

the death to a child of the farmer who is resident in

Canada immediately before the death (he need not farm

it after the death); and

4. The property must vest indefeasibly in the child within

fifteen months of the death of the farmer or such longer

time as is reasonable in the circumstances.

Revenue Canada takes the position in Interpretation Bulletin IT-349

that the rollover does' not apply to sales by the estate, so options

to purchase. in the will should be avoided. Nor will the rollover

be available where immediately before the death of the farmer the

property is rented to someone other than the farmer's spouse or one

of his children. Where the rollover does apply the farmer will not

be subject to recognition of any capital gain or recapture on the

disposition, which is deemed to take place at undepreciated capital

cost, in the case of depreciable property of a prescribed class, and

at adjusted cost base,. in the case of other capital property. The

child is deemed to have acquired the property for an amount equal

to those proceeds.

A similar rollover is available on death where the property

goes first to a spouse trust and on the death of the spouse becomes

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vested indefeasiblY in the child of the farmer who is resident in

Canada immediately before the death of the spouse. The most 6igni-

ficant difference between the rollover which applies when a spouse

trust is interposed between the farmer and the child and the roll-

over which applies on a direct transfer by the farmer to his child

is that in the latter case the property must have been used in the

business of farming by the farmer, his spouse, or any of his child-

ren immediately before the death of the farmer, whereas in the former

case it must have been used in the business of farming by anyone

immediately before the death of the farmer's spouse. That is, the

spouse could have rented out the land to another farmer without

disqualifying the subsequent transfer to the child from a rollover.

Revenue Canada I s position with respect to transfers of

farm ,property to a child on death is set out in Interpretation Bul-

letin IT-349.

The rollover for shares in family farm corporations and

interests in family farm partnerships transferred on death is pro-

vided for in section 70(9.2). Again, the shares or partnership

interests must vest indefeasibly in the child within fifteen months

of the death of the farmer. The transfer is deemed to take place

at the adjusted cost base of the shares. "Share of the capital

stock of a family farm corporation" is defined in section 70(10) (b)

as follows:

"Share of the capital stock of a family farm corpor­ation" of a person at a particular time means a share of the capital stock of a corporation that, at that time, carried on the business of farming in Canada in

- 22 -

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)

which'it used all or substantially all of its property and in which that person, his spouse, or his children was actively engaged.

"Interest in a family farm partnership ll is defined in section 70(10)

(e) as follows:

"Interest in a familY farm partnership" of a person at a particular time means an interest in a partner­ship that, at that time, carried on the business of farming in Canada in which it used all or substanti­ally all of its property and in which that person, his spouse, or his children was actively engaged.

It matters not under what schedule capital cost allowance was claimed

on depreciable assets owned by the corporation or partnership. What

is important is that "substantially all" of the property be used in

the business of farming in Canada. It is therefore unwise to hold

investments in the corporation or partnership or to have the corpora-

tion or partnership engage in any business other than farming, lest

it become disentitled to the rollover. If the corporation or part-

nership rents out the farmland rather than using it in the business

of farming the rollover will not be available.

As with transfers of farm property itself, there is a roll-

over on transfers of shares of a family farm corporation or interests

in a family farm partnership where a spouse trust is interposed bet-

ween the children and the farmer: section 70(9.3). During the

period of time that the spouse trust holds the shares or partner-

ship interest it is not necessary that the corporation or partnership

qualifies as a "family farm corporation" or "family farm partnership"

as long as the corporation or partnership carries on the business of

farming in Canada and uses substantially all of its property in that

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)

business.

It should be noted that there is no provision for electing

not to have the rollover on transfers of farm property, shares in

family farm corporations, and interests in family farm partnerships

apply when such property is transferred to a farmer's child, but the

rollover can be avoided by delaying indefeasible vesting in the

child until a time which is more than fifteen months after the death

of the deceased. However, unless the testator is prepared to leave

a great deal to the discretion of his personal representative it may

be impossible for him to foresee at the time he makes his will that

a particular rollover might not be advantageous.

Vesting Indefeasibly Within Fifteen Months:

The roliovers on death apply only where the property vests

indefeasibly in the transferee within fifteen months of the death or

such longer times as is reasonable in the circumstances. "Vested

indefeasibly" has a somewhat uncertain meaning. Revenue Canada1s

position on its meaning is set out in Interpretation Bulletin IT-449,

a copy of which is appended to this paper.

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REVENU CANADA, IMPOT

INTERPRETATION BULLETIN D'INTERPRETATION REVENUE CANADA. TAXATION

SUeJECT, INCOMB TAX ACf Reserves - Disposition of Capital Property

NO: IT-236R, DATE, September 12, 1979 RI!FERENCE, Subsection 40( 1) (also subsection 40(2) and

p".gr'ph 72(1)(.))

This bulletin cancels and repfaces!nrerpretation Bulletin /T·2J6 dated July 21, 1975. Current revisions are deslg­na,ted by vertical lines ,

I. Subsection 40(1) of the Act contains rules for deter· mining a taxpayer's gain from the disposition of capital property. Italso provides that a reasonable amount may be deducted as a reserve in respect orlhe gain included in the proceeds that are not due to the tax.payer until after the end of the taxation year. Reserves claimed in one taxation year are included in computing the taxpayer's capital gain in the next year and a new reserve may be available for deduction in that latter year.

2. It is the Department's position that proceeds are not due to the taxpayer prior to the date on which he has an enforceable right to an immediate payment. Whether any part of proceeds that remained unpaid on the closing date of the sale of property is not due at the end of a year would usually be detenninable on the basis of the terms of the sale agreement between the taxpayer and purchaser. It should be noted that an amount that has become due but has not been paid before the end of the year does not qualify for a reserve under subparagraph 40(l)(a)(iii). For comments on amounts due under demand notes reference can be made to IT.436, Reserves - Demand Notes.

3. The only requirement for the allowable amount of a reserve is that it must be reasonable. Normally the reserve may reasonably be assumed to be that proportion of the amount not due to the taxpayer until after the end of the taxation year that the original capital gain (before the reserve) bears to the proceeds of disposition of the prop­erty:

capital gain X proceeds of disposition

amount not due until after the end of the year

OBJET, LOJ DE L'JMPOT SUR LE REVENU Reserves - Disposition de biens en immobilisations

NO, IT.236R CATI!!:, Ie 12 septembre 197~ RENVOI: Paragraphe 40(1) (aussi Ie paragraphe 40(2) el "aline!

72(1).))

Le present bulletin annule el remplace Ie bulletin d'interprita­lion IT-236 du 21 Juillet 1975. Les revisions apporties sonl indiquees par des frOl'ts verticaux.

I. Le paragraphe40(J) de la Loi prevoit des regles pour deter­miner Ie gain qu'un contribuable tire de la disposition de biens en immobilisations. II stipule egalement qU'un montant raison· nable peut Stre deduit a titre de reserve a !'cgard du gain compris dans Ie produit qui n'est pas duau contribuable jusqu'apres la fin de I'annee d'imposilion. Les reserves demandees pour une annee d'imposition sont incluses dans Ie calcul du gain en capitardu contribuable dans l'annee qui suit, et une nouvelle reserve peul Stre admissible pour deduction au cours de cette demiere annee;

2. Le Minislere est d'avis que Ie produit n'est pas dO au contribuable avant la date a laquelle iI a Ie droit executoire de recevoir un paiement immediat. On peut habituellement deter­miner d'apres les conditions de vente entre Ie contribuable et I'acheteur si une fraction du produit qui resle non payee a la date de cloture de la vente des biens n'est pas due s. I_a fin diune annce. II est bon de remarquer qu'un montanl dO, qui n-'a pas ete paye avant la fin de !'unnee, ne peut pas etre considere comme une reserve en vertu du sous·alinea 40(1)a){iii). Pour plus de precisions sur les montants dus en vertu de billets a vue, on peut consulter Ie IT-436. Reserves - Billets a vue.

3. La seule condition touchant l'admission d'un montan! a titre de reserve est qu'U doit etre raisonnable. Regie generale, on peut raisonnablement considerer la reserve comme elanl la pro· portion du montant exigible par Ie contribuable seulement apres la fin de I'annee d'imposition, que Ie gain en capital original (avant la reserve) represente par rapport au produit de la disposi· tion du bien:

ain en ca ital X produit e a Isposition

montanl qui n'est exigible qU'apres la fin de I'annce

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PUBLISHED UNDER THE AUTHORITY OF THE OEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION

PUBLIE AVEC l.'AUTORISATION DU SOUS~MINISTRE DU REVENU NATIONAL POUR L'IMP6T .

2

'The following example illustrates how a reasonable re­serve would be calculated in the year of disposition of a capital property and in the next two years, Assumptions

Capital Property sold for $10,000

Adjusted cost base Outlays and expenses

Capital gain (before reserve) Amount not due until after the end of year of sale end of year 2 . end of year 3

Reserve Calculations

$6,600 -4lll!

Year of sale $ 3,000 X $6,000 = $1,800 $10,000

Year 2 $ 3,000 X $4,000 = $1,200 $10.000

y", 3 $ 3,000 X $2,000 = S 600 $10,000

·1,000

$ 3,000

$ 6,000 $ 4,000 $ 2,000

Where the reserve is delermin"ed on some other basis and the amount is greater than it would he if it had been calculated as above, the taxpayer must submit his reasons )or considering that the reserve is a reasonable amOll,nt.

4. Where a taxpayer (veMar) sells property to which he never had clear title (because at the time of original pur­chase he' either gave a mortgage or assumed an existinK mortgage on the property as part of the purchase price) it can be said that what he sells fa the present purchaser is merely 'his existing equity in ttiat property. Accordingly, where the-purchaser assumes the vendor's liability under such a mortgage it is acceptable pra~tice for the vendor to claim a reserve computed in relation to that equity. This is achieved by substituting for "proc~eds of disposition" in the formula described in 3 above, the amount by which such proceeds exceed the: amount of the mortgage as­sumed on purchase. For example; if the capital gain is $3.000, proceeds of disposition $10,000, unpaid balance of an existing mortgage assumed $2,000. and a new mortgage of $6,000 taken back, the reserve is calculated as follows:

$3,000 X $6,000 = $2,250 $8,000

5. Having calculated what a reasonable reserve is. a taxpayer need not claim the maximum reserve in any particular taxation year, but may claim any amount he wishes up to the maximum. It should be noted. however. that the amount of the reserve claimed in a subsequent year in respect of the disposition of a particular property

)'llay not exceed the amount claimed in respect of that roperty in the immediately preceding year.

..

IT-236R

L'exemple suivan! illume comment une reserve raisonnable serait calculee dans I'annee d~ la disposition d'un bien en immobilisations et au cours des deux annees suivantes. Hypotheses

Bien en immobilisations vendu pour $10,000 Prix de base rajuste Debours et depenses

Gain en capital (avant la reserve) Montant qui n'est pas exigible jusqu'apres

la fin de l'annee de la vente la fin de la 2e annee la fin de la 3e annee

Calcul des reserves Annee de la vente -

2e annee

3e annee

$6,600 400

1,000

$ 3,000

$ 6,000 4,000

$ 2,000

$ 3,000 X $6,000 = $1,800 $10,000 $ 3,000 X $4,000 = $1,200 $10,000 $ 3,000 X $2,000 = $ 600 $10,000

Lorsque la reserve est detenninee sur une autre base et que Ie montant est plus eleve qu'it ne I'aurait etc s'i1 avait ete calcule comme ci-dessus, Ie contribuable doi,t presenter ses raisons de considerer que la reserve est un montant raisonnable.

4. Lorsqu'un contribuable (vendeur) vend un bien sur lequel iI n'a jamais eu de titre de propriete incontestable (parce qu'au moment de l'adiat initial il a donmS une hypotheque au a assume une hypotheque existante sur Ie bien a titre de fraction du prix d'achat), it estjuste de dire que cOe qu'j( vend II. !'acheleur acfuel est simplement son avoir propre dans ce bien. En consequence, lorsque I'acheieur assume I'obligation du vendeur en veitu d'une telle hypotheque, it est d'un usage acceptable pour Ie vendeur de demander une reserve calculee- par rapport a cel avoir. Ceci se fait en rempla~ant Ie «produit de la disposition» dans la formule decrite en 3 ci~dessus par l'exc6dent. d'un tel produit sur Ie montant de I'hypotheque assumee a l'achat. Par exemple. si Ie gain en capital est de $3,000, Ie produit de la disposition de $IO,OOO,le solde impaye d'une hypolheque exis~ tante assumee de $2,000 et une nouvelle hypotheque reprise de $6,000, la reserve est calculee comme suit:

3,000 X 6,000 = 2,250 8,000

S. Apres avoir calcule Ie montant raisonnable de sa reserve, Ie contribuable n 'est pas lenu de deduire, dans une annee d'imposi­tion donnee, Ie montant maximal de la reserve admissible; iI peut deduire Ie montant qu'i1 veut jusqu'a concurrence du ma­ximum permis. II est II. noter, toutefois, que Ie monlan! dc la reserve deduite dans une annee subsequente relativement 1"1 1a disposition d'un bien donne ne peut exceder Ie monlanl dCduit relativement a ce bien au cours de J'annee precedente.

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IT-236R 3

6. Where a taxpayer's return for a year is reassessed to bring into income a taxable capital gain he has omitted or to increase the amount of a taxable capital gain reported, the taxpayer will be advised of the adjustments and asked if he wishes to make a claim or to increase his original claim for a deduction of a reserve under subparagraph 40(l)(a)(iii) that may have become available to him as a result of reassessment. Moreover, where a reassessment of tax is made in a yeacfor any other reason, the taxpayer is entitled to claim a reserve as pennilted by subparagraph 40(l)(a)(iii) which he has not already taken.

7. The reserve is denied where the capital property was sold after May 6, 1974 to a corporation which im· mediately after the sale was controlled directly or indi­rectly by the taxpayer, was controlled directly or indi· rectly by a person or group of persons by whom the taxpayer was directly or indirectly controlled, or control­led the taxpayer directly or indirectly where the taxpayer is a corporation.

8. Paragraph40(2)(a) provides that areserve may not be claimed in a taxation year if the taxpayer, at the end of the year or at any time in the immediately following year, was not resident in Canada, or was exempt from tax by virtue of any provision of Part I of the Act.

9. Se<;tion 72 provides that no reserve may be claimed under subsection 40(1) in computing a taxpayer's income in the year of death, unless as stipulated in subsection 72(2) the amount not due was transferred to a spouse or a trust on behalf of the spouse, and the taxpayer's legal representative and the transferee have jointly filed an eleclion in respect of the property pursuant to that subsec· tion. This election should be made on Form T·2069, which is available at any District Taxation Office. Where an election is made an amount in respect of a reserve may be deducted in computing the deceased taxpayer's income in the year he dies and the reserve is then transferred to the beneficiary.

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6. Lorsqu'une nouvelle coUsation est etablie pour une annee 11 I'egard de la declaration d'un contribuable afin d'integrer dans sonrevenu un gain en capital imposable qu'iJ avait omis, ou afin d'augmenter Ie montant du gain en capital imposable declare,le contribuable est infonne des rajustements effectues et demande s'il desire faire une demande ou augmenter Ie montanl de ,sa demande initiale de deduction 11 !'egard d'une reserve en vertu du sous·alinea 40(I)a)(iii) a laquelle iI pourrait avoir droit a la suite de la nouvelle cotisation. De plus, lorsqu'une nouvelle cotisation d'impot est etabUe dans une annee pour tOUie autre raison, Ie conlribuable a Ie droit de demander une reserve dont iI ne s'est pas deja prevalu comme Ie pennel Ie sous.atinea 40(I)a)(Hi),

7. La reserve est refusee si Ie bien en immobliisalions a ete vendu apres Ie 6 mai 1974 a une corporation qui, immediate­ment apres la vente, etait controlee directement ou indirecte­ment par Ie conlribuable, par une personne ou un groupe de personnes par qui Ie contribuable etait directement ou indirec· tement controle, ou bien controlait Ie conmbuable directement au indirectement dans Ie cas au ce demier est une corporation.

8. L'alinea 40(2)a) stipule qu'une reserve ne peut etre dMuile dans une annee d'imposition, si 10' contribuable n'etait pas, a la fin de I'annce ou a tout moment au cours de l'annce suivante, resident du Canada au s'i1 etait exempte de I'impot en vertu d'une disposition quelconque de la Partie I de la LoL

9. L'article 72 stipule qu'i! ne peut etre deduit de reserve en vertu du paragraphe 40(1), lors du calcul du revenu d'un conlri· buable pour {'annee de son deces, it moins que, aux tennes du paragraphe 71(2), Ie montant non exigible n'ait ete transfere au conjoint ou it une fiducie creee en faveur du conjoint ef que les representants Jegaux du contribuable et Ie beneficiaire du trans­fert n'aient produit conjointement un choix. relatif au bien, en conformite de ce paragraphe. Le choix doit etre produit au moyen de la fonnule T.2069, disponible a n'importe quel bu· reau de district d'impot. Lorsqu'un choix. est exerce, un monlant peut etre deduit 11 titre de reserve, lors du calcul du revenu du contribuable deced~ -pour l'annee de son deces; la reserve est alors transferee au beneficiaire.

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InnPRETATION BULLETIN REVENUE CANADA. TAXATION REVENU CANAOA, lMP()T

SUB,lliCT: INCOME TAX ACT Eligible Capital Property ~ Ceasing to Carry on Business

NO, IT·313&' DATE: October 10,1978 REPEAENCE: Section 24 (also section 14 and subsection

25(1».

This bulletin cancels and replaces-Interpretation Bulletin IT-313 dated May 3. 1976. Current revisions are desig­nated by vertical Jines.

I. A taxpayer who has ceased to carry on a business is entitled, pursuant to paragraph 24(I)(a), to deduct in computing income for the laxation year in which he or she ceased to carry on the business the amount of cumulative eligible capital in respect of the business at the time it ceased to be carried on.

2. Whether a taxpayer has "ceased to carry on II busi­n~ss" is determined on the facts of each case. Generally, where the normal business activities have ceased and there is little likelihood of the business starting up again in the near future, business is considered to have ceased.

3. Where the taxpayer is an individual, the amount of cumulative eligible capital in respect of the business must be deducted from income for the taxation year (i.e. calen· dar year) during which the business ceased unless the individual makes an election pursuant to subsection 25( I), the effect of which is to allow a deduction of that amount from income for the following taxation year (i.e. next succeeding calendar year). The election under subsection 25(1) is permitted where the individual was the proprietor of the business and has disposed ofit during a fiscal period of the business. Where the taxpayer is a corporation, the deduction must be taken for the fiscal period in which the business ceased to be carried on.

4. The amount deductible by virtue of paragraph 24(I)(a) is the amount of the taxpayer's cumulative eligi· ble capital in respect of the business calculated at the time the business ceased to be carried on. The taxpayer's cumulative eligible capital at the time the taxpayer ceased to carry on the business is defined in paragraph 14(5)(a). For details, see the comments in Interpretation Bulletin IT-123R3 "Disposition of Eligible Capital Property". Furthermore, paragraph 24( l)(b) provides that in comput· ing the taxpayer's income fora year in which the taxpayer ceased to carry on the business, no amount is deductible by virtue of paragraph 20(l)(b) (10% deduction of

OBJET, LOI DE L'IMPOT SUR LE REVENU Biens en immobilisations admissibles - Cessation de I'exploitation d'une entreprise

NO, IT-313R DATE,_ Ie lOoctobre 1978 RENVOI, Article 24 (egalement I'article 14et Ie paragraphe 25(

Le present bulletin annu/e el remplace Ie Bulletin d'interpreta lion/T-313 du3 rna; 1976. Les modifications sont indiquees pw des traits verticaux_

L En vertu de J'alinea 24(1)a), Ie contribuable qui a cess( d'exploiter une entreprise a Ie droit, lo(s du calcul du revent pour I'annee d'jmposition au cours de laquelle iI a cesse d'ex ploiter "entreprise, de deduire Ie montant admissible des immo­bilisations cumulatives, pour I'entreprise, a la date a laquelle i1; ainsi cesse de I'exploiter.

2_ La question de savoir si un contribuable a «cesse d'exploi ter une entreprise .. est resolue d'apres les faits propres a chaqu{ cas. En general, si les activites normales de l'entreprise on cesse et s'iI est peu probable que I'entreprise les reprenne dam un proche aVenir, on estime que I'entreprise a cesse d'etrf exploitee.

3. Lorsque Ie contribuable est un particulier, Ie montant ad· missible des immobilisalions cumulatives au titre de I'entrepris! doit eIre d6dujt du revenu pour l'ann6e d'imposition (c.-a.-d. I'annee civile) au cours de laquelle I'entreprise a cesse d'etrf exploitee, a. moins que Ie particulier ne fasse un choix, en vertu du paragraph 25(1), qui I'autorise a d6duire Ie montant susmen· tionne du revenu pour I'annee d'imposition suivante (c.-a-d. "annee civile suivante). Le choix en vertu du paragraphe 25(1: est autorisc si Ie particulier elait Ie proprietaire de I'entreprise el s'iI en a dispose au cours d'un exercice financier de I·entreprise. Si Ie contribuable est une corporation,la deduction doit etre faite pour I'exercice financier au cours duquel I'entreprise a cesse d'etre exploitee.

4. Le montant deductible en vertu de I'alint~a 24(I)a) est Ie montant admissible des immobilisations cumulatives du contri­buable, pour j'entreprise, calcule a la date a laquelle I'entreprise a cesse d'elre exploitee. Le monlant admissible des immohilisa­tions cumulatives du contribuable a la date a laquelle iI a flinsi cessc d'exploiter I'entrepnse est defini a. I'alint~a 14(5)a). Pour de plus amples renseignements, voir les observations du nulle­tin d'interpretation IT ·123R3, ~Disposition de biens en immobi­Iisations admissibles». De plus, l'alin6a 24(l)b) prevoit que, lors du calcul du revenu du contribuable pour j'annee au cours de laquclle il a ainsi cesse d'exploiter I'entreprise, aucun mon­tant ne peut alre deduit en vertu de l'alinea 20( I)b) (deduclion de

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PUBLISHEO UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATiON

PUBLIE: AVEC L'AUTOR/SATION OU SOUS_MINISTRE DU REVENU NATIONAL ~OUR L'IMPOT

2

I cumulative eligible capital), On the other hand, the tax­payer's cumulative eligible capital is deemed by para. graph 24(1)(c) to be "nil" immediately after the time the taXpayer ceased to carry on the business.

5. Where eligible capital property is disposed of at the time Ine business ceases, a taxpayer that is an individual who has not elected under subsection 25(1) is required by subsection 14(1) and paragraph 24(1)(d) to include in income in that calendar year

(a) for taxation years ending before April I, 1977, the excess of the eligible capital amount (one·half of the amount payable in respect oCthe disposition) over the amount of the cumulative eligible capital in re­spect of the business calculated at a time immediately before the amount became payable; and (b) for taxation years ending after March 31, 1977, the negative balance (if any) of the cumulative eligi~ ble capital at that time. '

6, The Department takes the position that an election under subsection 25(1) has the effect of bringing the amount in 5 above into income in the calendar year in which the fiscal period would have ended had the business

lot ceased, Where eligible capital property is disposed of ,,,fter the date of cessation of the business -but within that taxation year, the amount included in the taxpayer's in­come is equal to the eligible capital amount because the cumulative eligible capital is "nil" as provided by para· graph 24(IXc). Again, this amount is brought into in­come in the calendar year in which the business ceased unless the taxpayer is an individual who has elected under subsection 25(1). Eligible capital amounts arising from dispositions thereafter are brought into income in the calendar year in which an amount becomes payable.

1, Where an individual ceases to carry on a business and thereafter his or her spouse or a corporation controlled by the taxpayer carries on the business, the following rules are applicable:

(a) the "terminal allowance" (Le., the deduction orthe taxpayer's cumulative eligible capital) referred to in paragraph 24(1)(a) is not allowed pursuant to paragraph 24(2)(a); (b) the individual's cumulative eligible capital is deemed to be "nil" after the end of the taxation year in which the tax.payer so ceased to carry on the busi­ness pursuant to paragraph 24(2)(a); and (c) the amount of the individual's cumulative eligi_ ble capital at the end of the taxation year in which the taxpayersoceased tocany on the business is included

\,) in computing the cumulative eligible capital in reo spect of the business of the spouse or corporation at any time after the end of that taxation year pursunnt to paragraph 24(2)(b),

IT-313R

10% du montant admissible des.immobilisations cumulatives). O'autre part, en vertu de "alinea 24(1)c), Ie montantadmissible des immobilisations cumulatives du contribuable est repute nul, immediatement apres la date a laquelle Ie contribuable a ainsi cesse d'exploiter J'entreprise.

5, Si la disposition de biens en immobilisations admissibles coincide avec la date de cessation de I'exploitation de l'entre­prise, un contribuable qui est un particulier qui n'a pas exerce de choix en vertu du paragraphe 25(1) doit, en vertu du paragraphe 14(1) et de J'alinea 24(1)d), inclure dans Ie revenu de I'annee civile en cause,

a) pour les annees d'imposition se lerminant avant Ie ler avril 1971,I'excMent du montanl admissible des immobili­salions (Ia moitie du monlan! a payer pour la disposition) sur Ie montant admissible des immobilisations cumulatives, pour l'enlreprise, calcule a une date immediatement ante­deure a la date a laquelle Ie montan! est devenu payable et, b) pour les annees d'imposition se terminant apres Ie 31 mars 1977, Ie solde negallf (s'il en est) du montantadmissi­ble des immobllisations cumulatives a cetle date·la.

6, De I'avis du Ministere, l'exercice d'un choix en ~ertu du paragraphe 25(1) fait entrer Ie monlant vise en 5 ci-dessus dans Ie revenu de I'annee civile au cours de laquelle "exercice finan­cier se serait tennine s'il n'y avait pas ell cessation de I'exploita­tion de I'entreprise. S'il y a disposition des biens en immobilisa­tions admissibles ·apres la date de cessation de I'exploitation de I'entreprise mais avant In fin de "annee d'imposition, Ie mon­lant jnclus dans Ie revenu du contribuable est egal au montant admissible des immobilisations, Ie montant admissible des im­mobilisations cumulatives etanl «nuJ" en vertu de l'alinea 24(1)c). lei encore, a moins que Ie contribuable ne soit un particulier qui a exerce un choix. en vertu du paragraphe 25(1), ce montanl entre dans Ie revenu pour l'annee civile au cours de Iaquelle "entreprise a cesse d'ctre exploitee. Les montanls ad­missibles d'immobilisations d6coulant de dispositions ulterieu­res sont inclus dans Ie revenu pour I'annee civile au cours de laqueUe un montan! devient payable.

1. Lorsqu'un particulier cesse d'exploiter une entreprise e! que, par la suite, son conjoint ou une corporation controlee par lui exploite I'cntreprise, les regles suivantes s'appliquent:

a) en vertu de l'aUnea 24(2)a), la «deduction finale,. (c.-a-d. la deduction du montan! admissible des immobili­sations cumulatives du contribuable) mentionnee a I'alinea 24(1)a) n'est pas admise~ b) en vertu de I'alinea 24(2)a), Ie montant admissible des immobilisations cumulatives du particulier est repute nul apres la fin de I'anmie d'imposition au cours de laquelle Ie contrlbuable a ainsi cesse d'exploiter l'entreprise et, c) en vertu de I'alinea 24(2)b), Ie montan! admissible des immobilisations cumulalives du particulier a la fin de I'an­nee d'imposition au cours de laquelle il a ainsi cesse d'ex· ploiter I'entreprise est inclus dans Ie calcul du montan! admissible des immobilisations cumulatives, pour I'entre­prise, du conjoint ou de la corporation, a une date quelcon· que apres la fin de I'annee d'imposition.

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IT-313R

Subsection 24(2) does not apply, however, where the taxpayer and a corporation of which the taxpayer is a shareholder have elected to transfer an eligible capital property of a business operated by the taxpayer to the corporation under subsection 85(1).

8. Pursuant to subsection 70(5.1) the terminal loss pro­visions of section 24 do not apply upon the death of a taxpayer which occurs after May 6, 1974; nor do they apply where a taxpayer died on or before May 6, 1974, if the business of the deceased is continued by any person other than a spouse or a controlled corporation to whom subsection 24(2) applies. However, when the taxpayer died on or before May 6, 1974, and the business in fact ceased, the balance of the cumulative eligible capital account is deductible in the year of death pursuant to paragraph 24(1)(a).

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TOUlefois, en vertu du paragraphe 85(1), Ie paragraphe 24(2) ne s'appJique pas dans iI~ cas ou Ie contribuable et une corporation dont Ie contribuable est un actionnaire auraient choisi de transfe­rer un bien en immobilisations admissible d'une entreprise ex­ploitee par Ie contribuable a la corporation.

8. En vertu du paragraphe 70(5.1), les dispositions de I'article 24 relatives it: la perte finale ne s'appliquent pas advenant Ie deces du contribuable apres Ie 6 moo 1974; eUes ne s'appliquent pas non plus advenant Ie deces du contribuable Ie 6 mai 19740u a une date anterieure, it: la condition que I'entreprise de la personne decedee soit ensuite exploitee par une personne physi­que au morale quelconque autre que Ie conjoint ou une corpora­tion controIee auxquels Ie paragraphe 24(2) s'applique. Cepen­dant, en vertu de l'aUnea 24(I)a), lorsque Ie deces inlervient Ie 6 mai 1974 ou it: une date anlerieure et que l'entreprise cesse effectivement d'elre exploitee, Ie solde du montant admissible des immobilisations cumulallves du contribuable est deductible dans l'annee du deces.

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REVENU CANAOA, I",POT

INTERPRETATION BULLETIN D'INTERPRETATION

REVENUE CANADA, TAXATION

SUBJECT: INCOME TAX ACT Transfer of Farm Property to Child on Death

SERIAl-NO: IT-343. DATE, November 8, 1976 REFERENCE, Subsection 70(9) (also subsections 70(9,1)

and (10), and subsections 20( I), 20( 1.1), 26(3), and 26(18) of the Income Tax Application Rules, 1971 (ITAR»

I, Pursuant to subsection 70(9), a taxpayer's land in Canada and depreciable property of a prescribed class in Canada which

(a) is transferred or distributed on or after the taxpayer's death and as a consequence thereof to his child,and (b) becomes vested indefeasibly in the child within six months of the taxpayer's death, is deemed to have been disposed of by the taxpayer and acquired by the child at its adjusted cost base or unde· preciated capital cost, as the case may be, to the taxpayer, if immediately before his death,

(e) the property was used in the business of farming by the taxpayer, his spouse, or any of his children, arid (d) the child was resident in Canada.

(If the proposed amendment to subsection 70(9) in Bill C·97, first reading June 30,1976, becomes law, the time within which the property must vest in the child is extended to fifteen months after the taxpayer's death.)

2. Where the deemed cost to the child (computed pursuant to subparagraph 70(9)(b)(i)) of depreciable property transferred under the conditions described in paragraph I above is less than the capital cost thereof to the taxpayer, the capital cost of the property to the child is deemed to be the amount that was its capital cost to the taxpayer. The difference between these two amounts is deemed to have been allowed to the child as capital cost allowance and thus may be subject to recapture on a subsequent disposition by him,

3. The Department considers that a lessor of (arm property does not use such property in the business of farming. Thus, property (or any portion thereof) which immediately before the taxpayer's death was leased by him to another person (including a sharecropper) is not ordinarily eligible for transfer under subsection 70(9). However, such leased property would be eligible where

(a) the lessee was using thc property in the business of farming, and (b) the lessee was

(i) the taxpayer's spouse or any of his chi!· dren, or

OBJET: LOI DE L'IMf>OT SUR LE REVENU Transfert au deci!s de biens agricoies 11 un enlant

NODE SERlE: IT-349 PATE, Ie 8 novembre 1976 FU!NVOI: Paragraphe 70(9) (ainsi que les paragraphes 70(9,1) et

(10) et les paragraphes 20{l), 20{l.I), 26(3), et 26(18) des Regles de 1971 concernant l'appllcation de I'lmpot sur Ie revenu (RAIR»

I, Conformement au paragraphe 70(9), un fonds de terre d'un contribuable situe au Canada et un bien amortlssab1e d'une categorie prescrite d'un contribuable sltu6 au Canada qui

a) est trausfere ou transmls lors du d6ds ou apri!s Ie deces du contribuable et en consequence de ce deci!s it son enfant, et b) est, par devolution, irr6vocablement acquis par l'enfant dans les 6 mois qUI suivent Ie deces du contribuable, est repute avoir et6 l'objet d'une disposition par Ie con· tribuable at avoir ete acquis par I'enfant au prix: de base rajuste ou, selon Ie cas, it la fraction non amortie du coil! en capital pour Ie contribuable, si, immedlatement avant son deces c) Ie bien 6tail utilise dans Ie cadre de l'exploitatlon d'une entreprise agdco)e par Ie contribuable, son conjoint ou I'un de ses enfants, et d) I'enfant residalt au Canada.

(St la modification proposee au paragraphe 70(9) du bill c.97 it la premiere lecture du 30 juin 1976 devient 101, Ie delai dans Iequel Ie bien amorlissable doH etre acquis par I'enfant sera protonge de 15 mois apres la mort du contribuable).

2. Lorsque Je coO:t repute pour I'enfant (calcul6 conforme· ment au sous-alinea 70(9)b)(i) d'un bien amortissable transfere dans les conditions exposees au num6ro 1 cj·dessus- est inferieur au coO:t en capital du bien pour Ie contribuable. Ie C0111 en capital du bien pour )'enfant est repute I!tre Ie montant du coilt en capital pour Ie contribuable, L'ecart entre ces deux moniants est repute avoir Me alloue ii I'enfant 11 titre de deduction pour amortlssement et peut ainsi faire l'objet d'une recuperation lors d'une disposition ulterieure par I'en· fant.

3, Le Ministere estime que Ie locateur d'un bien agricole n'utilise pas ce bien dans Ie cadre de I'exploitation d'nne entreprise agricole. Donc, tout bien (ou toute partie de co bien) qui, immediatement avant Ie deces du contribuable, etait loue par lui a line autre persontle (y compris un metayer) n'est d'ordlnaire pas admissible aux fins d'un transfer! en verln dll paragraphe 70(9). Cependant, ce bien loue serait admissible si

a) Ie localaire uillisait Ie bien dans Ie cadre de I'exploita, tion (I'une entreprise agricole, et b) Ie locataile 6talt

0) Ie conjoint (lu contribuable ou I'un de ses cnfants, ou

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PUElLrSHEO UNOER THE: AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION

PUBLlE: AVEC L'AUTORISATION DU SOUS.MINISTRE DU REVENU NATIONAL POUR L'IMP6T

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(ii) a partnership, the only members of which were the taxpayer, his spouse, or any of his children.

4. In the preceding paragraph "sharecropper" means a farmer who is a tenant and gives a share of his crop to the landlord in lieu of rent. There may be other types of sharecrop arrangements, for example, where the share­cropper is actually an employee of the (arm owner and not a tenant and receives a share of the crop as remuneration for services rendered. Under such an arrangement the farm property may be eligible for transfer under subsection 70(9).

5. Subsection 70(9) contemplates a transfer or distri­bution of property to beneficiaries of the taxpayer's estate as a consequence of his death and is not applicable to any sale of property by the estate. In addition, subsection 10(9) applies only to property owned by the taxpayer immediately before his death and thus is not applicable to property owned at that time by a partnership or corporation.

6. The following are examples of transfers of property to which subsection 70(9) may apply:

(a) A father and his son operate a farm in partner­ship; the father owns the farm property which he leases to the partnership. On the father's death, the farm property passes to the son by direct bequest. (b) A father and his son operate a.farm in partner­ship and own the farm property jointly (it is not partnership property). On the father's death, his interest in the farm property passes to the son by virtue of the joint ownership. (c) A father operates a farm and owns the farm proper!y. On his death, the farm property is held in trust for his son, and by the terms of the trust it vests indefeasibly in the son although it Is not transferred to him until he attains a certain age.

Intervening Spouse Trust

7. Subsection 70{9.l) refers to a taxpayer's land in Canada or depreciable property of a prescribed class in Canada, which has been transCerred to a "spouse trust" in accordance with subsection 70(6) or 73(1) and which, on the death oC the spouse and as a consequence thereof, is transCerred or distributed to a child of the taxpayer in whom it vests indefeasibly. Subsection 70{9.1) deems such land or property to have been disposed of by the spouse trust and acquired by the child at its adjusted cost base or undepreciated capital cost, as the case may be, to the trust, if immediately beCore the death of the spouse

(a) the property was used in the business of Carming, and (b) the child was resident in Canada.

)8. Where the deemed cost to the child (computed . pursuant to subparagraph 70(9.1){b)(i)) of depreciable

IT-349

(ii) une societe dont les seuls assocics etaient Ie contribuable, son conjoint ou I'un de ses enfants.

4. A I'alinea precedent, "metayer" signifie un ferrnier qui est locataire et donne une partie de sa recolte au proprietaire en tant que loyer. II peut y avoir d'autres genres d'accords, par exemple si Ie metayer est effectivement un employe du proprietaite de l'entreprise agricole et non locataire et re~oit une partie de la recolte en remuneration de services rendus. En vertu de cet accord, Ie bien agricole peut etre admissible pour transCert en vert" du paragraphe 70(9).

5, Le paragraphe 70(9) prevoit Ie transfert ou la transmission des biens aux Mneficiares de 18 succession du contribuable par suite de la mort de ce dernier et ne s'applique 11 aucune vente de biens par la succession. De plus, Ie paragraphe 70(9) ne s'applique qu'aux biens qui appartiennent au contribuable immediaternent avant son doces. II n'est donc pas applicable aux "biens qui appartiennent a ce moment·la 11 une societe ou corporation.

6. Le paragraphe 70(9) peut s'appliquer aux exemples suivants de transfert de biens:

a} Un phe et son fils exploitent une entreprise agricole en tant qu'associ6s; Ie pere possede les biens agricoles et les laue a la societe. Lars du deces du perc, les biens agricoles sont Jegues directement au fils. b) Un pere et son fils exploitent une entreprise agricole en tant qu'associ6s et possMent conjointement les biens agricoles (ce ne sont pas des biens de la societe.) Lors du dcces du pere, sa partiCipation dans les biens agricoles est transrnise au fils en taison de la copropriete. c) Un perc exploite une entreprise agricole et possMe les biens agricoles. Lors de son deces, les biens agricoles sont administres par une fiducie pour Ie (i]s afin qu'ils soient, par devolution, irrevocablement acquis par Ie fils, bien qu'i1s ne doivent pas lui eIre transmis avant un certain age.

Fiducie du conjoint

7. Paragraphe 70(9.1) vise un fonds de terre d'un contri· buable sltue au Canada ou un bien amortissable d'une catego­rie prescrite situe au Canada qui est transCere a une "fiducie du conjoint" selon les paragraphes 70{6} ou 73(1) et qui, au deces du conjoint ct en consequence de ce deces, est transfere ou transmis a un enfant du contribuable et est, par devolution, irrevocablement acquis par I'enfant. En vettu du paragraphe 70(9.1) un tel fonds de terre ou bien est repute avoir ete I'objet d'une disposition par Ia Cidude du conjoint et avail ete acquis par l'enCant all prix de base rajusU ou, selon Ie cas, a la fraction non amortie du coftt en capital pour la fidude, si, immediatement avant Ie dews du conjoint.

a) Ie bien Mait utilise dans Ie cadre de I'exploitation d'une enheprise agricole, et b) I'enfant residait au Canada.

8. Lorsque Ie cOlH repute pour I'enfant ({calcuM conforme­ment au sous·alinea 70{9.1)b)(i)) d'un bien amortissable

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IT-349

property transferred from the spouse trust is less than the capital cost thereof to the trust, the capital cost of the property to the child is deemed to be the amount that was its capital cost to the trust. The difference between these two amounts is deemed to have been allowed to the child as capital cost allowance and thus may be subject to recapture on a subsequent disposition by him.

9. For the purposes of subsections 70(9) and 70(9.1), a "child" includes a grandchild and a great-grandchild (subsection 70(10) if the proposed amendment thereto in Bill C-97 becomes law). In addition, the meaning of "child" is extended In subsection 2S2( 1).

IT AR Provisions

10. Where subsection 70(9) applies to a transfer of land which was owned by the taxpayer on December 31, 1971 (or which was owned on June 18, 1971, by a person who did not deal. at arm's length with the taxpayer, and no arm's·length owners intervened to the date of such transfer), subsections 26(3) and 26(5) of the ITAR preserve the tax-free zone in the hands of the transferee in the usual way {see Interpretation Bulletin IT-132R, "Capital Property Owned on December 31, 1971 - Non-Arm'sLength Transactions", and subsection 26( I8} of the IT AR). By virtue of subsection 20( 1.1) of the ITAR, the tax-free zone may also be preserved in respect of depreciable property of a prescribed class transferred pursuant to subsection 70(9) (see Interpreta­tion Bulletin IT-217, "Capital Property Owned on December 31, 1971 - Depreciable Property").

II. Where depreciable property of a prescribed class is transferred or distributed by the spouse trust as des­cribed in paragraph 7 above, the Department takes the view that the tax-free zone is similarly preserved (see preceding paragraph). Subsections 26(3) and 26(5) of the ITAR preserve the tax-free zone in the usual way in respect of land which is transferred as described in paragraph 7 above.

Property Depreciable Pursuant to Part XVII

12. Subsections 70(9) and 70(9.1) do not apply to the transfer of property which was depreciated pursuant to Part XVII of the Regulations immediately before the taxpayer's death or immediately before the transfer to the spouse tmst, as the case may be. Fmlher, such property which Is transferred to a child or trust after 1971 is required to be included in a prescribed class under Part XI of the Regulations by the child or trust, since property acquired after 1971 may not be depre­ciated pursuant to Part XVII of the Regulations.

3

transfere de la fiducie du conjoint est inferieur au co!)t en capital du bien pour la fiducie, Ie cout en capital du bien pour l'enfant est repute Hre ·le montant du coo.t en capital pour la fiducie. L'ecart cntre les deux montan!s est repute avoil" ete alloue a I'enfant a titre de deduction pour amortissement et peut ainsi faire I'objet d'une recuperation lors d'une disposi­tion ulterieure pllr I'enfant.

9. Aux fins des paragraphes 70(9) et 70(9.1), Ie mot "enfant" comprend les petits-enfants et les arriere-petils­enfants (paragraphe 70(10) si la modification proposee du bill C-97 devien! loi. De plus, Ie paragraphe 252(1) donne un sens encore plus large au mot ".enfant".

Stipulations des RAIR

to. Lorsque Ie paragraphe 70(9) s'appJique au transfert d'un fonds de terre appartenant au contribuable Ie 31 d6cembre 1971 (ou qui appattenait Ie 18 juin 1971 a une personne ayant un lien de dependance jusqu'a la date du tranfer!), les paragraphes 26(3) et 26(5) des RAIR maintiennent la marge libre d'impOt du cessionnaire de la maniere habituelle (voir Ie Bulletin d'lnlerpretation IT -132R, "Biens en immobilisations detenus Ie 31 decembre 1971 - Transactions avec lien de dependance" > at Ie paragraphe 26( 18) des RAIR). En vartu du paragraphe 20(1.1) des RAIR, la margll IIbre d'impM peut aussi etre maintenue A I'egard de biens amortlssables d'une categorie prescrile transUres conformement au paragraphe 70(9) (voir Ie Bulletin d'interpretation IT - 217, intitute "Biens en immobilisatlons possedes Ie 31 decambre 197] - Biens amortissables").

II. Lorsqu'un bien amortissable d'une categorie prescrite est transfe~ all transmis par la fiducie du conjoint comme il est indique au num6ro 7 ci--dessus, Ie Ministere considere que la marge libre d'impot est maintenue de fa~on sembi able (voir Ie numero precedent). Les paragraphes 26(3) et 26(5) des RAIR maintiennent la marge libra d'impOt de la maniere habituelle 1t l'egard d'un fonds de terre qui est transfere tel qu'll est decrit au num6ro 7 ci·dessus.

Biens amorlissables confonnement a la Partie XVII

12. Les paragraphes 70(9) et 70(9.1) ne s'appliquent pas nux transferls de biens qui ont etC amortis conformement a la Partie XVII des Reglements, soit immediatement avant Ie d6ds du contribuable ou immedlatement avant Ie transferl A la fiducie en faveur du conjoint, selon Ie cas_ De plus, tout bien de ce genre qui cst Iransfere a un enfant ou a line fiducie apres 1971 doit etre compris dans une categorie prescrite en verlll de la Partie XI des Reglements par I'enfant ou la fiducie, puisqu'un bien acquis apres 1971 ne peut !tre amorli conform6ment a la Partie XVII des Reglements.

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R~V~NUE CANADA. TAXATION

IHIE RP II ElATION BULLETIN D'INTERPRETATION REVENU CANADA. IMPOT

SUB.lECT,INCOME TAX ACf Miscellaneous Farm Income

NO, IT-425 DATE, February 5, 1979 REP'ERENcE,Subsection 9(1) (also sections 14 and 80.3)

I. This bulletin discusses miscellaneous income of a taxpayer in the business of farming.

Sales of Farm Land Including the Crop

2. Where an agreement for the sale of farm land on which there is a standing crop specifies the amount pay­able for the crop, the amount so specified is income to the vendor and an allowable deduction to the purchaser. Where the agreement does not specify an amount payable for the crop. no portion of the sale price may be attributed to the crop insofar as either the vendor or the purchaser is concemed.

Sales of Rights to Harvest Crops

3. Where a taxpayer in the business of farming relains the title to his fann and merely sells the right to harvest the crop therefrom, the consideration so paid for that right is income to the vendor and an allowable deduction to the purchaser for tax purposes.

Farmers - Farm Produce Consumed

4. As in the case of all taxpayers in business, the cost value of all materials or produce consumed by a taxpayer in a business offarming,lhat were stock in trade and could have been sold as such, should be deducted from the otherwise allowable expenses of the farm. Similarly, in regard to produce from the farmer's home garden, i.e.: produce for his own consumption rather than for sale, any expenses incurred in connection therewith should be excluded from the operating expenses of the farm.

Exehange of Goods

5. Where goods or services are received in exchange for farm products by a taxpayer in the business offarming, the fair market value of the farm products given by the tax­payer in exchange must be included in his or her income. The value of the goods or services received in exchange by the taxpayer may possibly be expensed or capitalized, depending on what is received. For example, if a taxpayer exchanges wheat for repairs made to a tractor, the value of the repairs would be deductible in computing farm in­come. If, however, the wheat is exchanged for a new

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PUBLISHEO UNOER THE AUTHORITY OF THE OEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION

OElJET,LOI DE L'IMPOT SUR LE REVENU Revenus divers tires d'une enlreprise agricole

NO, IT-425 DATE, Ie 5 fevrier 1979 RENVOI! Paragraphe 9(1) (egalement les articles 14 et 80.3)

1. Le present bulletin traite des revenus divers d'un contribua­ble qui exploito une entreprise agricole.

Vente de terre agrlcole comprenant la reeolte

2. Lorsque Ie contrat de vente d'une terre agricole sur laquelle iI y a une recolte sur pied precise Ie montant a payer pour la recolte, Ie montant ainsi precise est considere comme un revenu pour Ie vendeur et une deduction admissible pour I'acheleur. Lorsque Ie contrat ne precise pas un montant a payer pour la recolte, aucune fraction du prix de vente ne peut etre attribuee a la recolle, pas plus pour Ie vendeur que pour I'acheteur.

Vente du droit de falre la recolte

3. Lorsqu'un contribuable qui exploite une entreprise agricole garde Ie droit de proprh~le de sa terre et ne vend que Ie droit de faire la recolte. la contrepartie ainsi payee pour ce droiJ est consideree comme un revenu pour Ie vendeur et une dCd.uction admissible pour !'acheteur, aux fins de l'impot.

Agriculteurs - Produils agricoles eonsomm& .-4. Comme dans Ie cas de taus les contribuables qui exploitent une entreprise. la valeur de tous les produits consommes par un contribuable qui exploite une entreprise agricole, qui faisaient partie du stock et auraienl pu "etre vendus, doh etre deduite des depenses par ailleurs deductibles de I 'entreprise agricole. De la merne maniere, toutes les depenses engagees en ce qui conceme les produits du jardin domestique de I'agriculteur, c'est-a-dire les produits pour sa propre consommation plutot que pour la vente, doivent etre exclues des depenses d'exploitation de I'en­treprise agricole. , Ecbange de biens

S. Lorsque des biens au des services sont re~us en echange de produits agricoles par un contribuable qui exploite une entre­prise agricole, la jusle valeur marchande des produils agricoles donnes par Ie contribuable en cchange doh etre incluse dans son revenu. La valeur des biens au des services re~us en cchange par Ie contribuable peut eire consideree comme depense au capital selon ce qu 'il re~oit. Parexemple, si un contribuable echange du ble contre des reparations faites a un Iracteur, la valeur des reparations pourra etre deductible dans Ie calcul du revenu de I'en~reprise. Si, d'autre part Ie ble est echange cOnlre un nou·

PUBLIE AVEC L"AUTORISATION OU SOUS_MINISTRE DU REVENU NATI~NAL POUR L'jMP6T

2

) refrigerator for the taxpayer's·house, the value of the refrigerator would be considered a personal or living ex­pense and not deductible by virtue of paragraph 18·(1 )(h).

Destruction of Livestock

6. An amount received or receivable (depending on the method regularly followed in computing income) by a taxpayer in the business of farming as -compensation, under statutory authority for the forced destruction of livestock (such as under the Animal Contagious Disease Act), is considered to be income. Section 80.3 permits the deferral of reporting of this amount to the year following that in which it was received or receivable. This deferral is not available in the taxation year during which a taxpayer dies or ceases to be resident in Canada or in any sub· sequent year.

Sale or Lease of Marketing Quotas

7. An amount received or receivable (depending upon the method regularly followed in computing income) by a taxpayer for granting a farmer pennission to use the tax­payer's marketing quota (for example tobacco, egg, milk or grain) is considered to be income and will be treated as income from farming if the taxpayer is engaged in a farming business. The sale oflhe actual quota by a farmer

\would be considered to be the disposition of an eligible ,tapital property. '

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Other

8. Other Interpretation Bulletins which discuss miscel­laneous receipts of a taxpayer in the business of farming are as follows:

'(a) IT -182, Compensation for Loss of Business In­come, or of Property Used in a Business (b) IT-197, Subdivision and Sale of Farming or Inherited Land (c) IT-200, Surface Rentals and Farming Opera­tions (d) IT -252, Agricultural and Rural Development Act Grants (e) 1T-273, Government Assistance - General Comments (t) IT.346, Commodity Futures and Certain Com­modities (g) IT -373, Farm Woodlots and Tree Farms

IT-425

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veau refrigerateur pour la mai~on du contribuable, la valeur du refrigerateur sera consideree comme une depense personnelle au des frais de subsistance et eUe ne sera pas deductible en vertu de I'alinea 18(l)h).

Destruction du betall

6, Une somme re~ue ou it. recevoir (selon la methode adoptee pour calculer Ie revenu) par un contribuable qui exploite une entreprise agricole comme dedommagementen vertu d'un texte 16gislatifpourl'abauageobligatoiredu belait (commela Loi sur les epizooties) est consideree etre 'un revenu. L'article 80.3 permet de differer la declaration de ce montanl a I'annee suivant celie pendant laquelle iI n etc re~u au est a recevoir, Ce report de I'impot n'est pas permis dans une annee d'imposition ou Ie contribuable meurt ou cesse d'elre un resident du Canada ou dans toute annee d'imposition posterieure,

Vente ou location de contingents de commercialisation

7. Une somme re~ue ou a recevoir (selon la methode adoptee pourcalculer habiluellement Ie revenu) par "un contribuable pour accorder a un agriculteur la permission d'utiliser Ie contingent de commercialisation du contribuable (par exemple Ie tabac, les oeufs, Ie lait ou Ie grain) est consideree etre un revenu et sera traitee comme un revenu tire d'une entreprise agricole si Ie contribuable exploite une entreprise agricole. La vente du contingent reel par un agriculteur doit eire consideree comme une disposition de biens en immobilisations admissibles.

Autres

8. Les aulres bull~tins d'interpretation qui traitentdes revenus divers d'un conlribuable qui exploite une entreprise agricoJe sont les suivants;

a) IT-182 - Dedommagement pour la peete d'un revenu tire d'une entreprise au d'un bien ulilisedans une entreprise b) IT-197 - Subdivision et ventes de terres agricoJes ou re~ues en heritage c) IT-200 - Location du sol et exploitation agricole

d) IT-252 - Subventions en vertu de la Loi sur J'amena­gement rural et Ie developpement agricole e) IT -273 - Aide gouvernementale - observations genera­les t) IT -346 - Operations a terme sur marchandises et opera­tions sur certaines marchandhles g) IT·373 - Boises de fermes'et fcrmes foreslieres

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R~VENUE CANADA. TAXATION

5UBJE"CT: INCO:-'IE TAX ACf Meaning of "Vested Indefeasibly"

NO: ITA49 DATE: June 13, 19~0 RE:FE"RENCE", Subsection 70(6) (also subsections 70(5.2),

70(9), 70(9,1), 70(9.2), 70(9.3), 70(9.4), 70(9.5) of the Act and subsection 26(18) of the Income Tax Application Rules)

I. The purpose of this bulletin is to state the Depart· ment's view of the me'aning of "vested indefeasibly" as used in the above indicated provisions. Our comments are also extended to other requirements that must be met in order that the rollover under the cited provisions can apply.

2. The Act does not define the meaning of "vested indefeasibly" for the purposes of the above indicated provisions. Accordingly, the meaning of this term must be construed within the context of the provisions where it is used. In all the provisions indicated above "vested inde­feasibly" refers to particular property that, in conse­quence of death of the previous owner, has been transfer· red or distributed either to It spouse, spouse trust or a child of the taxpayer. In the Department's view a property vests indefeasibly in a spouse or child of the testator when s'uch a person obtains a right to absolute ownership of that property in such a manner that such right cannot be de· feated by any future event, even though that person may not be entitled to the immediate enjoyment of all the benefits arising from that right. Where property is held in trust for the benefit of one or more persons it is the Department's view that such property normally vests in· defeasibly in the trust and not in a beneficiary thereof. However, where the Department is satisfied that a prop­erty is held in trust solely to carry out the terms of It will under which the ullimate and absolute ownership of that property is bequeathed to a particular individual and the trust arrangement is such that the individual's ownership rights cannot be defeated by any future event and no other person has any right whatsoever to an immediate or future benefit from that property or that trust, the property will be considered to vest indefeasibly in that individual.

3. It is considered that property vests indefeasibly when the transferee has an enforceable right or claim to the ownership of the property even if the actual conveyance of the property by preparation and registration of the re­quired transfer indentures has not been completed. There­fore in the case of a specific bequest in a will the property would vest immediately after the death of the testator. A nonspecific bequest will vest in the beneficiary when he has a binding right to receive the specific property.

- 36 -PUBLISHED UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION

ReV~NU CANADA. IMPOT

OBJIIT, LOI DE L'IMPOT SUR LE REVENU Sens de I'expression «a ete, par devolution, irrevoc blement acquis»

NO: IT·449 DATE: Ie 13 juin 1980

RENVOI: Le paragraphe 70(6) (aussi les paragraphes 70(5.2). 70(9),70(9.1),70(9.2),70(9.3),70(9.4)" 70(9.5) de la Loi ot Ie paragraphe 26(18) des Regles concer­nant I'application de I'impol sur Ie revenu).

1. Le present bulletin a pour objet d'exposer Ie point de vue dt.: Ministere sur Ie sens de l'expression «a ete, par devolution. irrevocablement acquis» qui est utilisee dans les dispositiom susmentionnees. Nos commenlaires s' appliquenl egalement am. aulres exigences qui doivent etre satisfaites pour que Ie repon prevu par les dispositions susmentionnees puisse s'appliquer.

2. La Loi ne definit pas I'expression «a ele, par devolution. irrevocablement acquis» aux fins des dispositions susmention· nees. Par consequent, Ie sens de cette expression doit lenil compte du contexte des dispositions dans lesqueUes I'expres· sion est utilisee. Dans toutes les dispositions susmentionnees. I'expression «a etc, par devolution, irrevocablement acquis, s'applique 11. un bien en particulier qui, par suite du deces dl proprietaire precedent, a ete transfere ou transmis lors d'ur partage, soit 11. un 'conjoint, soit 11. une fiducie creee'au profit dt: conjoint, soit a un enfant du contribuable. Seton Ie Ministere, Ul:

bien est devolu irrevocablement 11. un conjoint ou 11. un enfant dL testateur lorsqu'une telle personne oblient Ie droit de propriete absolue de ce bien, de fagon telle que ce droit ne puisse eire annule par aucun evenement ulterieur, meme si cetle personn( ne peut profher immCdialement de tous les avanlages qu'en· tralne ce droit. Lorsqu'un bien est detenu en fiducie au profit d'une ou de plusieurs personnes, Ie Ministere est d'avis que ce bien est normalement devolu irrevocablement a la ftducie et nor au beneticiaire de cette fiducie. Toutefois,lorsque Ie Minislere est convaincu qu 'un bien est detenu en fiducie uniquement pOUI respecter les clauses d 'un testament selon lesquelles la ptoprietf definitive et absolue de ce bien est leguee 11. un individu er. particulier, qu'en vertu du contrat de flducie les droits de pro· priete de cet individu ne peuvent etre annules par aucun evene· ment ulterieuret qu 'aucune autre personne n 'a Ie droit de tirer ur. avantage'immediat ou uIterieutde ce bien oude cette fiducie, k bien sera tenu comme etanl devolu irrevocablement a cel indi­vidu.

3. Un bien est «par devolution, irrevocablement acquis» lors· que Ie beneficiaire du transfer! a un droit executoire sur la propriete du bien, meme si Ja cession n~elle du bien, necessitant la preparation et I'enregistrement des contrats de transfert re­£luis, n'est pas terminee. Par consequent, dans Ie cas d'un legs particulier dans un testament, Ie bien sera devolu immediate­ment apres Ie deces du testateur. Dans Ie cas d'un legs universe! Ie bien sera devolu au beneficiaire lorsque ce demier aura Ie droit executoire de recevoir Ie bien particulier.

PUBLIE: AVEC L'AUTORISATION DU SOUS_MINISTR~ OU REVENU NATIONAL POUR !..·IMPOT

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) 4. For the rollover provisions in subsections 70(5.2), 70(6), 70(9), 70(9.2), 70(9.4) of the Act. and lTAR 26( 18) to apply, the property must vest indefeasibly in the transferee or distributee within 15 months after the death of the taxpayer. The fpllover provisions in subsections 70(9. I), 70(9.3) and 70(9:5) concerning property that has been transferred by a taxpayer to a spouse trust as de­scribed in subsections 70(6) or 73(1), only apply if the taxpayer's child is a capital beneficiary oCthe spouse trust and the property vests automatically in the child im­mediately on the death of the spouse,

5. A rollover under any of these subsections does not apply unless the property has been transferred or distri­buted to the spouse, spouse trust or the child of the taxpayer. However, the time in which such a transfer or distribution of property must be completed is not specified. Taxpayers should be prepared to provide proof of such tmnsfer.

6. For the purposes of sub sec lions 70(6), 70(9), 70{9.2} and 70(9.4) the vesting must be established within 15 months ufter the death of the taxpayer, or any such longer period as is reasonable in the circumstances. While it is unlikely that a period longer than 15 months would be required to establish that the vesting has in fact taken

) place, it is possible that in some cases, such as litigations, settlements of claims, detennination of assets and debts of the estate, or delays in the' satisfactory conclusions of other matters, it may require a time longer than 15 months. There is no time requirement specified in subsec­tions 70(9.1), 70(9.3), or 70(9.5) in which the vesting "on the death of the spouse" must be established. Since vesting is automatic. proof thereof should be available without delay.

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1. The following are examples of circumstances in which the question of whether a particular property has 'vested indefeasibly (as described above) must be consi­dered.

(a) A testator who wishes to ensure that absolute ownership of his fann land will ultimately be con­veyed 10 his son, while allowing his widow the use of the property during her lifetime, would normally achieve this effect in one of two ways, under the terms of his will, as illustrated below:

(i) He bequeaths the land to his son SUbject to a life interest for the benefit of the testator's widow, or

(ii) he bequeaths the land to his widow for her life with the requirement that it pass abso­lutely to his son upon her death.

In both oflhcse situations it is the Department's view that the property would have vested indefeasibly in the son upon the death of the testator. The result would be the same even if the will contains a clause to the effect that the property will pass to the son upon the remarriage of the widow. (b) Under the tenns of a witl. the testator bequeaths his farm land to his spouse for her life on condition that it will p:lSS absolutely to his sons who survive his -

1T449

4. Pour que les dispositions de report des paragraphes 10(5.2), 10(6), 70(9), 10(9.2) et 70(9.4) de la Loi et du paragraphe 26( 18) des RAIR s'appliquent, Ie bien doil eIre, par devolution, irrevocablement acquis par Ie benCficiaire du transfert ou par celui a qui il est transmis lors d'un partage. dans les 15 mois du deces du contribuable. Les dispositions de report des paragm­phes 10(9.1), 10(9,3) et 10(9.5). concernant un bien qui a ete transfere par un contribuable a une fiducie cr4!ee au profit du conjoint dont il CSt question dans les paragmphes 10(6) ou 13( I). ne s'appJiquent que si I'enfant du contribuable est un blinCfi­cia ire du capital de la fiducie crece au profit du conjoint et que si Ie bien est dcvolu automatiquement a I'enfant immediatement apres Ie deces du conjoint.

5. Un report effectue en vertu de ces paragraphes ne s'appli­que que si Ie bien a etc transfere ou transmis lors d'un partage conjoint, it la fiducie cn%e au profit du conjointou a I'enfant du contribuable. Toutefois. Ie dclai dans lequel ce genre de trans­fert ou de distribution de bien doit etre effectue n' est pas precise. Les contribuables doivent foumir une preuve que Ie transfert a bel et bien ete effectue.

6. Aux fins des paragraphes 70(6). 70{9), 10(9.2) et 70(9.4), la devolution doit etre 6tablie dans les 15 mois qui suivent Ie deces du contribuable ou dans un delai plus long qui est raison­nable, compte tenu des circonstances. Meme s'i1 est peu proba­ble qu'un delai plus long que 15 mois soit necessaire pour qu'il soit etabli que la devolution a reellement etc effectuee. il se peut que des litiges, des reglements de creances, l'elablissement de l'actif et du passif de la succession ou des retards dans Ie reglement satisfaisant d'autres questions puissent entrainer un dclai depassantl5 mois. II n'cst nullemenl question d'eeheance prescrite dans les paragraphes 70(9.1). 70(9.3) ou 10(9.5), pour etablir la devolution «Iors du deces dll conjoint». Etant donne que la devolution se fait automatiquement, des preuve5 doivent etre fournics sans delai.

1. Voici des exemples de cas ou la question doit etre soulevee de savoir si lin bien particulier a ete, par devolution, irrevoca­blemcnt acquis (comme il est decrit ci·dessus).

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a) Un testateur qui veut que la propriete absolue de son entreprise agricole soit transmise en dernier lieu a son fils, tout en permeltant a son conjoint de jouir du bien de son vivant, pourrait normalementle faire, en vertu des clauses de son testament, d'une des fa90ns suivantes:

(j) il U:gue son fonds de terre a son fils, sous reserve que la veuve du testateur soit beneficiaire de l'usufruit sa vie durant; ou

(ii) il legue Ie fonds dc terre a sa femme, sa vie durant, et exige que la propriete absolue de ce bien soit cedee a son fils au ded:s de sa femme.

Dans les deux cas, Ie Ministere est d'avis que Ie bien sera, par devolution, irrevocablement acquis par Ie fils lors du deces du testateur. II en scmit de meme si Ie testament renfermait une clause selon laquelle Ie bien semit cede au fils advenant Ie remariage de la veuve.

b) En vcrtu des clauses d'un testament, Ie testateur legue son fonds de tcrre n son conjoint, sa vie durant, pourvuque la propriete absolue du fonds de terre soit transmise nux fils

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spouse. It is the Department's view that the property docs not vest indefeasibly upon the testator's death in either Ihe widow or the sons then alive. II does not vest indefeasibly in the spouse because she obtains only a life interest and it does not vest indefeasibly in any of the sons since the interest of cach of them is subject to divestment if he does not outlive the spouse. (e) According to the lenns ora will f!lfm land is, on the death of the testator, to be conveyed to a trust created by the will under which the testator's wife is entitled to receive all income of the trust that arises before her death. and no other person is entitled to receive any income or capital of the trust during her life time. On the widow's death the property is to be conveyed to the testator's son. The rollover applies to the transfer. on the testator's death. of the farm land to the spouse trust (paragraph 70(6)(b». The rollover also applies to the transfer (distribution) of the prop­erty to the son on the death of the widow (subsection 70(9.1». (d) Under the terms of a will, property has been transferred after the death of a taxpayer to a trust, as corpus of the trust, to be held in trust until the tax­payer's child attains a certain age when it must be distributed to the child for his use, absolutely, or to his e~!ate ifhe should die before attaining that age. In such {\ case the property will be considered to vest indefea~ibly in the child on the death of the taxpayer.

(e) Shares in a corporation, owned by the deceased immediately before his death, are directed by his will to go to his beneficiary. If, in such a situation, the shares are subject to a buy-sell agreement, the vesting o(the shares in the beneficiary would depend on the terms of the buy-sell agreement. Where the terms of the agreement provide that it is compulsory for the executor to sell and for the other party to buy them the shares subject to such a buy-sell agreement will not be considered to vest indefeasibly in the beneficiary. Similarly, shares that the will directs to be sold by the executor before settling the estate will not be consi­dered to vest indefeasibly in the beneficiary. On the other hand, it will be considered that shares Ihllt are subject to a buy-sell agreement vest indefeasibly in the beneficiary where the executor transfers the shares to the beneficiary before the option is exer­cised, and the buy-sell agreement is merely an option that mayor may not be exercised.

(f) The terms of a will may provide thllt a particular beneficiary is to receive land but, before any transfer or distribution can be made, a mortgage or charge must be placed on the land in order to provide funds to satisfy cash bequests to other beneficiaries. Not­withstanding the fact that his IWe must be encum­bered in this manner, the land will be considered to

_ have vested indefeasibly in the particular beneficiary.

IT-449

- 38 -

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qui survivent au conjoint. Le Ministere est d'avis que Ie bien n'cst pas, par devolution, irrevocllblement acquis, au de.ces du testateur, ni par la veuve ni par les fils alors vivants. Le bien n'est pas, par devolution , irrevocablement acquis par Ie conjoint, car ce demier ne jouit que de I 'usu­fruit, ni par les fils, etant donne que chaque fils doit aban­donner son droit s'i1 ne suevit pas au conjoint.

c) Selon les clausesd'un testament, un fonds de terredoit, au deces du testateur, etre Iransmis a une fiducie crece en vertu du testament, qui prevoit que la femme du testateur a droit de toucher tous les revenus tires de la fiducie avant son deces et qu 'aucune autre personne n 'a droit de toucher des revenus ou du capital dela fiducie, du vivant de la veuve du testateur. Au deces de la veuve, Ie bien doit etre transmis au fils du testateur. Le report s 'applique it III cession, au deces du testateur, du fonds de terre a la fiduciecreee au profit du conjoint en vertu de l'alinea 70(6)b). Le report s'applique egalement it la cession (transmission lors d'un prutage) du bien au fils lors du deces de In veuve (paragraphe 70(9.1».

d) En vertu des clauses d'un testament, un bien a ete transfere a une fiducie apres Ie deces d'un conttibuable, a titre de capital de la fiducie, et doit etre d6tenu en fiducie jusqu'a ce que l'enfaO't du contribuable atteigne un certain age. A ce moment-la, Ie bien doit etre transmis lors-d'un partage a renfant pour son utilisation absolue ou 11 sa succession. si I'enfant devait moueir avant d'aueindre I'age prescrit. Dans ce cas, Ie bien sera tenu comme ayantete. par devolution, irrevocablement acquis par I'enfant au decesdu contribuable. e) Des actions dans une corporation, detenues par Ie dC­funt imme.diatement avant son deces, sont transmiscs a son beO'eficiaire en \'ertu de son testament. Si, dans ce clls,les actions sont assujetties a un accord d'achat-vente, la devo­lution des actions au beneficiaire serait alors assujettie aux clauses de cet accord. Lorsque les clauses de I'accord prevaient que I' executeur testamentllire doit vendre les ac­tions et que les autres parties doivent les acheter, les actions asslIjetties a un lei accord d'achat-vente ne seront pas tenues comme etant, pardevolution, irrevocablement acquises par Ie beneficiaire. ParalU:lement, des actions qui, en vertu du testament. doivent etre vendues par I'executeur testamen­taire avant Ie reglement- de la succession, ne seront pas lenues comme etant, par devolution, irrevocablement ac­quises par Je beneficiaire. Par ailleurs, les actions qui sont assujetties a un accord d'achat·vente seront tenues comme etanl, par devolution, irrevocablement acquises par Ie bene­ficiaire, lorsque I'execuleur les transfere au beneficiaire avant que Ie choix ne soit exerce et I'accord d'achat-vente est alors simplement tenu comme un choix qui peut etre au ne pas etre exerce. f) Les clauses d'un testament pellvent prevoir qu 'un bene­ficiaire en particulier doit reccvoir un fonds de terre qui, avant que tout transfert ou transmission lors d'un partage puisse etre fait, doit etre greve d'une hypotheque ou d'une charge de fac;on a ce que des legs en argent puissent eire verses aux autres beneficiaires. Nonobstant Ie fait que Ie titre de propriete du beneficiaire doive etre greve de cette fac;on, Ie fonds de terre sera tenu comme ayant ele, par devolution, irrevocablement acquis par ce beneficiaire.