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Multi-Level Farming Structures and the Capital Gains Exemption
Taxpayers selling a farming (or fishing) business will want to have the
assets that are being sold qualify as “qualified farm or fishing
property” (QFFP) so that the sale will be eligible for the capital gains
exemption of $1 million in 2016 under subsections 110.6(2) and (2.2)
(the farming exemption). Some multi-level structures will not be
eligible for the farming exemption; in that case, the taxpayer can
either (1) restructure to qualify and delay the sale by 24 months, or
(2) claim the more limited QSBC shares capital gains exemption under
subsection 110.6(2.1) ($824,176 for the 2016 taxation year).
For shares to qualify as QFFP, the farming business must be carried on
actively and continuously by the individual, his or her spouse, or his
or her child; and the farming property must be used by any of those
individuals, the corporation (whose shares are being disposed of), a
related corporation, or a partnership in which the individual has an
interest for 24 months. In addition, at the time of sale, all or
substantially all of the fair market value of the properties must be
attributable to the properties used in the farming business.
One problematic ownership structure is that in which the farming
business is carried on by a partnership owned 50 percent by Holdco and
50 percent by D Co, as illustrated in figure 1. Holdco is also owned by
another holding company (C Co), which is owned by individual C. D Co is
owned by individual D; individual C and individual D are arm’s-length
parties.
In order to qualify as QFFP, the D Co shares must be shares of the
capital stock of a family farm or fishing corporation as defined in
subsection 110.6(1). However, element (a)(i)(F) of the definition
requires that individual D hold an interest in the partnership that is
carrying on the farming business, which he or she does not.
Nevertheless, the CRA has stated that when a partnership carrying on a
farming business has only one level of corporate partners, the corporate
partner will be considered to carry on the business of the farm
partnership (CRA document no. 2008-0299741I7, March 16, 2009). This
statement qualifies the shares as QFFP under element (a)(i)(A) of the
definition. Thus, by virtue of this administrative relief, the D Co
shares are QFFP.
The C Co shares do not seem to be able to benefit from this relief
because they are two levels above the partnership and therefore are not
QFFP. Thus, there is a choice between claiming the $824,176 exemption
for QSBC shares and claiming the $1 million farming exemption provided
to QFFP by restructuring and waiting 24 months before selling. The
restructuring would require individual C to have at least a nominal
direct interest in the partnership. This strategy might have an adverse
effect on individual D, who, as a commercial matter, would probably also
have to wait 24 months before being able to sell.
Authors’ note: In an earlier version of this article, we addressed
the situation in which the farming business is carried on in Opco, which
is owned 50 percent by Holdco (100 percent owned by taxpayer A) and
50 percent by taxpayer B (an arm’s-length party). We suggested that in
this ownership structure taxpayer A’s shares in Holdco would not qualify
as QFFP. Our view has now changed. When one is making this
determination in the situation where Holdco relies on the shares of Opco
to qualify (using subparagraph (a)(ii)), subparagraph (a)(i) is applied
from Opco’s perspective. Thus, if farming assets are held in Opco, Opco
will be “the corporation” in clause (a)(i)(A), and taxpayer A’s shares
in Holdco are QFFP. We thank an alert reader for suggesting this line of
reasoning.
Henry Shew and Jody Wong
Cadesky Tax, Toronto
hshew@cadesky.com
jwong@cadesky.com
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