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Qualified farm property

Income Tax Act s. 110.6(1), s. 110.6(1.3), s. 110.6(2)

An individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $750,000 ($500,000 for dispositions occurring before March 19, 2007) capital gains exemption when the farm property is sold.

Income Tax Act s. 110.6(1) Qualified Farm Property Definition

Qualified farm property of an individual includes property owned by:

The qualified farm property can be:

(a)    real or immovable property as long as it is used principally (see note below) in the course of carrying on a farming business in Canada by:
        (i)    the individual
        (ii)   if the individual is a personal trust, a beneficiary of the trust that is entitled to receive directly from the trust any income or capital of the trust,
        (iii)  a spouse, common-law partner, parent or child of a person referred to in (i) or (ii),
        (iv)  a family farm corporation where any of the persons in (i) to (iii) above owns shares in the corporation, or
        (v)    a family farm partnership where any of the persons in (i) to (iii) above owns an interest in the partnership

Note:  Draft legislation was released on November 5, 2010 which would remove the word "principally" from (a) above.  This amendment applies to dispositions made after May 1, 2006.

Income Tax Act s. 110.6(1.3) Property Used in a Farming Business

There are rules about the period of ownership and the use of real property and eligible capital property in order to meet the qualified farm property requirements:

(a)    throughout the 24 month period immediately preceding the disposition of the property, the property must have been owned by one or more of
       (i)    the individual, or a spouse, common-law partner, child or parent of the individual,
       (ii)   a partnership, an interest in which is an interest in a family farm partnership of the individual or of the individual's spouse or common-law partner,
       (iii)  if the individual is a personal trust, the individual from whom the trust acquired the property or a spouse, common-law partner, child or parent of that individual, or
       (iv)  a personal trust from which the individual or a child or parent of the individual acquired the property;

and

(b)    one of the following requirements must also be met:
        (i)    in at least 2 years while the property was owned by the one or more persons mentioned above,
                (A)  the gross revenue of a person referred to in (a) from the farming business exceeded the income of that person from all other sources for that period, and
                (B)  the property was used principally in a farming business carried on in Canada in which an individual referred to in (a), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis, or
        (ii)    the property was used by a family farm corporation or partnership  in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time one of the persons mentioned above was actively engaged on a regular and continuous basis in the farming business in which the property was used.

If the farm property is real property that was acquired prior to June 18, 1987 and does not meet the above requirements, it still may qualify for the exemption.  To qualify, it must have been used by one of the persons mentioned above, principally in the course of carrying on the business of farming in Canada in the year of disposition, or in at least 5 years during which the property was owned by any of the persons mentioned above.