Deemed Proceeds of Disposition of Property

Subsection 69(11) was amended in 1998, applicable to a series of transactions beginning after April 26, 1995. Among other things, an exception for transactions with related persons (previously included in the definition of specified persons in subsection 69(12)) was replaced with an exception for transactions with affiliated persons. As a parent and child are not affiliated persons under section 251.1, subsection 69(11) could apply to a transaction designed to benefit a child with a deduction.

The particular situation the CCRA was asked to comment on was the transfer of farm property to an adult child on a partial rollover basis pursuant to subsection 73(3) or (4), followed by a disposition of the property. The child disposes of the property within three years and claims the capital gains exemption. Although the purpose of the disposition of the property to the child is to gain access to multiple capital gains exemptions, the subsequent sale of the property by the child is not anticipated at the time of the transfer to the child. As the child disposes of the property within three years, it is the CCRA's view that subsection 69(11) would apply to deem the disposition of the property to the child to occur at fair market value.

In another document, the CCRA commented on the application of subsection 69(11) in several situations involving farm property.

Transfer of Property to Corporation

As part of an estate and succession plan and/or to comply with provincial land use regulations, Father wishes to incorporate his farming business and include Son as a shareholder. As part of the series of transactions, Father transfers farmland qualified farm property, having a fair market value of $500,000 and an ACB of nil to Son for no consideration. Father and Son then incorporate Farmco and Father transfers farmland with a fair market value of $1,000,000 and an ACB of nil to the corporation. Father receives, as consideration, a non-interest-bearing demand note for $500,000 and preferred shares with a redemption–retraction amount of $500,000. Father elects under section 85 to transfer the farmland at $500,000. Son then transfers the farmland, received from Father, to the corporation for a $500,000 non-interest-bearing note.

Some provinces have enacted legislation regarding the amount of farmland that one individual can own. A transfer of excess land to a relative, Son, and/or a corporation with other persons as shareholders, Farmco, would comply with the legislation. Estate planning is also a motivation for the transaction.

Subject to the application of subsection 69(11), paragraph 73(3)(b) applies to the transfer of the farmland to Son. For subsection 69(11) to apply, one of the main purposes of the transaction must be to obtain a benefit described in paragraph 69(11)(a) or (b). Whether the main purpose of the transactions is to comply with provincial land use restriction or to facilitate estate planning and not to obtain a benefit described in subsection 69(11), is a question of fact. However, it is the CCRA's view that subsection 69(11) could apply where there is a non-tax purpose to the transaction, unless Son holds the land for three years prior to the transfer to Farmco.

Transfer to Partnership Followed by Transfer to Corporation

In a variation of the transactions, Father and Son transfer their interests in the land to a partnership, FarmPart, with each electing at $1 under subsection 97(2). After one year, Farmco is incorporated with Father and Son as the common shareholders. FarmPart transfers the land to Farmco for consideration that includes a promissory note for $1,000,000 and preferred shares. FarmPart elects under subsection 85(2) at $1,000,000. Utilizing subsection 85(3), the note and preferred shares are distributed to Father and Son. The capital gain realized by the partnership is allocated, based on the partnership's income sharing formula, to Father, 51%, and Son, 49%. Subject to the application of subsection 110.6(11), Father and Son claim the capital gains exemption with respect to the gain allocated by the partnership.

Although the capital gain exemption is claimed with respect to a gain realized by the partnership, and not with respect to the property, the farmland, or a substituted property, the partnership interest, it is the CCRA's view that subsection 69(11) would be applicable. It is the CCRA's view that subsection 69(11) does not require that the non-affiliated person dispose of the property. The provision requires that the deduction be available with respect to the subsequent disposition. The CCRA also notes that subsection 103(1.1) could apply to the allocation of the gain by the partnership.

Technical Interpretation, Business and Publications Division, December 15, 2000; File Nos. 2000-0042945, 2000-0015595

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