The provisions of the Income Tax Act governing when a taxpayer can claim the capital gain exemption in respect of farm property are complex. Otteson v R, 2014 TCC 250, is an interesting case that navigates the provisions in the context of a rather complex set of facts.
Among other issues, Justice Hogan considered when property is “used principally” in a farming business. He found that part of a piece of real property can be “used principally” in a farming business and that only that part will be eligible for the exemption.
The latter proposition is a surprise. I have no difficulty with the idea that one could decide whether a piece of real property is used in an active business based on factors other than the use to which its area is put. On this point, see CRA technical interpretation 2009-0307931E5 (November 5, 2009), in which the CRA wrote:
The square footage use of a building is generally accepted as a factor to be given significant weight in the determination of the particular use to which the building is put. However, qualitative factors need also be considered. If the fair rental value of the space rented to tenants is greater than the fair rental value of the space used in an active business, this may indicate that a building is not used principally in an active business. Whether such a factor would be decisive in relation to the square footage test would have to be determined on a case by case basis. We are unable to provide a definitive comment without the opportunity to review all the relevant facts.
Justice Hogan’s comments, however, seem to suggest a different approach, which might entail having to make an allocation between the value of the property used in the business and the value not used in that manner. On this view, every property might be regarded, at least in part, as an active property, but only the value of that part would count toward meeting the asset tests.
