Agriculture is an important industry for Canada, with over 200,000 farms averaging approximately 800 acres currently in operation. Farm performance remains strong, and asset values, particularly land, continue to grow. Like other business owners, farmers need to carefully plan for succession of their business operations.
Important considerations include:
- Funding any income tax liability that arises with the deemed disposition of the farm property upon death;
- Estate distribution among heirs, particularly where not all heirs inherit the farm; and,
- The financial needs of surviving family members.
The government provides a number of tax rules of benefit to farmers, including:
- A deduction from capital gains realized on the disposition of qualified farm property. The farm may be incorporated, in which case the shares of the farm corporation may qualify for the capital gains exemption. Alternatively, the farmer may be a sole proprietor, in which case the assets of the farm operation may qualify.
- A tax-deferred rollover of farm property and/or shares of a farm corporation to a child. This provision allows farmers to defer the payment of income tax on accrued gains embedded in the farm property indefinitely, so long as the farm stays an active farm in the family. In addition, an election can be made so that the transfer occurs at an elected price, which would allow the parent to crystallize his or her capital gains exemption, and the child to increase the adjusted cost base of the farm property received.
It is important to note that the definition of what qualifies is different for these two provisions.
Income Tax Rollover
For farm property to qualify for the rollover, the property must have been used principally in a farming business carried on in Canada. The rollover will be allowed on an inter vivos or testamentary basis between a parent and his or her “child.” In addition, one of the parents, grandparents or a child of the transferor must be actively engaged in farming on a regular and continuous basis at the time of the transfer of property. The word “principally” is generally defined to mean more than 50 per cent.
The provision uses the extended definition of child, which includes a natural or adopted child, a grandchild and an individual married to, or in a common-law relationship with, a child or grandchild. In addition, the child receiving the property must be resident in Canada at the time of receipt, and in the case of a transfer on death, property must vest in the child within 36 months of the death of the transferor.
The shares of a farm corporation can qualify for the rollover if they meet the definition of “capital stock of a family farm corporation.” In general terms, the definition requires that “all or substantially all of the fair market value of the property owned by the corporation was used principally in a farming business in Canada where the person, spouse, common-law partner, child, parent, or a partnership that itself meets the definition of a family farm partnership was actively engaged on a regular and continuous basis.”
Capital Gains Exemption
Farm property that qualifies for the capital gains exemption is generally property owned by the individual that is used in the course of carrying on the business of farming in Canada by the individual, a spouse, common-law partner, child or parent. It is important to note that it does not matter who is acquiring the farm property in order for the transferor to qualify for the capital gains exemption.
For farm property purchased before June 18, 1987, the term “used in the business of farming” means the property was used in at least the 24 months prior to the disposition in the farming business, or was used at least five years during the entire period of ownership in the business of farming.
For farm property purchased after June 17, 1987, the term “used in the business of farming” means the property was owned for at least 24 months before the disposition, used mainly in the business of farming, and in any 24-month period the gross income from the farming operation was greater than the business income from all other sources.
Shares of a farm corporation that qualify for the capital gains exemption are generally defined as follows:
- The shares were owned by the individual at the time of disposition;
- Throughout the immediate 24-month period, more than 50 per cent of the fair market value of the property owned by the corporation was used principally in a farming business carried on in Canada by the individual, spouse, common law partner, child; and
- At the time of disposition, all or substantially all of the property of the corporation was attributable to a farming operation carried on in Canada.
A farmer therefore has two valuable income tax provisions that could apply in his/her situation, and it is important to comply with the criteria of each provision in order to qualify for the income tax benefit.
Note: Similar provisions for fishermen permit rollovers similar to those available to farmers.
E.O. & E.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.