Family Farm Tax Planning Strategies
If you own a family farm and are considering transferring it during your lifetime, you may need to address a number of issues relating to the transfer. Some of these issues you may need to consider are:
A rollover provision permits property to be transferred between certain persons without incurring an immediate capital gain, capital loss, recapture of capital cost allowance (“CCA”) or terminal loss. Instead, the tax is deferred until the person to whom the transfer is made (the “transferee”) disposes of the transferred property or is deemed to have disposed of it (for example, on death).
Rollover to Your Spouse
Transferring capital property to your spouse or common-law partner enables you to defer the tax that would otherwise arise.
Rollover to a Spousal Trust
You may also defer the tax liability by transferring capital property to a spousal trust (or common-law partner trust) provided both you and the spousal trust are resident in Canada at the time of the transfer.
Rollover to a Corporation
You may defer the tax on income, capital gains and/or recapture of CCA or cumulative eligible capital where you transfer “eligible property” to a taxable Canadian corporation and certain requirements are met. For example, part of the consideration you receive in exchange for the transferred property must include shares of the corporation and you must file the necessary joint election within the required time period.
Rollover to a Partnership
The provisions and rules relating to a rollover of property to a partnership are similar to those applicable to the rollover to a corporation discussed above. In this case, however, the transferee must be a Canadian partnership of which you are a member.
Rollover of Farm Property from a Parent to a Child
You may transfer certain farm property to your “child”, defined as noted below; on a tax-deferred basis provided your child is resident in Canada immediately before the transfer.
Rollover of Shares in a Family Farm Corporation or an Interest in a Family Farm Partnership from a Parent to a Child You may transfer shares of the capital stock of a family farm corporation or an interest in a family farm partnership to your child (broadly defined as noted above) on a tax-deferred basis provided your child is resident in Canada immediately before the transfer.
A tax exemption can reduce or eliminate a capital gain on the disposition of a taxpayer’s capital property. The following outlines some of the exemptions that may be available on a disposition of farm property.
Principal Residence Exemption
The principal residence exemption exempts gains on the disposition of a personal residence provided certain conditions are met, as outlined below. Farmers may use one of the following two methods to calculate the gain on a disposition or deemed disposition of their principal residence where that residence is located on farmland:
- Under the first option, your residence and ½ hectare of adjacent land can be designated as your principal residence. The capital gain would then be exempt from tax. Land in excess of ½ hectare may also qualify but only to the extent that it is established to be necessary for the use and enjoyment of the farmhouse as a residence.
- Under the second option, you could elect to deduct from the total capital gain on the entire property (your residence and farmland), the sum of $1,000 plus an additional $1,000 for every year since 1971 that the residence was your principal residence.
Capital Gains Exemption
A $1,000,000 capital gains exemption (or $900,000 if you had previously claimed the $100,000 capital gains exemption that was eliminated on February 22, 1994) is available to an individual (other than a trust) who is resident in Canada throughout the year and who disposed of qualified farm property or qualified small business corporation shares in the year.
As the tax rules relating to the transfer of the farm property are very complex, you should ensure that you involve professional legal and accounting advisors who are knowledgeable in this area in your planning.
Note that if you currently do not qualify for a rollover or exemption, it may be possible to undertake certain steps during your lifetime, which could enable you to qualify for a rollover or exemption at the time of a future transfer. You should discuss this further with your professional advisors.
By Adrian C. Spitters, FCSI®, CFP®, FMA