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Tax Planning For the Transfer of Your Family Farm on Your Death

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If you own a family farm you will need to address a number of issues relating to the transfer of the family farm on your death.

ROLLOVERS

One strategy for minimizing tax on death includes the use of certain rollover provisions. A rollover provision permits family farm 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 liability is deferred until the person to whom the transfer is made (the “transferee”) disposes of, or is deemed to have disposed of, the transferred property.

Rollover to Your Spouse

You may defer the tax that would otherwise arise on your death if, as a consequence of your death, certain property is transferred or distributed to your spouse or common-law partner. In general, opposite sex and same sex partners are considered to be common-law partners for tax purposes after a period of 12 months cohabitation. Accordingly, all references to a “spouse” in this Reference Guide apply equally to a common-law partner. (Similarly, all references to a “spousal trust” apply equally to a common-law partner trust.)

Rollover to a Spousal Trust

You may also defer the income tax that would otherwise arise on your death if, as a consequence of your death, certain property is transferred or distributed to a qualifying spousal trust (or a common-law partner trust).

Rollover of Farm Property from a Parent to a Child

Where you owned land in Canada or depreciable property of a prescribed class in Canada, you may be able to transfer the property to your child on a tax deferred basis on your death where:

  • before your death the property was used principally (i.e. more than 50%) in a farming business in which you, your spouse or any of your children was actively engaged on a regular and continuous basis;
  • on or after your death the property was transferred or distributed to your child as a consequence of your death;
  • your child was resident in Canada immediately before your death; and
  • within 36 months of your death the property becomes indefeasibly vested in your child. The Minister of National Revenue may grant an extension of this vesting period within the 36-month period.

Rollover of Farm Property from a Spousal Trust to a Child

A tax deferred transfer from a qualifying spousal trust (or common-law partner trust) to your child may be available where:

  • land in Canada or depreciable property of a prescribed class in Canada was transferred or distributed to a spousal trust that was created either during your lifetime or by your Will;
  • the property (or certain replacement property) was used in the business of farming immediately before the death of your spouse;
  • on the death of your spouse, the property was transferred or distributed to your child as a consequence of the death of your spouse;
  • your child was resident in Canada immediately before the death of your spouse; and
  • the property indefeasibly vested in your child.

Rollover of Shares of a Family Farm Corporation from a Parent to a Child

A share of the capital stock of a family farm corporation may be transferred to your child on a tax deferred basis where:

  • on or after your death the share was transferred to your child as a consequence of your death;
  • your child was resident in Canada immediately before your death; and
  • within 36 months of your death the share becomes indefeasibly vested in your child. The Minister of National Revenue may grant an extension of this vesting period within the 36-month period.

Rollover of an Interest in a Family Farm Partnership from a Parent to a Child

An interest in a family farm partnership may be transferred to your child on a tax deferred basis where:

  • on or after your death your partnership interest was transferred to your child as a consequence of your death;
  • your child was resident in Canada immediately before your death; and
  • within 36 months of your death the partnership interest becomes indefeasibly vested in your child. The Minister of National Revenue may grant an extension of this vesting period within the 36-month period.

Rollover of Shares of a Family Farm Corporation or an Interest in a Family Farm Partnership from a Spousal Trust to a Child

Shares of a family farm corporation or an interest in a family farm partnership may be transferred on a tax deferred basis from a spousal trust (or common-law partner trust) to your child where:

  • the spousal trust was established during your lifetime or by your Will;
  • the property was, immediately before the transfer to your child, a share of the capital stock of a family farm corporation or an interest in a family farm partnership;
  • the property was, immediately before the death of your spouse, a share of the capital stock of a family farm corporation (however, the trust, spouse, common-law partner, child or parent does not have to be actively engaged on a regular and continuous basis in the corporation’s business immediately before the death of the spouse or common-law partner) or an interest in a partnership that carried on the  business of farming in Canada and in which it used all or substantially all of its property;
  • on the death of the spouse, the property was transferred or distributed to your child as a consequence of the death of the spouse or common-law partner;
  •  your child was resident in Canada immediately before the death of your spouse; and
  • the property indefeasibly vested in your child.

Rollover to a Parent

You may roll over land, depreciable property of a prescribed class, shares of a family farm corporation and an interest in a family farm partnership to a parent if:

  • you received the property from a parent pursuant to certain rollover provisions available during life or on death;
  • as a consequence of your death, the property is transferred to your parent;
    and
  • your personal representative elects in your income tax return for the year of death to realize a full or partial capital gain, capital loss, recapture of CCA or a terminal loss by electing to have the asset transferred for proceeds of disposition equal to any amount between its fair market value immediately before your death and certain other values depending upon the type of asset being transferred.

EXEMPTIONS

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 your death with respect to the deemed 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.

Capital Gains Exemption

A $800,000 capital gains exemption (or $700,000 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 or is deemed to have disposed of qualified farm property or qualified small business corporation shares in the year.

CONCLUSION

As the tax rules relating to the transfer of the family farm on death are complex, it would be important to 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 on death. You should discuss this further with your professional advisors.

– By Adrian C. Spitters, FCSI®, CFP®, FMA

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About the Author:

Adrian Spitters is an avid writer and blogger who recognizes the need to publish on issues relating to the retiring farmers, by offering information and insight to help them transition into retirement and create sustainable multi-generational family wealth.

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