A parent can transfer farm land to their child on a tax-deferred basis on their death provided certain requirements are met
James is married to Mary and they have a son Bob.
In 1996 James acquired a section of land, which he farmed until he retired in 2014. Since James retired, the land has been rented to a neighbor, George, who uses it in his farming business. The land has increased in value since it was acquired.
The land will eventually be transferred to Bob after James dies. James does not want his estate to pay any income tax on the transfer of the land to his son. James and Mary have both used their capital gains exemption.
A parent can transfer farm land to their child on a tax-deferred basis on their death provided certain requirements are met. One such requirement is, before the transfer, the land must have been used principally in the business of farming in which the taxpayer, his or her spouse or child was actively engaged on a regular and continuous basis.
The Canada Revenue Agency has indicated that a property is considered to be used principally in the business of farming if more than 50% of its use is in that business.
If James were to die in 2006, the land could not be transferred to Bob on a tax deferred basis because the land would not have been used principally in the business of farming in which James, Mary or Bob was actively engaged on a regular and continuous basis. Rather, the land was leased to George for seven of the 10 years that James owned the property.
If James died first the land could be transferred on a tax-deferred basis to a qualifying spousal trust for Mary. This is because in order to achieve a tax deferred transfer to a spousal trust, there is no similar requirement that the land be used principally in the business of farming.
On Mary’s death, the land could be transferred to Bob on a tax deferred basis provided that the land was leased to someone, such as George, who used it in a farming business at the time of Mary’s death and the other requirements for the rollover are met. This is because the requirements for a tax-deferred transfer from a spousal trust to a child are less stringent than those for a transfer from a parent to a child. For a transfer from a spousal trust to a child, the user of the property does not have to be the parent or the child, provided the land is used in a farming business.
– By Adrian C. Spitters, FCSI®, CFP®, FMA