Producers who plan ahead and work with financial experts may be eligible for a capital gains exemption
By Kate Ayers
When producers think about selling their family farms, arguably one of the most important factors they should consider is the capital gains exemption.
Allison Henkell, a tax partner at BDO Canada LLP in Woodstock, Ont., provides farmers with a general overview of capital gains, explaining how producers can benefit from the exemption.
For starters, “capital gain is basically the difference between what you bought a property for and what you sold it for,” she said.
Capital gains can be quite large for properties that are in families for multiple decades or generations.
“For farmers, a lot the time, it is because they’ve held the land for a long time or because the property was transferred to them by a parent,” Henkell explained.
Producers looking to sell their farms may qualify for a capital gains exemption, which can help lessen the amount of tax they must pay at the time of sale.
Indeed, if farmers qualify, this exemption is the single largest tax break they can use, the OMAFRA website said.
“It is a $1-million exemption, so farmers don’t have to pay tax for the first $1 million of gain on qualified farm properties,” Henkell added.
The assets that qualify for capital gains exemption include land, quota and buildings, the website said. An interest in a family farm partnership qualifies for this exemption. If the farm is incorporated, shares of the company can qualify as well.
But farmers must be aware that many rules apply to land and Canada Revenue Agency (CRA) does not consider all farm properties to be equal.
“As soon as you have the idea you might sell, you may have to change some things to make sure the farm qualifies for this exemption and you can’t do that last minute,” Henkell said.
For example, if the current owner bought the property on or before June 17, 1987, the land must be used for ag at the time of sale or for any five years during its ownership, the OMAFRA website said.
If the farm was acquired after this date, two conditions may apply:
- The producer must have owned the farm for at least two years. The gross income from farming must be also higher than income from any other sources for at least two years.
- However, the income condition above is not applicable for properties used for at least 24 months in a family farm partnership or corporation. A direct relative, common-law partner or spouse must have been continuously active on the farm.
Henkell has assessed hundreds of farms. She reviews each file closely because CRA staff require land to meet specific criteria for the $1-million exemption to apply.
For example, “one of the big things we have to look at is that often farmland is rented. So, we must compare the length of time it was rented versus the length of time it was farmed” by the property owners, she said.
Given such specifications, Henkell suggests that farmers speak to tax advisers as early as possible. The person they speak to should be well versed in both taxes and agriculture, she said.
“All of the rules surrounding the capital gains exemption … are very similar to the rules around transferring land to the next generation without tax,” Henkell said.
“Some farmers have come in wanting to pass land onto their children but then their properties don’t qualify as farms and they are shocked.
“There are all of these little things. … If people had met with professionals, they could have set things up differently to qualify for the exemption,” she added.
The potential tax implications from the sale of a farm property can be significant.
“It’s a lot of dollars,” Henkell said.
“A $1-million gain is half taxable, so $500,000 of that gain is taxable and the highest rate it can be taxed at in Ontario is 53.53 per cent.
“It’s a big deal to get this right,” she added.
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