If you’re thinking about selling your farm, you should visit your accountant first
When the time comes to sell farmland, a lot of considerations come in to play. One factor you should have a good grasp on is the lifetime capital gain exemption (LCGE).
Clint Gifford is a tax partner with Virtus Group and is based in Saskatoon. Producers should visit a professional to plan farmland sales, he said.
“If you've farmed for long enough, you're going to realize a big gain (in farmland value). It's a significant portion of your wealth and it's a big decision,” he said.
The best-case scenario is when farmers visit their accountants before selling land as the professionals can ensure producers can use their LCGEs. Unfortunately, the situation doesn’t always work that way, said Gifford.
“Sometimes they come and say ‘Oh, hey, I sold my farm this summer. Now it's time to do my taxes. What do I need to do?’” he told Farms.com.
For farmers, The LCGE is $1-million worth of potentially tax-free capital gains on certain types of property per person in his or her lifetime.
“If you have certain types of property and realize a capital gain on it, we will offset the amount that would otherwise be taxable by using up this capital gains exemption. Farmers have the widest use available for the capital gains exemption. Not only is their exemption the highest at a million dollars, but they also have the widest variety of assets that qualify to be capital gains eligible,” said Gifford.
Qualified farm property that falls under the LCGE includes farmland, interest in farm partnerships and shares of a family farm corporation, said Gifford.
To qualify for an LCGE, the land being sold must have been used in active farming for at least two years.
Some hiccups may arise if someone has already claimed an allowable business investment loss (ABIL) or a cumulative net investment loss (CNIL), said Gifford.
These “would affect my ability to claim the capital gains exemption. It doesn't mean that I can't, it just means that these amounts that I might have claimed prior for tax purposes cause me trouble when I try to claim the LCGE. Now, I might have to pay tax on some of the gain before I get back to that non-taxable portion,” he said.
If the ABIL or CNIL don’t affect your ability to claim the exemption, it still might not be tax free, said Gifford.
“On sizable exemption claims in any one year, there can be something called alternative minimum tax (AMT), which is another complicated calculation. It can mean that the person claiming the gains exemption might have to pay some tax that year that is potentially refundable in the future,” he said.
As long as you continue to pay taxes in Canada, you’ll receive a credit for the AMT you paid this year for up to seven years, said Gifford.
“A common mistake is that it's farmland (so people assume) it's tax free. That can be the case, certainly, and that's what you aim for. But it's not always the case,” he said.
Another important note is companies don’t get the exemption, said Gifford.
“A farmer may have land that he owns personally and land that he owns in his company. If he sells the land that he owns personally, he can claim the gains exemption. If the purchaser instead … buys the piece of land from the company, it can't use the gains exemption,” he said.
Pra-chid/iStock/Getty Images Plus photo