TAX ALERT |
Authored by RSM Canada
This article was orginally published on October 1, 2018 and has been updated.
As a farm owner, bequeathing your farmland to another party or to the next generation may be on your mind. In general, farmland rollovers can be complex from a tax perspective. The rules differ depending on several factors, including:
- whether a spouse or a child is your intended beneficiary; and
- whether you are alive or have passed away at the time of the property transfer.
This article explains some of the tax implications surrounding farmland rollovers. With a clear picture of the rules and regulations, the process of transferring farmland, as well as preparing to do it, is far less daunting.
Capital gains and gifts…yes or no?
One of the most common questions is in regards to whether or not land is eligible for the capital gains exemption.
A number of rules apply when determining which land and assets are eligible. First, you will need to determine how those assets have been used.
As an example, Ms. Barley has a tax pool of farming machines that have depreciated – their current undepreciated value is $100,000. She can transfer the $100,000 pool of assets tax-free to her child; however, before the transfer takes place, she must be able to prove that the assets were used primarily in the farming business.
There is no tax implication in a case where farmland is passed along as a gift. The CRA assumes this property has been passed along at base property cost. Meaning, if a farmer pays $200,000 for a portion of land and later gives it to his or her child, the child, in turn, inherits that $200,000 as the base cost. However, if a farmer sells land to his or her child, it is often at a higher value, with a possibility to utilize his or her capital gains exemption on the gain.
Where spouses and children are concerned, certain stipulations apply
For transfers of land between spouses, the tax treatment depends upon whether the farmer is alive or deceased. A living farmer cannot transfer land tax-free to a husband or wife. Said land needs to be sold, in this case, at fair market value. However, if a farmland rollover occurs following the death of the farmer, all of his or her assets automatically transfer to your spouse on a tax-free basis, at the property’s cost.
Where children are concerned, the above rules remain the same when passing land to the next generation. However, while a spouse cannot receive your land tax-free if you are still living, a child can. Your child needs to be a Canadian resident before the transfer can occur.
Fair versus equal is a common challenge faced by farm families when considering a rollover and figuring out who gets what – for example, if one child wants to take on the farm and the other pursues a different career. Most parents want the allocations to be as fair as possible; however, there is no rule requiring allocations to be equal. You may chose to offer first right of refusal for the next generation farmer to buy or rent any land left to his or her sibling, or you may equalize allocations by providing other assets to the siblings who chose not to pursue farming.
This article was written by Rob Fischer and originally appeared on 2021-08-30 RSM Canada, and is available online at https://rsmcanada.com/our-insights/agriculture-insights/tax-implications-of-farmland-rollovers-what-you-need-to-know.html.
The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
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