Q: I live in town but bought one quarter of farmland years ago. I now am retiring and want to sell it, after farming it myself for many years. Does it attract capital gains tax?
A: As my partners will quickly tell you, what I know about tax isn’t worth knowing. Still, this is an important question for many readers.
Generally, a capital gain or loss is triggered when you sell or dispose of property, creating a gain or loss. There are rules as to how the gain or loss is calculated.
If you sell your land outright, the rules will be engaged. However, there are numerous rules where there is a deemed disposition, which will bring the capital gains/losses rules into play.
They include exchanging one property for another, giving property other than cash as a gift, but also apply to land that is expropriated from you and property that is stolen or destroyed. Changing the use of property or settling a receivable are also considered.
If any of these and other rules apply to you, you must report the transaction to the Canada Revenue Agency on your annual tax return. It is done on a calendar year basis, so if your farm is incorporated, it still must report the capital transaction in the year it occurs.
Some, but not all, capital gains are eligible for the cumulative exemption or deduction. This can reduce your taxable income.
But make sure the property, which is the basis of the transaction, qualifies. The property must be qualified farm property. This will include items you or your spouse own such as land and buildings, shares in a farming corporation and intangible farm property such as milk or egg quotas.
If you are eligible, you are entitled to a cumulative lifetime capital gains exemption on $750,000 of net capital gains. All these gains have to come from transactions related to qualified property. Currently, only half the actual gain is taxable.
You also have to fill out a particular schedule or form on your tax return to claim this gain or loss. Be sure to fill it out correctly.
With land, you will need to know the year you purchased or acquired the land, the value or adjusted cost base, outlays and expenses incurred by the sale and how much the sale proceeds were.
You may also be able to add into your cost base any repairs on items that could not be used in your intervening years’ tax returns. You then calculate your gain or loss, report it, and either pay the tax or claim an offset or refund.
Bear in mind you will need to keep records pertaining to this transaction, even though you don’t have to file them with your actual tax return.
If you’re audited or the transaction is questioned, you need to be able to substantiate what you claim.
It is important to have records of the value of the property as of the date you purchase or otherwise receive it.
I always recommend obtaining the services of a competent accountant. They can save you a lot of money and aggravation and ensure you claim any gain or loss properly and legally.
Rick Danyliuk is a lawyer with McDougall Gauley LLP in Saskatoon.