The Art of the Deal by U.S. President-elect Donald Trump comes to mind when looking at selling the farm.
There can be some “huge” (or “yuge”) tax savings by structuring this deal properly.
For those who are incorporated, structuring the deal includes deciding whether to sell the shares of the farm corporation or sell the land out of the farm corporation.
In most cases, it is more beneficial to sell the shares of the corporation. This results in a personal capital gain and falls under one of the common tax planning rules that give preferential treatment to capital gains over other types of income.
On the other hand, selling the land out of the corporation triggers tax on the capital gain that the corporation must pay. Corporations cannot access the farm capital gains exemption.
There are rules that can be used to minimize the tax, but these layers usually add up to more tax than selling the shares of the corporation.
Selling the shares of the corporation can allow you to use your lifetime capital gains exemption. A common misconception is that you have lost your ability to use the lifetime capital gains exemption when all of your land is owned in a corporation. This is not the case.
The lifetime capital gains exemption on farm property will exempt you from $1 million in capital gains. This can translate into tax savings of up to $250,000, depending on which province you live in.
However, using the lifetime capital gains exemption on shares is not as straight forward as using it on land. You must meet the following rules to do so:
- ensure that more than 90 percent of the corporation assets are farming assets at the time of sale
- ensure that more than 50 percent of assets in the corporation over the past two years are farming assets
- ensure that you will have owned the shares of the corporation for at least two years.
If there are assets that are not used in farming, such as large cash balances or other investments held within the corporation, you would have to move them to ensure you meet the rules. It is important to know these rules and discuss them with your accountant annually to ensure you are on-side.
You may hear your professional advisers discuss “purification.” This is the planning we do to ensure your corporation is “pure” to meet the above rules and qualify for the lifetime capitals gains exemption.
Common purification strategies include:
- paying higher dividends to strip cash out to a personal level
- setting up a holding company to hold non-farming assets in order to avoid the personal tax when moving amounts
- setting up a family trust to distribute cash among family members to provide for better income splitting
These strategies allow you to control the amount of non-farming assets in your farming corporation.
Seek professional advice to ensure you meet all of the qualifications before it comes time to sell your farm.
Riley Honess and Chelsea Shaw of KPMG contributed to this article. Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.