Estate plans are key when trying to figure out how to keep non-farming children involved in the family operation
Farmers with children who will eventually inherit the farm but do not necessarily want to farm it may consider transferring the land to those individuals. This can be done in a couple of ways.
In Saskatchewan, for instance, land can be held by multiple individuals in two ways: as joint tenants or as tenants in common.
When land is held by joint tenants, all of the owners’ names are on the same title.
When land is held as tenants in common, each owner receives a fractional interest in the land and each fractional interest has its own title.
“One joint tenant cannot transfer the land without the authorization of the other joint tenants, whereas an owner of a fractional interest in a piece of land could transfer their fractional interest to someone else without the consent of the other owners of fractional interests in that piece of land,” says Michael Weger, lawyer with NSWB Law Firm at Weyburn, Sask.
Both options have legal pitfalls, he says.
Creditors, rural municipalities looking for taxes in arrears or an ex-spouse looking for family property could all bring claims against the land.
Potentially, the new owners might disagree on how the land is to be managed — conventional versus organic; cash versus crop share; sold versus kept and other possibilities.
Then there’s the issue of death. Typically, if one joint tenant dies, their interest does not form part of their estate but passes to the surviving joint tenants. Thus, that tenant’s interest in the land could go not to his or her heirs, but to the other joint tenants.
But if the land is held as tenants in common, the deceased person’s share would pass to his or her heirs.
“Most importantly, a transfer of land to children can have some unexpected income tax implications for both the parent and the child and therefore a tax planner needs to be consulted prior to any decision being made,” says Weger. “The parent may incur a capital gain as a result of the disposition and if the children receive income from the land they will be required to report this new source of income.”
Putting the land into a trust and naming the children as beneficiaries is an option.
A trust is a legal relationship in which property is held by one party for the benefit of another. In this case the property in question would be held for the children by a trustee. The original owner of the property (the parent) is called the settlor.
“This is an option, but not one that I see many clients using these days,” says Weger. “The transfer of the land to the trust will trigger a capital gain for the farmer on the disposition of the land. If the farmer has not used up the capital gains exemption they may want to wait and let the land keep rising in value before triggering the gain.”
Sharing farm income with multiple children may be one of those situations where this could work, he says, but the farmer may have a difficult decision appointing a trustee that will manage the trust. Also, unless the children are in lower tax brackets than the farmer, the income benefits may be minimal and the end benefit will be different for each child based on their tax bracket.
If the beneficiaries are minors, any income earned would have to be claimed on the farmer’s income tax return as well.
Also, a trust created during the settlor’s lifetime must dispose of its assets every 21 years, and at fair market values. This disposal could result in capital gains taxable to the trust.
“The use of trusts in estate planning, however, is much more common and is still popular in many situations despite changes in 2016, which affected the tax treatment of testamentary trusts,” says Weger.
By creating trusts in your will for your spouse or children, land can be passed on to the next generation so that the income and future capital gains can be divided among multiple beneficiaries rather than being taxed all in the hands of one beneficiary.
Legislation pertaining to trusts is similar across Western Canada and much of the law around the establishment of trust has evolved from common law. The taxation of trusts is the same across Canada as per the Income Tax Act, says Weger.
“Every situation is unique and the decision to look to using a trust is one that requires careful planning and communication with your lawyer and tax adviser.”