When it comes to buying or selling farmland, it is important to know when the Goods and Services Tax must be charged and whether the buyer or the seller is responsible to send the GST to the government.
As a seller, not charging GST on a taxable sale of farmland could mean having to reduce your proceeds to pay the outstanding GST to the government.
First off, farmland is not only the land used in your farming business.
GST can also apply to vacant land, such as bush area, that may not be directly used in the farming business, and any fixtures on the farmland, such as a barn or corral.
Generally, if you personally own farmland and sell it, GST must be charged on the sale. However, there are some circumstances in which no GST needs to be charged or the seller is not responsible to collect and remit the GST to the government.
If you sell farmland to a direct relative (a child, grandchild, or former spouse) you do not need to charge GST if they are buying the farmland for their personal use and enjoyment.
However, if the relative buying the farmland will be using it for farming or other commercial purposes, GST will need to be charged on the sale. Ensure this is appropriately addressed in any matrimonial disputes or transfers to the next generation.
If the buyer is registered for GST, the government requires that they report the GST owing on the purchase on their GST return instead of paying it to the seller.
If the buyer will be using 90 percent or more of the farmland in their farming business, they can claim an input tax credit (ITC) to offset the GST paid on the purchase (commonly known as self-assessing). Due to this, if you are thinking of buying farmland to expand your operations, it is recommended that you are registered for GST.
On the flip side, if you are the seller, it is recommended that you confirm the purchaser’s registration status at the time of the sale. This is due to the fact that if neither the buyer nor seller are registered for GST, it is still the seller’s responsibility to collect and remit the GST to the government.
As you can see, if you are considering buying or selling farmland, there are lot of factors to consider to make sure GST is being charged and remitted to the government correctly. Make sure to discuss all factors with your adviser before the sale or purchase.
Thank you to Riley Honess and Kristen Schafer of KPMG for their assistance with writing this article.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.