As you bring in your harvest, you may be reminiscing of the hopes and dreams it has inspired, the valuable lessons you have learned, and the pride that it has brought you. You may be considering passing on the legacy to the next generation.
There is a lot of value in your farmland, which can raise tax concerns when passing it to the next generation.
From a tax perspective, if you have qualified farmland you may be able to:
- Gift it to your children or grandchildren during your lifetime or on death without triggering immediate tax.
- Sell it to the next generation for an amount up to fair market value and use your lifetime capital gains exemption.
Transferring land as a gift allows you to defer tax until the property is actually sold. This means if your child sells the land in the future, they would pay tax based on a gain using your original cost base. You may gift land on a tax-deferred basis while you are alive or upon your death. Your child must be a Canadian resident at the time of the transfer to qualify and they do not need to be actively farming at that time.
Selling land to your child above cost triggers a capital gain. However, this may allow you to claim your lifetime capital gains exemption. You can take payments over time or have a promissory note outstanding that you can forgive in your estate if you wish.
The sale to a child increases the land’s cost base for your child. This will reduce tax for any future generation in your family if they do eventually sell the land.
Considerations when weighing both options are as follows:
- Whether you sell or gift the land you are giving up some control. Ensure you are comfortable with this.
- Even if you do not need to receive any cash for the land, consider receiving a promissory note because this can provide you with protection for your retirement and allow you to retain some control.
- Consider if a matrimonial dispute may take place in the future with your child. Any growth in the land value from the time of gift or sale may be considered matrimonial property. A promissory note can also help here to have a clear line in the sand on values.
- Even if you claim the lifetime capital gains exemption, you may have to pay alternative minimum tax (AMT), which catches people off guard. Sometimes claiming a capital gains reserve to bring the gain in over time (maximum 10 years to children for qualified farm property) may help to reduce the AMT.
It is important to remember that everybody’s situation will be unique. Like any decision, you need to consider your specific situation and what will be in your best interest.
Talking to your professional adviser will ensure you know all the options available to you and your family.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com.