Producers are sometimes forced to make the tough decision to sell farmland when the suburbs become their neighbours.
However, with land prices being what they are today, what do you do about the potential tax on the sale?
Selling farmland doesn’t result in immediate tax consequences and in fact could open up opportunities for the farm to grow.
Tax consequences usually arise when farm property is sold for more than it was bought. Fortunately for farmers, there is an opportunity to make use of an exception to this result known as the “replacement property rules.”
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Under this rule, an election can be filed to defer the taxes that would otherwise have been owing if land used in a farming business is sold and replaced by land for a similar use. This means farmers who sell a valuable piece of farmland and buy new farmland at a lower price could increase the amount of land they own and worry about the taxes later.
The following criteria must be met for the sale of farmland to qualify under these rules:
- The original land being replaced must have been actively used in the business of farming.
- The new land must be for similar use as the old land and must be used by the taxpayer or a related person.
- The land must be taxable Canadian property if the owner of the land is not a Canadian resident.
- A letter of election must be filed.
Additional criteria will apply, depending on why the land was sold.
Replacement land must be bought and used for farming within 12 months of when the original land was sold voluntarily. That increases to 24 months when the land is sold involuntarily, such as expropriation by the government.
As a result, finding replacement land within the required time frame can sometimes be harder than accepting the offer to sell.
It is important to note that the replacement land can also be bought before the sale of the original land and still qualify.
The new land doesn’t have to be located in the same province as the land that was sold. This could allow an entire farm to be relocated with little to no tax consequences. The new land doesn’t have to be the same number of acres as the original land.
As well, the replacement property election can allow farmers to “swap” land. In many cases, members in a farm family will want to swap land with each other or a farmer may want to swap personal land with the farming corporation. In these situations, using the replacement rules can help mitigate the potential tax consequences.
The criteria for determining if a replacement property election is applicable can be complex. Early planning and professional help can allow farmers to meet their goals.
