The recent federal budget increased the lifetime capital gains deduction limit to $1 million from $800,000 for qualified farm property that is disposed after April 20, 2015.
This increase could result in more than $40,000 of tax savings, depending on the province. Farmers need to know their options and how they can benefit from these recent changes.
Every individual is eligible to claim the capital gains deduction, but it is limited and can be applied only to capital gains on certain small business shares and farm or fishing property.
Specific criteria relating to how long the asset was held and what it was used for must be met for the asset to be considered qualified farm property and be eligible for the deduction.
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Being able to meet the criteria and use the deduction can have significant benefits.
For example, consider the situation where a farmer decides to sell land. If the farmer received $1.2 million in proceeds but paid only $200,000 for the land 20 years ago, the gain would be $1 million.
If the land meets the criteria of qualified farm property and the farmer has never used his lifetime capital gains deduction, he could use the exemption to avoid paying tax on the $1 million gain.
Depending on where the farmer lives, he could avoid paying more than $200,000 of tax on the sale of that land.
Aside from simply selling an asset and making use of the deduction, there are a number of other ways to make use of this provision:
- Transfer land — If you hold land personally and have or are considering setting up a farming corporation, consider transferring the land over to the corporation and make use of the deduction. This allows you maintain ownership of the land indirectly through the corporation while still being able to use the capital gains deduction.
- Estate planning — A farmer may have no desire to sell his qualified farm property, but his estate can still make use of the deduction to significantly reduce the beneficiaries’ tax exposure if they ever decide to sell the property.
There are also other factors to consider:
- Alternative minimum tax — This applies when your taxable income is high but a deduction has been used to keep taxes low. There are strategies to reduce the AMT, but this planning will need to occur before the assets are sold.
- Old Age Security — Selling an asset results in a capital gain that will increase net income, regardless of whether it is taxable. Old Age Security payments will start to be reduced if net income exceeds $71,500.
Contact a professional to help identify how you can benefit from the recent federal changes and what tax planning opportunities are available to save money.
