What happens to the land and farm when you decide to quit?
A major consideration, according to Saskatoon lawyer Al Haubrich who practises in the Robertson Stromberg firm, is the $500,000 capital gains exemption. It can be used to transfer farmland or shares in a farming company to a spouse or child, or to sell to an unrelated third party without incurring capital gains tax.
If the farmer is incorporated and the land remains in the farming company, the land and assets are no longer eligible for the exemption. It is important that the owner maintain the capital gains exemption and rollover for the shares.
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In that case, at least 90 percent of the company’s assets should be farm property, as opposed to cash from sale of machinery or inventory.
Rather than a sale, you may want to retain farmland for the children or for the rental income to supplement your retirement.
For many years it was common for the retired farmer to custom farm the land to ensure that she could take advantage of the capital gains exemption and rollover rules.
However, changes to tax rules in 1991 mean you don’t have to custom farm to use those tax advantages, Haubrich said.
Prior to 1991, if farmland was not farmed at the time of transfer or at death when a transfer is deemed to have occurred, the transfer would not qualify for the rollover or capital gains exemption.
In 1991, the test became whether the land had been principally used in the business of farming. Canada Customs and Revenue Agency’s interpretation of principally used for farming is that the land has been farmed more years than it has been rented.
As a result, the career farmer, in most cases, does not have to be concerned that the number of rental years will exceed those that he farmed the land.
This interpretation also applies to the farming widow who inherits the shares of the farming company or the land. She can rent the farmland or have the company rent the farmland without being concerned about losing the capital gains exemption or the ability to roll over the land or shares to her children upon her death.
In determining the total farming years, all the years the land has been farmed as a proprietorship, a partnership and as a company are counted, Haubrich said. The years farmed by a parent are also counted.
In summary, Haubrich poses these questions and then answers them.
- Can the shares of a farm company that is now leasing its farmland still qualify for the capital gains exemption and rollover provisions?
Yes. The land would meet the requirement under the Income Tax Act if substantially all of the fair market value of the farmlands owned by the company had been used principally in the business of farming.
- If the farmland was owned personally would it qualify for the capital gains exemption? If the farmland had been used principally in the business of farming, which means it was farmed for longer than rented, then that land would qualify for the capital gains exemption and rollover provisions.
Of course, deciding whether to incorporate and transfer land to the company and deciding what to do with the farm upon retirement must be looked at on a case-by-case basis and before making decisions, professional advice should be sought.
My thanks to Al Haubrich for his assistance with these past three columns.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
