The inheritance of agricultural land in Canada is a significant concern for farm families who wish to pass down their land and operations to future generations.
While Canada does not have a specific inheritance tax, there are still considerable potential tax obligations associated with transitioning agricultural land.
Another increasing concern for many farm families are future tax changes that could be significantly detrimental to the family farm transition.
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Many people have taken note of recent tax law changes in the United Kingdom concerning the transition of farmland and have wondered about what may happen on our side of the pond.
Currently under Canadian tax laws, capital gains tax on farmland is the most significant estate and succession issue for family farms.
The tax is levied on the difference between the original purchase price of the land and its fair market value at the time of transfer or sale. Because farmland has appreciated over the years, the increase in value may result in a substantial capital gain, which is subject to taxation.
When agricultural land is transferred or inherited, it is normally considered a disposition for tax purposes, meaning the capital gain may be calculated based on the fair market value at the time of death or transfer, compared to the original purchase price.
Farmers may be eligible for tax deferred rollover rules or the lifetime capital gains exemption (LCGE), which can shelter up to $1.25 million of capital gains per individual, on the deemed disposition of qualified farm property.
These options can significantly reduce the overall tax burden. However, the rollover and LCGE rules are complicated and something you should discuss with your trusted advisers.
There are several strategies to consider when planning for the transfer of agricultural land to your heirs prior to your death:
Transfer during your lifetime at cost — If the farm property and heirs qualify, the property may transfer with no immediate tax implications. However, if the transfer does trigger capital gains tax at the time of the gift, the LCGE can potentially still be applied to reduce the tax and provide some benefits to both parties. Gifting land during the owner’s lifetime will also help reduce the size of the estate (and potential tax) and ensure that any future tax law changes cannot impact the situation negatively.
Family trusts — These may be a tool for farm succession planning. By placing corporate shares or partnership interests of a farming operation into a family trust, farmers can maintain control over the land while gradually transferring ownership to their heirs. Trusts can also help minimize capital gains tax, especially if the land is actively farmed by the next generation.
Estate freeze — For corporate farms, an estate freeze strategy involves converting the farm value in the company’s common shares into redeemable, fixed-value preferred shares. New family members can then join the farm by purchasing new common shares for a nominal value. This allows new individuals to benefit from future growth in values, while the preferred shares can be redeemed over time, offering flexibility in farm succession.
Sell the farm assets at a discounted rate — Another option is to sell the assets, such as land and equipment, to children. When selling qualifying farm property to children, the sale price can be set anywhere between the adjusted cost base and fair market value, allowing the landowner to control the value they receive and on which they have to pay tax. While selling at a price higher than the cost base may trigger capital gains tax, the LCGE can help reduce the tax burden. Instead of a lump sum payment, a landowner can opt for a promissory note that allows payments over time, effectively creating a pension-like structure. Furthermore, if the note is issued to a child, it can potentially be forgiven in the landowner’s will without negative tax consequences for the estate or the child.
Given the complexity of agricultural land inheritance and the potential for significant tax implications, it is crucial to work with professionals such as estate planners, accountants, and lawyers. These experts can help landowners develop a customized succession plan, considering tax strategies, legal considerations and family dynamics.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
