An accountant says the $2 million deduction that most farm couples are eligible for should be more than sufficient
It is a good time to be a retiring farmer, says an accountant.
“I’m happy to see that many of my clients are actually able to experience the retirement that they didn’t think they’d be able to, due to the rise in land values,” said Mike Farrer, owner of Great Plains Accounting in Regina.
Canadian farmland values have never been higher. They have increased every year since 1993.
The vast majority of farmers wanting to sell land to help fund their retirement will not have to worry about the tax implications of the appreciation in the value of their property, said Farrer.
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There is a lifetime $1 million capital gains deduction for qualified farm property. Essentially, as long as the retired producer was a legitimate farmer who farmed for a long time then their capital gains will be tax-free.
In addition, their spouse gets another $1 million exemption as long as he or she was involved in the farm operation and benefited from it.
Farrer said for most farmers the combined $2 million exemption is more than sufficient.
“They would have to have a lot of land that was acquired a long time ago in order for the gains not to have been covered by that,” he said.
Kelvin Shultz, president of Wheatland Accounting Services in Fillmore, Sask., said the current rules for land purchased after June 17, 1987, is that it must have been owned for two years before disposition. And during the ownership period, farmers must have two years where the gross farm income exceeded all other sources of income.
For land purchased before June 17, 1987, the land needs to be used in the year of disposition.
Schultz said one thing to keep in mind is that if you are receiving the Old Age Security pension you will have to pay it back in the years you are claiming the capital gains deduction.
Another consideration is the alternate minimum tax, which comes into play when you are using a large amount of capital gains exemption.
For a farmer claiming the full $1 million exemption, the alternate minimum tax could be around $70,000. That tax is refunded over the next seven years if the farmer owes tax in those years.
Shultz said one way to spread out the capital gains exemption is to sell land to a child and finance it over 10 years or to a third party and finance it over five years. The former is the most common.
“Usually if you’re selling to a third party, you want your money,” he said.
The capital gains exemption is a lifetime deduction, so if the farmer sold land 20 years ago and used a portion of the deduction, only the remaining portion would be available for the retirement years.
If a farmer exceeds their lifetime exemption, capital gains still receive preferential treatment. They are not taxed on the full amount of the gain, only half of it.
Some farmers wonder if they will still be further ahead if their capital gains exceed the $1 million exemption.
“Well, yes. The fact that it has appreciated that much in value is still going to economically advantage you greatly,” said Farrer.
“If the deduction is only a million dollars and you’re above that, that is a good thing.”
Many farmers find renting land to be a more attractive option than selling it because of the emotional attachment to their property.
“There is a lot of blood, sweat and tears in that soil — literally. It’s hard to part with that,” said Farrer.
Another option is to use the rollover provision in the tax laws.
“You can transfer land to a child without triggering a taxable event,” he said.
Farrer said high farmland values and the preferential tax treatment of capital gains on that land are helping farmers afford a nice retirement but he warned growers that farmland values can drop as quickly as they went up.
“We’ve seen this movie before,” he said.
