There is big money in farmyards and cropland and half of farmers who are ready to retire are only able to access that value when they start liquidating their assets.
When land and property are sold in Canada, it is subject to income tax based on the value it has accumulated, but Canadian farmers have a special tool on their tax tool belt to help them save money on these capital gains — the capital gains exemption.
Ryan Kehrig, senior tax manager at MNP in Saskatoon, works with farmers to unlock this value. It can help farmers save money when they are selling property, interest in a farm partnership, shares in a family farm corporation, and quotas on dairy and poultry.
According to Canadian tax law, only 50 percent of capital gains realized are included under taxable income, but for farmers selling off big shares or big tracks of land, this can still mean big money, and with it, big taxes.
For farmers in Canada, this capital gains exemptions lets them claim $1 million in capital gains tax-free but, in some pockets of Saskatchewan, it would only take two to three quarters of land for those capital gains to reach that mark, says Ron Friesen, tax partner with MNP in Saskatoon.
“Any farms that particularly own their own land holdings, they’re more than likely going to use their full amount at some point during their lifetime or upon their death,” says Kehrig.
And there are rules in place for eligibility.
For farmland, land is eligible for the exemption if the gross revenue has exceeded all other income for two years of production, says Kehrig.
“If they’re farming, we want their gross revenue to be more than any other income, another job they may have or investments or anything else they may have.”
For exemptions on corporate shares and farm interests in a partnership, over 90 percent of the company’s assets have to be attributed to that farm for the shares to be eligible, says Friesen. In this case, things like mutual funds revenue cannot be included.
Selling land can be a big decision and farmers do have an option to transfer farmland to their children.
This can be an incentive for children to continue farming after their parents want to retire, but Kehrig says that taxes and exemption should not be the driving force behind how land is divided or sold among family members.
However, it definitely comes into play. On a tax basis, if a farming couple has already claimed their capital gains exemption and they pass the land unto their children, the children can use their exemption when it comes time to sell the land in the future.
“Rather than Mom and Dad being in a situation where they have to sell; they’ve already used their exemptions and they’d be subject to capital gains tax, with proper planning and time frame horizon, the vast majority of that gain can be sheltered by the children’s exemptions as well,” says Kehrig.
Family dynamics can have a huge impact on these decisions and communication among the family members is necessary. If parents want all their children to have a share in the farm, even if they are not going to be actively participating in the farm work, everybody needs to understand how shares in the farm might affect relationships.
Sibling dynamics are never the same from one family to another so farmers must be aware of how the long-term viability of the farm could suffer if sibling relationships are problematic, says Kehrig.
Fallouts that occur with the parents around can be more easily handled compared to after the parents are gone, so families need to discuss that during the transfer process to plan for any contingencies.
Parents also have to be comfortable relinquishing that wealth to their children and take into account that they will no longer have that revenue to use toward retirement or health needs.
That’s a strong warning that Friesen gives to all farmers who plan to pass their land on — have your retirement plans ready.
When helping a farmer plan their liquidation or transfers, these are things that Kehrig needs to know.
“We like to sit down, flush out a lot of those factors, and of course, we can bring tax into the equation because we want to use the exemption to the extent possible,” says Kehrig.
Claiming capital gains like revenue can have an impact on other revenue that farmers see, such as Old Age Security.
OAS is calculated based on income, so this can cause problems in claiming OAS in certain years and clawbacks are likely to occur, says Kehrig. Planning is key to ensure farmers are prepared for a drop in OAS that may come with property sales.
It’s a common problem but OAS deferral has only recently become an option for all Canadians, including farmers. Because they can choose when they would like to start taking their OAS, farmers can take a year or two to plan liquidations and transfers before receiving benefits, providing another opportunity to eliminate clawbacks.
It takes time and knowledge to make sure the process is properly done, so planning is important in properly using capital gains exemptions, says Kehrig.
The plan cannot be executed over a matter of months. Less time allotted for planning means fewer options will be available for using the exemption, says Kehrig.