Disposing of farm property usually results in capital gains, which are taxable.
However, it is possible to postpone such gains by deferring them if the farmer plans to replace the property in the future.
The decision will be based on the timing of the acquisition of the replacement property.
There are two types of property disposal:
- Involuntary disposition, in which the property has been lost, stolen, destroyed or taken over through expropriation or bankruptcy.
- Voluntary disposition occurs when farmers sell or swap assets that are designated former business property. This usually refers to real or immovable property such as land and buildings.
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The timing requirement is different for each type of property disposal.
To qualify for the deferral in an involuntary disposition, the property must be replaced either by the end of the second taxation year after the year of disposition or 24 months after the end of the year of disposition, whichever is later.
The time is half that in a voluntary disposition: the end of the first taxation year after the disposition or 12 months after the end of the disposition year.
To qualify as replacement property, it must be acquired for same or similar use as the original property and must be used for gaining income from the same or similar business.
The adjusted cost base of the replacement property will be reduced by the deferred capital gain when the new property is ultimately sold or deemed to be sold.
For example: New Farms Ltd. has decided to change the present location of its farm by disposing of land, a building and equipment in 2015. All the assets are replaced the following year.
Land that cost $30,000 is disposed of for $270,000 and replaced at $300,000. The entire capital gain of $240,000 is deferred. The new cost base of the land is $60,000 for tax purposes.
The building, which cost $50,000 and has an undepreciated capital cost (UCA) of $30,000, is sold for $100,000 and replaced for $150,000. The CCA recapture and the capital gain is deferred. The deemed capital cost of the building is now $100,000, while the UCC balance for CCA purposes is $80,000.
Equipment does not qualify for the replacement property rules.
Disposition of the property technically occurs only when the proceeds become receivable.
Determining when a disposition occurs with involuntary dispositions is a little more complicated.
If the replacement property is not acquired in the same year as the disposition of property, the gain is reported in the usual manner when filing taxes for that year. When the replacement property is acquired after the year of disposition but within the allowed time, an amended return may be filed to take advantage of the deferral.
All capital gains must be recognized, but it is just a matter of when.
