If certain conditions are met, property can usually be passed from generation to generation without taxes.
However, what if you have to move your operation or an opportunity arises to sell some of your farm land at a premium and buy more at a different location?
You could face a high tax bill.
Let’s say that Rodney owns a section of land that has been in his family for generations.
It originally cost $300,000, but is now worth $900,000, yielding a capital gain of $600,000.
Read Also
Crop insurance’s ability to help producers has its limitations
Farmers enrolled in crop insurance can do just as well financially when they have a horrible crop or no crop at all, compared to when they have a below average crop
The resulting tax bill could range from $120,000 to $140,000 depending on Rodney’s province, his personal tax bracket and assuming he could not or did not want to use his $750,000 capital gains exemption.
But by using replacement property rules, farmers may be able to avoid the capital gain on the sale by reducing the cost base of the land purchased.
This means the capital gain will not be recognized until the replacement land is ultimately sold.
To eliminate the gain recognized on the initial sale, you must buy new property for a cost at least equal to the proceeds of the disposition.
The deadline for buying replacement land varies according to the reason for selling.
If the land sale is voluntary, you must buy replacement property within one year following the sale.
If the land sale is an involuntary disposition (for example, government expropriation), the deadline is two years.
You can also buy the replacement property before selling the initial property.
Let’s use Rodney again to illustrate.
The capital gain on the land Rodney is selling is $600,000. If he buys land valued at $1.2 million and makes the replacement property election, he can reduce the gain on the old property to zero.
The adjusted cost of the new land will be $600,000 to account for deferral of the capital gain on the old land.
If Rodney instead decides to buy replacement land worth only $600,000 and makes the replacement property election he can reduce the capital gain on the old sold land to $300,000, or half of what it would have been with no deferral.
The cost of the new land will be $300,000 (rather than $600,000) to account for the partial deferral of the capital gain on the old land.
Several restrictions and rules apply to replacement property transactions.
Seek professional advice to determine what course of action will be most beneficial.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. Dave Goughnour of KPMG assisted with writing this article.
