A farm is more than a business. It’s a legacy built through generations of sweat and determination.
As farmers, you plan for the coming year’s harvest, but it’s equally important to plan for the future of your land and livelihood. This includes understanding the implications of selling or transferring the farm.
The Capital Gains Deduction (CGD) is an important consideration that can help minimize tax burdens and pave the way for a smooth transition.
The CGD is a provision in the Canadian tax code that allows eligible individuals to exempt a portion of capital gains from taxation when they dispose of qualified capital property. In simple terms, it means you can sell certain assets without paying capital gains tax.
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However, there is a limit to how much you can sell without paying tax. As farmers, the CGD is particularly beneficial since Qualified Farm or Fishing Property (QFFP) falls under its umbrella.
QFFP includes farmland used for commercial agricultural purposes, buildings and structures used primarily for farming activities (such as barns and greenhouses), quotas related to agricultural production (such as milk and eggs), shares of capital stock of a family-farm corporation, and interest in a family-farm partnership. The CGD limit for QFFP is $1 million.
A quick example is a farmer who sells $2 million of QFFP. With an original cost base of $1.5 million, the capital gain (the difference between the cost and selling price) is $500,000. The taxable portion is 50 per cent, so in this case it will be $250,000.
This farmer, if eligible for the CGD, can use $250,000 as a capital gain exemption, effectively reducing the taxable capital gain to zero. The farmer has a remaining $750,000 to use for other dispositions.
To be eligible for the CGD, you must be the legal owner of the farm property. The property must have been used primarily for farming throughout the period of ownership. There is also a minimum holding period, meaning you must have owned the property for at least 24 months before selling it.
Areas to keep in mind with the CGD:
- The limit does not increase and is fixed at $1 million, as opposed to the capital gains deduction on qualified small business corporation shares, which is indexed and grows every year.
- An eligible individual is a resident of Canada throughout the calendar year.
- Taxation on the remaining capital gain after applying the CGD will be based on your marginal tax rate.
- The CGD applies only to the capital gain portion of the sale proceeds. It does not exempt the entire selling price.
It’s important to distinguish between the CGD and the principal residence exemption, which allows you to exempt the capital gain on sale of your principal residence.
Effective tax planning is crucial for those looking to make the most of the CGD. While it offers significant tax benefits, navigating its intricacies can be complex. It is highly recommended to consult with a qualified accountant specializing in agricultural taxation.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
