Leasing land to farm corporation comes with tax implications

A pattern is starting to take shape in how the federal government treats the family farm corporation for taxation purposes.

The manner in which income is taken and expenses claimed is much tighter and the potential for audit greater if the regulations aren’t precisely followed.

We mentioned in a previous column that the federal finance department has signaled its intent to deny shareholders in the family farm corporation the ability to claim the lower dividend tax rate on income unless they met significant standards of individual input to farm activities. If they didn’t meet the threshold, the shareholders would be taxed at their highest marginal tax rate on such income.

As well, the Canada Revenue Agency will prevent the corporation from expensing operating lease payments if the payment period is too aggressive and the contract comes with an ownership provision for the equipment at the end of the lease. Such a lease would be declared a capital lease with a much longer payout period through depreciation of the asset.

There are other reasonably important tax consequences when corporations farm on land owned by a shareholder, whether leased to the corporation or not.

Essentially, if the corporation farms the shareholder’s land and fails to pay rent but constructs new buildings or makes any other improvements to the property, there could be a tax liability for the actual costs of the improvements. It gets more complicated if the property is owned by a parent of the shareholder. Either way, someone is going to pay tax for the improvement benefits.

A formal lease on the land between the corporation and the shareholder may avoid the tax to the land-owning shareholder if it is of such length to match the useful lifespan of the improvements. Extensions to the lease may be recognized as part of the lease as long as the extensions appear to be in good faith and are willing to be honoured. This confers to the corporation the benefits of making the improvements and therefore not taxable to the land-owning shareholder.

But if the land is sold before the end of the lease, there are residual and complex tax consequences.

What if there is a lease or no lease at all and the corporation fails to pay any rent? That raises the issue of fair market value rent of the property and what the CRA will assess the property’s fair market value rent at to see if there is a benefit for renting the property for less than the market value.

This is a complicated area of tax interpretation controlled by CRA, so we suggest you seek professional tax or financial advice to keep your personal assets and farm corporation whole.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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