Are you thinking about retiring or exiting from farming? Depending on the way you dispose of your farmland, you should consider the potential impact of the six percent GST.
GST generally applies to all land sales by a corporation or partnership. However, where the vendor is an individual, the GST rules can be more complex. In some cases GST will apply to the sale and in others it will not.
In general, GST must be applied to the sale if the land was used in a business such as farming that had a reasonable expectation of profit. As long as you are a GST registrant, the reasonable expectation of profit test will also apply even if you were merely renting out or licensing the land to someone else for farming or grazing activities.
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Subdividing the land for sale will also generate GST if the property is to be severed into more than two parcels of land.
There are situations when the sale of farmland by individuals is exempt, so it is important to consider the structure of the sale before proceeding with the transaction.
If you are retiring from farming and wish to convert the property from active farming to personal use, there will be no need to pay GST at the time of conversion or to charge GST on a sale thereafter as long as it is held for personal or non-commercial use.
The sale or transfer will also be GST-exempt if you sell or transfer the land to a relative, as long as the property will only be for personal use and not farming. Relatives, in this case include a former spouse or common law partner. If your relative wants to continue operating the farm as a business, GST will then apply to the sale.
If you sell farmland that includes the farm residence, the value of the house plus the surrounding land that is considered necessary for enjoyment of the house usually are not subject to GST.
A hobby farm that is operated without an expectation of profit is considered personal use land and is not GST-taxable at time of sale.
However, let’s say you wish to sell your farm to your neighbour as a going concern so he can expand his farm operation. This means that you are selling not only your land but also all, or substantially all, of the assets used in the commercial operation.
By jointly filing a GST 44 form with the Canada Revenue Agency, called an Election Concerning the Acquisition of a Business or Part of a Business, you and your neighbour can elect not to have GST apply to the sale.
If you sell your taxable farmland, you are required to collect the GST unless you are selling to another GST registrant. In this case, the registered buyer is required to self-assess the GST by reporting the tax payable on the transaction on his regular GST return. The amount payable, however, will be offset on the buyer’s GST return by a corresponding input tax credit.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
