Are you considering selling the shares of your farm and buying shares of a new farm, or maybe shares of an entirely different business? Maybe you have been approached with an offer that is too good to pass up, so why not take the opportunity to sell and buy new?
Unfortunately, such a sale and replacement could have adverse tax consequences that you will want to avoid. Generally, when you sell the shares of your farm, there will be a capital gain on the sale, calculated as your sale proceeds less the original cost of your shares, and this tends to be rather significant.
So, what do you do? Do you pass up that opportunity? Do you take it and accept the immediate tax consequences?
You may have heard of the replacement property rules that many farm operations use to defer tax when they are selling and buying land directly. If you have, you may think that this could be the solution you are looking for, but there is a catch. The replacement property rules do not allow for share replacement.
There may be some good news. Another option exists that does allow for share replacement and does not have the same or similar business requirement like the replacement property rules. This is the small business share rollover, which can defer the capital gains on the sale of your farm.
It can be restrictive to a farm, but the criteria are:
- You must be selling shares of an eligible small business corporation and purchasing shares of a different eligible small business corporation.
- An eligible small business corporation is a corporation in which substantially all assets are used in an active business. This is a little complex, but essentially, if you have incorporated your farm, and you are actively farming, your farm may qualify.
- You need to have owned your shares for at least 185 days.
- The new shares must be bought at any time during the year the old shares were disposed of, or within 120 days after the end of the calendar year. For example, if you sell your shares in May 2021, you need to buy new shares either in 2021, or by April 30, 2022, in order to qualify for the rollover.
- These rules cannot be used for a corporation that has more than 50 percent of the fair market value of property attributable to real or immovable property, net of debt (for example, land). Therefore, a farm needs to be careful to ensure it qualifies.
If all the criteria are met, you may be able to use the small business share rollover to defer your capital gains when you sell the shares of your farm and replace them with shares of a new eligible farm or another business of your choosing. Keep in mind, this is only a deferral, so the tax consequences are delayed, but not eliminated.
These are complex rules and can be quite restrictive. Be sure to consult with your tax and business adviser before engaging in such a sale and replacement to determine if it qualifies for the rollover, and if this is the right option for you.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com. He would like to thank Marden Litchfield and Sarah LaRocque of KPMG for their assistance with writing this article.