Taxation rules need review in farm transfer cases

At its surface, Bill C-208 is about fairness. Currently a farmer who sells assets to a family member can ultimately pay more in taxes than a farmer who sells to a third party. Bill C-208 potentially puts the farming relative who receives the land on the same footing as any other buyer. 
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Taxes are inevitable unless you can convince governments that they are unfair or impractical.

This week the Canadian Senate has the job of considering a private member’s bill that passed the House of Commons and would potentially reduce the cost of passing on a farm to a family member.

Farmland has grown in value over the past dozen years, so it is also time to question whether the current taxation rules are fair, or at least practical, for the maintenance of family farming operations.

At its surface, Bill C-208 is about fairness. Currently a farmer who sells assets to a family member can ultimately pay more in taxes than a farmer who sells to a third party. Bill C-208 potentially puts the farming relative who receives the land on the same footing as any other buyer.

The bill didn’t receive unanimous support in the Commons and farming Canadians should consider why, besides the usual partisan, political reasons.

It could be because there are several other rules and exemptions that farmers can apply when transferring farming assets to farming children and grandchildren.

Lifetime capital gains exemptions of $1 million and rollovers of capital gains taxation deferrals come into play, along with tools that allow a variety of other strategies to be used to make the transfers easier to manage for a multigenerational operation.

If these weren’t options, many farms would be unable to bear the costs of the taxes on capital gains and would have to sell necessary operating assets or incur such large debts that they would become non-viable.

And, for many farmers, the value of their capital gain is their retirement savings.

However, non-farming Canadians can find these kinds of asset gains hard to understand and very tempting to tax. The tiny margins that producers typically have to live with and the negative effect of inflating land values that are out of step with operational returns are complex stories to tell effectively.

Some Canadian homeowners could compare the large increases in the prices of their own homes and wonder, if they didn’t already own the house, whether they could afford to buy it today based on their current incomes. Many could not.

High prices also keep new farming entrants from the industry.

In Canada half of capital gains are taxable, making that income typically the cheapest of any in the nation. In Ontario, for instance, if a person earns $1 million in capital gains, unless it involved sale of a farm, fishing operation or specific type of small business, they will pay about $268,000 in tax. That is the provincial maximum tax rate of 53.5 percent.

A farmer or fisher would be exempt from tax on the sale up to that level and then pay on profits above that. This where Bill C-208, if passed, will have a positive effect for some farmers.

Even if capital gains taxes are deferred, rolled over or otherwise exempted, the ever-rising value of farmland only builds wealth on paper. Deferred taxes inside a farming operation are liabilities on the books. At best, they buy the next generation some time but inevitably the bills must be paid.

Since the last time the exemptions for farming assets were thoroughly examined, the value of land has risen as much as 40 percent. For many prairie producers, land prices have increased four-fold during the past 30 years, but margins are stagnant or declining.

It’s time the Senate’s Committee on Agriculture and Forestry took a look at the effects that escalating farmland prices are having on the family farm and consider whether the current taxation system is helping to push the next generations off the property.

Karen Briere, Bruce Dyck, Barb Glen and Mike Raine collaborate in the writing of Western Producer editorials.

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