Tax Saving Opportunities in an Intergenerational Transfer of a Farm
Published July 23, 2010
Associated Areas of law
Operating a farm is often a family affair, with all members of the family pitching in to ensure that their operations run smoothly. Therefore, as the parents of the farming family grow older and wish to retire it is not unusual for one or more of the children to step in to continue to operate the farm. There has been a long standing policy in Canada that transfers of this nature are of great value as they ensure continued operation of family farms and are viewed as a vital aspect of our economy. As a result, there are tax saving opportunities for a transfer of a farm to a family member, of which you may be able to take advantage.
One such opportunity is the lifetime intergenerational deferral which generally applies on a transfer of farm land, depreciable property of a prescribed class (for example certain equipment), and eligible capital property (such as quota) or a share in a family farm corporation or an interest in a family farm partnership from the parents to a child which may defer the payment of tax which would otherwise be triggered on an intergenerational transfer. The rules are complex, but generally, to qualify the property must be, immediately before the transfer, in relation to a farming business carried on by the taxpayer; the child must be resident of Canada immediately before the transfer; and the property must have been used principally in a farming business which the taxpayer, his or her spouse or the taxpayer’s child had been actively engaged in on a regular and continuous basis. The tax treatment depends on the fair market value of the property, the cost of the property to the taxpayer, certain tax account balances (undepreciated capital cost and/or cumulative eligible capital) and the proceeds of disposition (i.e. the consideration received by the taxpayer on the transfer). Transfers between certain other related parties are also subject to the same rules.
There is also an intergenerational deferral available upon death, although the rules vary somewhat from the lifetime intergenerational deferral, and which generally applies on a transfer of farm land or depreciable property of a prescribed class (for example certain equipment) or a share in a family farm corporation or an interest in a family farm partnership to defer the payment of tax which would otherwise be triggered on death.
Special rules apply to eligible capital property (such as quota) on death. Again, the rules are complex but generally, to qualify the child must be resident of Canada immediately before the transfer; and the property must have been used principally in a farming business which the taxpayer, his or her spouse or the taxpayer’s child had been actively engaged in on a regular and continuous basis, and as a consequence of death, the property must transfer to and vest indefeasibly in the child within 36 months of death. The executor can elect out of the deferral if it is not advisable under the circumstances.
Another planning opportunity both during lifetime and upon death is use of the $750,000 capital gains exemption which may be available for dispositions of “qualified farm property”. A decision to pursue this option could be because the parents would like money up front from the purchase or because the children would like to take advantage of a higher adjusted cost base in the property transferred. The definition of qualified farm property is complicated, but it generally includes certain land used principally in the course of carrying on the business of farming in Canada, a share in a family farm corporation, an interest in a family farm partnership, or eligible capital property (such as quota) used in the course of carrying on the business of farming in Canada. There are special rules including a “gross revenue test” which apply in determining whether property is used in the course of carrying on the business of farming and which depend on whether the property was acquired before or after June 17, 1987.
There is extensive case law, commentary and guidance which assist in determining whether in any particular circumstance these deferrals and exemptions of tax are available or could be available with the property structuring. A professional advisor would be able to assist in providing advice on how best to structure your farming business over time and at the time of the transfer to advise and assist on obtaining such deferrals and exemptions and implementing other succession planning techniques including estate freezes.
Therefore, regardless of to whom the farm will be transferred to in the future, it is important for any farmer to consider consulting with appropriate professional advisors to create a succession plan outlining the most effective method for transfer of management, control, ownership, knowledge and skills. In doing so, not only can a farmer ensure business continuity and a clear direction for the business, but can ensure that he or she take advantage of any available exemption or deferral of taxes. If a transfer does not qualify for a deferral or exemption unexpected taxes could be triggered.
This publication provides information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements herein are general principles which may vary on a case by case basis.
For more information on creating a succession plan, contact our office to discuss a plan which fits your particular objectives and circumstances.