There can be a significant amount of wealth tied-up in farm businesses—including partnerships and corporations—and there are opportunities in the succession process to distribute that wealth on a tax-free or tax-deferred basis. Much of this wealth is eligible for capital gains exemptions, allowing it to pass on to the next generation, so that they can continue farming without a heavy debt burden. If you're in the process of planning the succession of your farming business, it's important to consider taking advantage of gifting, as it allows you to apply tax benefits to farming assets.
Who can receive a gift?
Generally, a farming gift—which can apply to almost any kind of farm asset except inventory—can be given to a child or a grandchild. However, the definition of "a child" can include a broad range of people, from a stepchild to the spouse of a child.
Selling to an external party
If you are selling to a non-family member, you usually sell at fair market value, thus incurring tax. There are various levels of tax that can be applied on a sale to a third party, such as tax on inventory, recapture on depreciable and capital gains on growth. However, capital gains can be offset with your lifetime capital gains exemption.
Transferring tax-free
If you meet the definition of a qualified farm property, including farm partnership or a qualified farm corporation share, you can transfer wealth to another generation without a tax impact. In a sense, you're passing that tax on to the next generation, and if the current tax laws remain in effect, they can employ the same strategies when succession planning for their heirs. Essentially, these gifting options are set up to allow successful farm businesses to continue to be passed on generation to generation.
Maintaining ownership
Different types of plans can be put in place allowing a farmer to transfer their property to someone else, while still maintaining ownership in some way. For instance, if you transfer your farmland to a family member, but maintain beneficial interest, you are allowed to live there for a lifetime. You can also reorganize your business as a farm corporation and still maintain control, passing the growth on to a child without any tax consequences.
Common mistakes
There are a number of common mistakes you can make when working through the succession process. For one, attempting to transfer an asset that you're not actually allowed to. If you transfer inventory during your lifetime, it's got to be at fair market value, not cost base. Another common mistake is attempting to transfer property in order to gain a benefit through the Income Tax Act. For example, if you're transferring farmland in an attempt to multiply your capital gains exemption. Say you have land that is worth four million dollars and you only have a million dollars of gain exemption and you're trying to get three or four family members involved, so you don't pay any tax. Unfortunately, this is not allowed and the entire capital gain can be attributed back to the transferor if the property is sold or an agreement to sell occurs within three years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
