A common scenario currently playing out at the kitchen table of
many family farms involves discussions about the transfer of
farmland to the next generation. More often than not, this also
involves farming and non-farming children who no longer have any
ties to the day-to-day operations of the farm. While mom and dad
may choose to transfer farmland to non-farming children, there are
a few issues to discuss prior to doing so in order to avoid placing
mom and dad in an adverse tax situation immediately after the
transfer. Consider this example:
Mom and dad decide to "gift" a quarter-section of
land to a non-farming son.
Mom and dad are familiar with the general concept that in most
cases, farmland can be passed down to the next generation on a
The fair market value of the gifted land is $250,000 and the
cost base of the land is only $30,000, as mom and dad purchased the
land over 30 years ago. Mom and dad have each fully utilized their
lifetime capital gains exemptions of $800,000.
As of January 1, 2014, mom and dad transfer the above farmland
to their non-farming son at its cost base of $30,000. Mom and dad
will not incur any taxes owing as a result of this transaction as
the farmland has been transferred to the son at its cost base. It
is important to note that the non-farming son does not actually
have to pay mom and dad the $30,000 for the farmland.
In February 2016, the non-farming son has decided that he wants
to sell the gifted land in order to purchase a resort property that
is near his current family residence. The farmland is sold to the
farming son at its fair market value of $250,000, which results in
a capital gain of $220,000. The non-farming son plans on using a
portion of his lifetime capital gains exemption to offset this gain
and receive the full $250,000 proceeds tax-free.
When it comes time to file non-farming son's tax return for
2016, his business advisor informs him that the gain on the sale of
the farmland must be reported on mom and dad's personal taxes
in 2016. Under subsection 69(11) of the income tax act (Canada),
any gain on the sale of gifted farmland sold by a child within
three years of receiving the gift will attribute back to mom and
dad. This means that the non-farming son has received the $250,000
proceeds tax-free, while mom and dad must pay the taxes owing on
the $220,000 capital gain from the sale of the farmland. Assuming a
high bracket tax rate (such as the 44% tax rate in Saskatchewan)
this means mom and dad must come up with $48,400 to pay the taxes
owing as a result of the sale. There may be other unforeseen
consequences, such as old age security benefit claw-backs, as well
as possible reductions in other assistance programs.
There are options available to help mom and dad protect
themselves from the scenario above while still being able to gift
the land on a tax-deferred basis to the non-farming son. In
addition to having open discussions amongst all family members
about how best to transition farming assets to the next generation,
it is imperative to consult with your business advisor so a plan
can be put in place to help identify and avoid any potential
pitfalls that could affect the security of mom and dad's
financial situation in their retirement 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.
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