Even though Canada does not have an inheritance tax, a
significant and unexpected tax liability can be left behind by a
farmer at death without proper planning and preparation.
A deceased farmer is deemed to have disposed of all capital and
depreciable property at its fair market value (FMV) immediately
preceding death, with the beneficiary acquiring the property at the
same value. Therefore, the FMV must be ascertained. The subsequent
gain or loss is reported on the deceased's final tax return and
this value becomes the beneficiary's cost basis going
However, under certain circumstances, the Income Tax
Act provides an opportunity for farmers to perform a rollover
of farm property on a tax-deferred basis when property is
transferred to family members, thus avoiding the deemed disposition
at FMV rules. Farm property may also be transferred on a
tax-deferred basis to children and grandchildren upon death. In
such cases, the farmer's estate may elect to transfer the
property at any value between its tax cost and its FMV. The
election optimizes the use of available accumulated loss
carryforwards, available lifetime capital gain deduction, or any
personal exemptions. Shares in a farm corporation or an interest in
a family farm partnership may also be transferred on a rollover
basis to children to use any available lifetime capital gain
If farm property is transferred to children prior to death under
a purchase agreement and there is an amount still owing at the time
of death, this debt may be forgiven without tax consequences if
indicated as such in the deceased parent's will. This strategy
allows the parent to make the transfer today at FMV to trigger a
capital gain, which is offset by the lifetime capital gain
Inventory/receivables – "rights or things"
Harvested grain inventory, livestock inventory, deferred grain
purchase tickets held by the farmer, and the right to receive an
interim or final payment from grain marketed through the Canadian
Wheat Board upon death are all considered to be "rights or
things" and can be reported in one of three ways:
It may be reported in the
deceased's terminal return
The value may be transferred to a
beneficiary and may be excluded from the deceased farmer's
income, deferring the tax paid until the beneficiary disposes of
it. The tax could be lower if the beneficiary has a lower marginal
tax rate at the time of disposal
A special election may be made to
report this income on a separate rights or things return. This
optional return could significantly reduce any tax burden as it
gives rise to a second set of deductions and exemptions for the
deceased, and could potentially reduce the deceased's income to
a lower tax bracket. This election must be made within one year of
death or 90 days from the notice of assessment of the terminal
return, whichever date is later. This election is an "all or
nothing" reporting matter and, as such, it is critical for the
personal representative to ensure all such rights or things are
identified up front.
Standing crop inventory
When a farmer dies having an interest in a crop that has been
seeded but not harvested, there are two options:
The unharvested crop may be included
in the farmer's rights or things return, stating its value at
the time of death
The eventual sale proceeds may be
taxed in the estate's tax return or in the beneficiary's
return when harvested and sold.
AgriInvest deposit accounts
Government contributions held in a farmer's AgriInvest
account are deemed to have been paid directly to the farmer
immediately prior to death, unless they are transferred to a spouse
or a spousal trust and vest within 36 months. Sometimes, it may be
desirable to recognize the AgriInvest contributions as income on
the terminal return rather than as a transfer. This would reduce
the spouse's or spousal trust's income on later withdrawals
from the account.
Alternative minimum tax (AMT) often arises when farmers make use
of their lifetime capital gains deduction on sales of qualifying
farm property. However, AMT does not apply on any returns filed for
the year of death. Previous AMT paid may be applied to reduce
ordinary tax in excess of the AMT, which typically would be payable
on the terminal return, but this reduction does not apply to rights
or things returns.
Mandatory and optional inventory adjustments added to income in
the prior year are still deductible in the terminal return of the
farmer. However, there are no provisions to apply the adjustments
as income in the year of death. If the inventory was transferred to
a beneficiary, a loss could potentially be created through the
deduction of the prior year's inventory adjustment, with no
corresponding income to offset it.
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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