Are you a farm owner? The rules of farmland rollovers are complicated and differ depending on (a) whether you're living or deceased at the time of the transfer and (b) whether your spouse or child is the recipient.
Spousal privilege? Not always
If your spouse is the recipient of the land, you can't transfer tax-free while you're alive. You have to sell your land at fair market value. If you're deceased when the rollover occurs however, all your assets transfer tax-free to your spouse at the cost of the property. (Note: This is not exclusive to farmers, but farmland specifically can be transferred at cost.)
Pass it on to the child
Whether you transfer a farm during your lifetime or after death, the rules are the same when passing on land to your child/children. Unlike a spouse, a child can receive your property tax-free while you're alive, but the recipient must be a resident of Canada immediately before the transfer.
What about the other children?
If one child plans to remain on the farm and another does not, a major rollover challenge can be determining what goes to each child. It doesn't necessarily have to be equal—which is almost impossible anyway, as most of the value is tied up in assets—but most people want it to be as equitable as possible. The child who'll maintain the farm needs the land in order to continue operating, but it can be challenging to tell your other child they're not getting the land. Many people try to make up the difference with other assets or insurance.
Another option is to leave farmland to the non-farm child, but with first right of refusal for the farm child to buy or rent the land. In any case, it's crucial that the farm child receive the assets necessary to continue operating the farm.
It's a gift!
In cases where land is gifted generally the assumption is that it's given at base property cost. So, if you paid $100,000 for a piece of land and gifted it to your child, that would become his or her base cost. There's no tax implication. If you sell farm property to your child, though, it will probably be for a higher amount. If you have a capital gains exemption, you may be able to realize a gain on the sale on a tax-free basis.
To capital gains...or not
Determining whether land qualifies for a capital gains exemption is one of the common hurdles we run across. The first thing we help a client determine is whether or not they're eligible to transfer the property and qualify for that rollover.
There are a number of rules related to what land and assets are eligible. Say you have a tax pool of farm equipment that has depreciated down to $30,000. You can transfer that pool of assets at $30,000 to a child on a tax-free basis, but before the transfer, it has to be used principally in the business of farming.
Once you've reached a better understanding of the rules and regulations of passing on farmland, the rollover process—and preparation for it—is far more manageable.
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.
