Canada: When Family Farm Corporations Don't Live Happily Ever After

Previous issues of Farm Alert have discussed the benefits of incorporating a farming business,1 factors to consider before and after incorporating,2 and the importance of maintaining a pure farm corporation in order to take advantage of the lifetime capital gains exemption on a potential sale or transfer of family farm corporation shares.3 This article discusses issues to be aware of when a family farm corporation must be discontinued or reorganized. A few practical scenarios demonstrate the downside of holding farm assets in a corporation.

Discontinuing the farming operation during lifetime

When no children are interested in continuing the farming operation, the shareholders may wish to wind up the farm corporation. Unfortunately, there is no opportunity to defer tax when a farm property is transferred from a corporation to its shareholders. The corporation will be considered to have transferred the assets to its shareholders at their fair market value. The transfer may result in recapture of capital cost allowance claimed on depreciable property (e.g. machinery, equipment, barn, vehicle and quota) and gains on capital property (e.g. farmland and quota). The assets that the shareholders do not want to keep must be sold. Income tax will likely be payable by the corporation.

The distribution of cash (after tax proceeds from sale of assets) and the transfer of remaining assets to the shareholders will be treated as a dividend for tax purposes. The drawback here is the corporation and shareholders will be required to pay taxes on assets that have not yet been sold, and the shareholders lose the opportunity to use their lifetime capital gains exemptions on those gains recognized in the corporation. If the shareholders retain the cash in the corporation and take it out over several years, they may be able to take advantage of lower personal marginal tax rates.

Splitting the operation

Often in farming operations, the children wish to split the business into separate operations – for example, milking operations to one child and cropping to another, or each child receives one of two farms. From an income tax perspective, it is much easier to divide assets held by a farm corporation on a tax-deferred basis while the parents are alive and controlling the farm corporation.

Reorganizing or splitting the operation where many individuals are involved can result in adverse tax consequences. For example, if two brothers are considering incorporating their farming business, they should understand that it will be difficult to "undo" the incorporation.

Death of a shareholder

Upon the death of a shareholder of a family farm corporation, shares held at the time of death may be transferred to the deceased's spouse and/or children on a tax-deferred basis. There may be an opportunity to make use of the lifetime capital gains exemption on some or all of the shares held by the deceased. Problems may arise subsequent to the shareholder's death when non-farming children want immediate cash for their shares and farming children want to continue the farming operation. The ideal option for farming children involves the corporation borrowing money to buy back the non-farming children's shares. The corporation may be able to deduct interest on that loan. The proceeds received by the non-farming children will be considered dividends and taxed at a rate that is higher than the rate for capital gains.

It is more likely that the non-farming children would prefer selling their shares, triggering capital gains and the ability to use their lifetime capital gains exemption (or taxed at a rate that is lower than the dividend tax rate). In such a situation, the farming children may be forced to borrow personally to buy the shares of the non-farming children. While the buyer will likely be able to deduct the interest paid on that loan, any withdrawal by the buyer from the corporation to repay the capital and interest will be treated as a dividend.

Where the buyer and seller are dealing with each other at arm's length, it may be possible to structure the transaction so the farm corporation assumes the loan. When the share sale is between related parties (e.g. siblings), the transaction is considered to be non-arm's length under the Income Tax Act and thus the loan cannot be assumed by the farm corporation. Although the Income Tax Act does not specify certain individuals (such as cousins) as "related," it would be difficult to convince the Canada Revenue Agency that a share sale transaction between cousins consisted of arm's-length parties.

If the children of the deceased wish to split the operations into separate entities, there may be adverse tax consequences similar to transferring assets from a corporation to its shareholders, as discussed above. As well, the situation can be complex when, upon a shareholder's death, non-farming children wish to hold the shares for sentimental reasons and may not cooperate with the farming children in business decision-making and any future reorganization of the corporation.


The above scenarios demonstrate that transferring entire farm assets into a family farm corporation is not always the best strategy. Generally, significant value of a farming operation will be attributable to farmland and quota. Keeping farmland in the individual's hand provides flexibility for future tax-deferred rollovers of specific parcels of land to different children, and also provides for the potential use of the lifetime capital gains exemption on future increases in land value.

In certain circumstances, a partnership may provide more flexibility in transferring the assets on a tax-deferred basis to the partners when farming operations are discontinued. Where the tax cost (adjusted cost base) of the partner's interest in the Canadian partnership is equal to the aggregate cost amount of the partner's pro rata share in the partnership property, the Income Tax Act permits tax-free transfer of partnership property to the partners. In addition, the partnership provides the ability to allocate capital gains on sales of properties to the partners so they may use their lifetime capital gains exemptions.

The GST/HST issues on discontinuing farming operations were discussed in a previous edition of Farm Alert.4


1. "Old MacDonald had a farm corporation," Collins Barrow Farm Alert, Summer 2007.

2. "Before and after incorporating your farming business," Collins Barrow Farm Alert, November 2012.

3. "Maintaining a pure farm corporation," Collins Barrow Farm Alert, July 2013.

4. "Income tax and HST implications of ceasing farm operations," Collins Barrow Farm Alert, March 2014.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
McKercher LLP
Collins Barrow National Incorporated
Collins Barrow National Incorporated
Collins Barrow National Incorporated
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McKercher LLP
Collins Barrow National Incorporated
Collins Barrow National Incorporated
Collins Barrow National Incorporated
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions