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
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
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
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.
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.
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