Canada: 8 Questions To Ask When Buying Or Selling Farmland

If you make the decision to buy or sell farmland without first talking to an advisor, you are likely to find yourself in a predicament that can be difficult (and costly) to resolve. With that in mind, never sign off on a deal without first sharing the particulars of your situation with an expert. The advice you receive will help in the strategic structuring of your business, which can go a long way toward minimizing your future tax obligations and put you in a better financial position moving forward. But before you meet with an advisor, here is an overview of the key questions you should keep in mind when buying or selling farmland.


Is this the right investment for your farm operations?

It's important to have a financial plan for your farmland purchase. Does it make good business sense in your operations? What is the timeline to recoup your investment? Is increasing your land base a good way to grow your business? Without considering the key financial and long-term implications, many farmers believe owning more land is the best way to grow their operations. You need to speak to someone who understands the related issues and can steer you in the right direction. Since this is usually a significant investment, you should have a strong financial plan in place – like any other business would – before undertaking a large capital purchase.

How are you going to pay for it?

Farmers who have the necessary funds available in cash often believe this is the best way to purchase farmland. Before making that decision, it's wise to consider your financing options and future cashflows. If you pay for the land entirely in cash, you're essentially turning a liquid asset into a fixed asset, which can have negative impacts on your operations. If you instead choose to obtain financing, you can preserve some of that working capital for other aspects of your business operations (e.g. growing your herd or purchasing seed and fertilizer), while having the ability to deduct the interest payments in your business. Ensure the financing options you enter into also respect the cashflows of the operations to allow for flexibility and seasonality.

Are you getting a fair deal?

Most farmers buying farmland are knowledgeable about current market rates in their region. However, they don't always do enough research in terms of relevant municipal and county regulations, property surveys or title research on the land. Do you actually know the boundaries and the acreage of the property you're buying? Are there any access restrictions to consider? Are there any easements or caveats on the property that could become a hindrance in the future? Has the local government contemplated annexation in the past? Those issues should play a significant role in your decision to buy. At the very least, ensure you've answered these questions before proceeding with a purchase.

How should you hold the title?

This is probably the most common question we get from clients buying farmland. "Should I hold it personally?" "Should I hold it jointly with my spouse?" "Should I hold it in my farm corporation?" Again, there isn't a single correct answer, but you should consider your future eligibility for the capital gains exemption, as well as succession planning, including the complexities of the tax-free rollover provisions to the next generations. By starting with the desired structure, you can save yourself the costs – and potential taxes – of unwinding the structure in the future.


Who is going to be liable for the tax bill?

When you purchase farmland, title is assigned to an individual, a partnership or a corporation based on who purchased the property. Some farmers who hold land in personal hands and add their spouse on the title have the misconception that he/she is liable for half of the tax arising and they have the ability to use the spouse's capital gains exemption to reduce taxes on the sale. However, they don't know if he/she has beneficial ownership. As a result, they may not be able to split or reduce the income tax bill with their spouse. This leaves some uncertainty regarding who is actually selling the farmland. Is it just the one spouse, is it jointly held or is it held within a corporate structure? Each of these holdings has different tax implications, so it's critical you learn who actually has title and beneficial ownership.

Have you weighed the tax considerations?

With regard to taxes, there are several determinations you should make before selling farmland. For one, does it qualify for the capital gains exemption? Only individual taxpayers can access the exemption on sale of the sole asset itself (if it is qualified farm property), so it leads back to the above question. If selling in personal hands, you should also consider alternative minimum tax (AMT) and the Old Age Security (OAS) clawback implications, to know whether they will be triggered on the sale and plan accordingly.

How can you mitigate the tax consequences of a sale?

When selling farmland, there is some planning you can do to mitigate various tax consequences, such as utilizing the capital gains reserve, purchasing RRSPs or just timing the sale appropriately. You may be able to claim the capital gain over time by utilizing the capital gains reserve in certain circumstances where you are receiving payment for the sale over time. By delaying the capital gain inclusion, you can potentially manage your AMT and OAS clawback levels. Furthermore, if you spread the receipt of payment of the sale over even just two years – for example, December 31, 2020 and January 1, 2021 – that will reduce the capital gain inclusion per year, resulting in deferral and, in most cases, tax savings. In addition, RRSPs can be a beneficial consideration in the year of a sale, allowing you to mitigate the overall tax at the time of sale and defer some of the tax over a period of time.

Are there other retirement options?

In some cases, we see farmers selling property because they're ready to retire and there is no generational succession plan applicable. While a sale opens up additional cash flow that can be used as an income stream for retirement, it might be more beneficial to simply rent the property and use that income for your retirement if it will generate more after-tax cash flows than the investment of the sales proceeds will after-tax. However, if you are renting out the land for a period of time, you will need to consider if this has any implications on the expected use of the capital gains exemption. As you approach retirement, it's prudent to look at your financial plan to see if the sale is the most advantageous for your cash flow and retirement needs.

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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