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.

Buying

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.

Selling

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.

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

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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