Farming is a fundamental part of our Canadian society and history. Entire generations of families have lived, thrived, and survived on the same land. However, farms today are increasingly large and complex operations. As such, various tools have been developed over the years to deal with one big question: How do I pass the farm down to the next generation when I retire?
This article will briefly discuss the options available for transferring farm property from parent to child while the parent is alive.
Two major questions that a farming-parent should consider when transferring farm property to a child are: 1) When do I want the disposition to be effective? and 2) What are the tax implications on the disposition?
Transferring Farm Property to a Child
Generally, farmland values have skyrocketed over the last few decades. Land acquired decades prior by the parent has often doubled, tripled or more in value. This means, without proper planning, capital gains tax triggered upon the disposition can be significant.
The other issue is when should the disposition happen? There will be a deemed disposition on death, so the question really is whether you want to transfer the land upon death or sometime before death.
There are three options for transfer:
- Fair market value disposition;
- Section 73 rollover; or
- a transfer to the child in bare trust.
Fair market value disposition
A fair market value disposition occurs at, unsurprisingly, fair market value. This triggers the full capital gains on the transfer. This means that the child who buys the land will then have an adjusted cost base ("ACB") equal to the fair market value. However, the parent may be able to use his or her lifetime capital gains exemption ("LCGE") to offset the capital gains tax. Farmers receive a $1,000,000 LCGE (compared to $883,384 (2020) for non-farmers) for dispositions on farm property (usually shares in farm corporation or farm land1).
For farm corporation shares, generally, throughout any 24-month period before disposition, more than 50% of the fair market value of the corporation's property must be attributable to property that was used principally 2 in the course of carrying on a farming business in Canada in which the individual, his or her spouse or common-law partner, child, or parent (or beneficiary of a trust if the individual is a trust) was actively engaged on a regular and continuous basis. 3
For farmland, if the land was acquired after June 18, 1987, the land must have been owned for any 24-month period before disposition by, generally, the individual, his or her spouse or common-law partner, child, parent (either owned directly or owned through a personal trust 4). If the land was owned by a farm partnership, the partnership interests must be held by the individual or his or her spouse or common-law partner. We will refer to this person as the "Operator". In addition to the 24-month ownership test, during any two-year period of ownership, the land must be used principally in a farming business, a farm corporation or a farm partnership carried on in Canada in which the Operator (or beneficiary, if Operator is a trust) was actively engaged on a regular and continuous basis.
If the land was acquired before June 18, 1987, then there are two ways to qualify for the LCGE. The first option is if, in the year of the disposition, the land was used principally in the course of carrying on a farm business in Canada by the individual, his or her spouse or common-law partner, child or parent; or by a farm corporation, a farm partnership; or by a beneficiary of a personal trust 5 or by a personal trust in which the individual acquired the property. The second option is if the land was both owned and used principally by these same categories of persons or individuals in the course of carrying on a farming business in Canada in any 5-year period.
It is important to confirm with a tax practitioner that your farm property qualifies for the LCGE before claiming it as the test is quite technical and may be complicated to apply in practice.
Section 73 rollover
A section 73 rollover is one in which the disposition of farm property is deemed pursuant to subsections 73(3) to (4.1) of the Income Tax Act to occur on a tax-deferred "rollover" basis. This means the land and farm property may be transferred at the ACB so the child inherits the same ACB that the parent had. There are no capital gains triggered on this disposition. 6
In order to qualify for the tax-rollover under subsection 73(4) and 73(4.1) (farm corporation and partnership shares):
- the child was a resident in Canada immediately before the transfer; and
- the property was, immediately before the transfer, a share of the capital stock of a family farm or fishing corporation of the taxpayer or an interest in a family farm or fishing partnership of the taxpayer (as defined in subsection 70(10)).
In order to qualify for the tax-rollover under section 73(3) and (3.1) (farmland):
- the property was, before the transfer, land in Canada or depreciable property in Canada of a prescribed class, of the taxpayer;
- the child of the taxpayer was a resident in Canada immediately before the transfer; and
- the property has been used principally in a farming or fishing business in which the taxpayer, the taxpayer's spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer was actively engaged on a regular and continuous basis
Again, these seemingly straightforward requirements can be complicated in practice, so we recommend you confirm with a tax practitioner that the transfer will qualify if you intend to rely on the provision.
Transfer to the child in bare trust
The last option is for the parent to place the farm property in joint names with him or herself and the child. However, the child is a bare trustee, meaning that he or she has no beneficial ownership in the land until the parent(s) die. The parent(s), while alive, have all the control, pay the expenses, and reap all the benefits of the land. The disposition does not actually happen until the parent(s) die.
At that point, provided the property qualifies, it is still possible to take advantage of the LCGE or do a tax-deferred rollover to the child.
When it comes to farms, there are many tools available to meet the unique challenges that farmers face. However, it is important to not let tax considerations lead your estate planning. Farms are some of the most common types of property fought over in estate litigation, a process that not only wastes significant amounts of money, but also tears families apart. It is more important that your estate plan related to the family farm suits your family, not simply that it saves the most tax.
1 May also dispose of farm partnership interests, which is not discussed in this article.
2 "Principally" means more than 50%.
3 LCGE can also be used for farm partnerships and qualified small business corporations. However, for simplicity, we only briefly touch on some LCGE areas, such as farm corporations and farmland.
4 If the land is in a personal trust or was from a personal trust, the ownership test applies to, generally, the same categories of persons (except if the land was from a personal trust, the ownership test cannot apply to the recipient individual's spouse).
5 As described subparagraph (a)(ii) of the definition of "qualified farm or fishing property" in subsection 110.6(1). The beneficiary or his or her spouse, common-law partner, child or parent.
6 Note, you can elect to transfer at an amount above ACB as well.
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.