Farming businesses form the backbone of Saskatchewan's agricultural sector. The family farm is a symbol of the hardworking roots of the Saskatchewan people and our province's foundational business. The family farm is also something that becomes a matter of great concern when the next generation is looking to take over ownership. This post highlights some key tax changes (currently in effect and subject to amendment on November 1, 2021) which will have large impacts on the succession plans of family farming businesses.

(1) What is the New Tax Opportunity?

The lifetime capital gains exemption (LCGE) allows eligible individuals to shield tax liability on up to $1,000,000 of taxable capital gains realized on the sale of qualified farm or fishing property. This allows eligible individuals to realize significant tax savings upon the sale of farming operations. In the case of a transition of family farm ownership, access to the LCGE is incredibly important to the older generation passing along ownership.

Historically, the Income Tax Act prevented the LCGE from being claimed when farming operations were transferred to corporations held by children or grandchildren. However, recent amendments to that Act (Bill C-208) allow the LCGE to be claimed on intergenerational transfers provided that certain conditions are met. The Department of Finance Canada, however, has announced that Bill C-208 will be amended to reduce its effect in expanding the scope of the LCGE as soon as November 1, 2021.

Summarized, the original Bill C-208 opened new opportunities for family farming succession planning; however, the proposed amendments may narrow that opportunity.

(2) What does Bill C-208 Say?

Bill C-208 (operative since June 29, 2021) amended the Income Tax Act in two significant ways:

a) Expanded eligibly for the LCGE:

The LCGE could be claimed on the sale of shares to non-arm's length purchasers. This allows parents or grandparents to use the LCGE when they transfer ownership of farming corporations to corporations held by their children or grandchildren provided that certain conditions are met.

b) Relaxed rules when shareholders are siblings:

There is a rule in the Income Tax Act which creates problems when siblings own a farming corporation, and they undertake a reorganization (perhaps for succession planning or to split up the business). Bill C-208 addressed this long-standing problem and assisted in facilitating the transfer of farming corporations from parents or grandparents to more than one child or grandchild.

(3) What do the Amendments Say?

In a news release on July 19, 2021, the Department of Finance Canada announced that Bill C-208 will be amended to limit its effect in expanding the scope of the LCGE. Specifically, Bill C-208 will be amended to address:

  • The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
  • The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;
  • The requirements and timeline for the parent to transition their involvement in the business to the next generation; and
  • The level of involvement of the child or grandchild in the business after the transfer.

The planned amendments may make the intergenerational transfer of some farming corporations ineligible for the LCGE. This will significantly increase the tax liability on the transfer of certain farming corporations.

(4) When do the Amendments Come into effect?

The Bill C-208 amendments are expected to be published on November 1, 2021 and are likely to come into effect as of that date (subject to the possibility of further revisions to the legislation).

(5) What should I do now?

Contact McKercher LLP to look into preserving your LCGE.

If you currently own shares in a farming corporation and plan to transfer ownership of the farming corporation to your child or grandchild, you may need to act before November 1, 2021 to preserve your eligibility for the LCGE.

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.