According to 2016 Census of Agriculture, there are 193,492 farms operating in Canada. While the total number of farm operators is declining, the average age of a Canadian farmer is increasing, with the largest share of farmers ranging in age from 55 to 59. Given that younger family members of family farm businesses, are typically not interested in continuing to run the family business, progressively more family farms are being sold instead of being transferred to the next generation.
If you are thinking of selling your family farm, it is important to understand that each individual is entitled to $1 million of life time capital gain exemption (“LCGE”) on the sale of a qualified farm property. At the combined top tax rate applicable to capital gains of 26.76% in Ontario, this could translate into an approximate tax saving of up to $475,000 for a couple when selling a farm of $2 million or more in value.
Qualified farm properties that would quality for the LCGE need to fall under one or more of the following:
- Buildings on farm land
- The production quotas for dairy and/or eggs
It is important to note that, the LCGE tax exemption remains available even if the property was owned through a family farm partnership or a through family farm corporation, as long as one of the sellers was actively involved in the operations of the farm. Any agriculture machinery and equipment do not qualify for the exemption, however usually there are no capital gains triggered on sale of these types of depreciable assets.
Depending upon when the farm was acquired, there are two separate set of rules to qualify for this exemption. For any farm property purchased before June 17, 1987, the property will be eligible for LCGE if it was used in the farming operations:
- at the time of sale; or
- for any five years period since the property was acquired
For any farms acquired after June 17, 1987 the exemption rules are more restrictive. The property now must meet the usage and ownership tests as follows:
- Immediately prior to the sale, the eligible property needs to be owned by the tax payer for at least 24 months; and
- For at least two years during the period property was owned, the gross revenue from the property must have exceeded the total of all other income in those two years. As well, at that time, the property was used principally in a farming business where the seller or an immediate family member was actively engaged on a continued basis.
If a farm property cannot be considered as qualified farm property under the rules outlined above, the capital gain on the sale of the farm will be subject to tax as regular capital gain.
If you are thinking of selling the farm but are concerned that your farm may not qualify for capital gain exemption, please consult with your Zeifmans tax advisor well in advance of any potential sale. Rules governing the farm property are complicated, however there may be certain tax planning opportunities available to you that will assist in ensuring that you can take advantage of the life time capital gain exemption.
For more information, contact us today at 416.256.4000 or firstname.lastname@example.org.