Inter-generational farm transfers

I can help you with the transfer of farmland, quotas, equipment and shares of a family farm corporation.

Did you know that the Ontario Soil and Crop Improvement Association has a subsidy program to assist you with professional fees for succession planning. For an established farm business, they may finance 50% of the costs under the capacity building program. You may contact them at 1-800-265-9751 for additional information and/or access their website http://www.ontariosoilcrop.org/en/programs/growing_forward_2_new.htm.

Planning

The Income Tax Act and the Land Transfer Tax Act (“Ontario”) provide for tax deferrals on the unrealized capital appreciation on the transfer of farm operations to the next generation during one’s lifetime and as a consequence of one’s death.

For transfers occurring during one’s lifetime, tax is postponed until the property is sold to a third party. Where a child is minor, Canada Revenue Agency has stated that an irrevocable trust for the benefit of the minor may acquire property, however when the child attains age 18, the property must be distributed to the child.

Farm property may include land, buildings, equipment and quotas. It may also include an interest in a family farm corporation (the issued share capital) or an interest in a family farm partnership.

Requirements

At some time before the transfer, the property must have been used more than 50% of the time in the business of farming in which the taxpayer, the taxpayer’s spouse, any of the taxpayer’s children, or a parent of the taxpayer, was actively engaged on a regular and continuous basis in the business of farming.

Actively engaged in the business on a regular and continuous basis, generally means one who is involved in the day to day activities of the farming business, contributing time, labour and attention to the business. Activity that is infrequent or frequent but undertaken at irregular intervals would not meet the requirement. If farming was not the individual’s chief source of income it may be difficult to meet this test.

Other considerations to be aware of

There could be periods of time in which the property is rented or leased to another person such as a sharecropper. In this regard, the leasor of the property is not considered to be using the property in the business of farming unless the leasee is the spouse or child of the leasor and the leasee was actively engaged in the business on a regular and continuous basis.

Incorporation of a farm proprietorship/partnership

A special election is available to treat quotas as capital property. In this regard, the vendor of the quota may utilize his or her capital gains exemption on the transfer without recapturing prior years’ amortization on the transfer of the quota to a related party. Generally a fair market value “due to shareholder” amount is created on the transaction that may be withdrawn without tax by the shareholder.

Planning to use your capital gains exemption

The intergenerational transfer does not result in tax payable to the parent where there is no consideration paid by the child. If the parent receives a non-interest bearing demand note for $800,000, the parent would report a capital gain of $800,000 with a corresponding deduction for the capital gains exemption. The child would at the same time have a cost basis of $800,000 for the property. The note may be forgiven upon the parent’s death.

The capital gains exemption limit increased to $800,000 in 2014 from $750,000. It is annually inflation-adjusted.  The 2017 limit is $835,716. The 2016 limit is $824,176. The 2015 Federal Budget proposes to increase it to $1M for transfers of farmng properties.

As a precaution, the parent’s prior tax history would have to be reviewed for any prior years’ cumulative investment losses and capital losses as these items will reduce the available capital gains exemption. Alternative minimum tax (“AMT”) may be payable by the parent because his or her taxable income for the year in which the transfer occurs may be low. Any AMT is recoverable in the following 7 years provided there is sufficient taxable income realized in the 7-year period.

The definition of “qualified farm property” is somewhat complex as there are specific tests for property acquired before June 18, 1987 and property acquired after that date. Unusual results may occur where there may have been inheritances, divorces, the $100,000 1994 capital gains election, or other transactions that have resulted in the transfer of the property.

If the child does not own the property for at least 3 years, there is a provision that could deem the proceeds of disposition to the parent, on the transfer to be at the fair market value, which in may exceed the parent’s available capital exemption.

Footnote

Reference may be made to various CRA interpretation bulletins for basic information on inter-generational transfers