Agriculture can be challenging at the best of times. Thankfully, the Income Tax Act does provide some relief to farmers who wish to sell their farm property. The Capital Gains Exemption (CGE) can be utilized to exempt up to $813,600 of capital gains from tax on the sale of farm property or an interest in a family farm corporation or partnership. The exemption can be used by every individual, cumulatively, up to the $813,600 amount in their lifetime and on their tax return at the time of their death. Commencing in 2015, the CGE will be indexed to inflation so this benefit will continue to grow in value. It would be nice if anyone who was involved in any farming activity could access this tax relief; however, nothing is easy when you are dealing with the Income Tax Act. There are various criteria that must be met in order to utilize the CGE. I will briefly review the criteria, in very general terms, as well as other issues to consider.
The Qualified Farm Property rules for the CGE are not onerous if farm property was acquired prior to 1987. If the property was used for farming in the year it was sold or for at least five years during the period of ownership then it qualifies. However, one too many “gentleman farmers” tried to use the CGE rules and the government made the criteria much tougher on June 18, 1987.
For property that was acquired after that date, to be considered “Qualified Farm Property”, it must have been owned for at least two years by an individual or a family member and used “principally” for farming by the individual or family member. The property can also be used by a family farm partnership, or a family farm corporation to meet the criteria. “Principally” used for farming means that the user of the property was “actively engaged on a regular and continuous” basis in farming. To meet this definition the income from farming of the individual must exceed all other sources of income in at least two years. If the user of the property was a family-farm corporation or partnership, the property must have been used principally in the farm business and the individual or a family member must have been “actively engaged on a regular and continuous basis” in the farm business for at least 24 months.
The rules, although complicated, are meant to result in a favourable tax treatment for farmers. However, the income test and the usage test noted above are often stumbling blocks. It is very important to complete a detailed analysis to see if a farm property does in fact qualify for the CGE. Often it is important to understand how the property was used many decades ago. It is best if this analysis is done prior to a sale transaction, however, we do encounter people who assume the sale of their farm property is tax free when it has not met the CGE criteria.
A very interesting point to note is that a property that was formerly farmed, but is currently being used for a non-farming purpose, may still be considered a Qualified Farm Property for CGE purposes. For example, an individual, who has never been a farmer, is earning rental income from a property that was inherited from a parent after 1987, who was a farmer. The individual will not meet the gross income test because they were not in the business of farming however they can use any two years of their parents to meet the gross income test. As a result, the individual may be able to utilize the CGE on the sale of the property. One CGE is worth up to $180,000 in tax savings so it is not a tax benefit you want to leave on the table.
One final note; farming and operating a winery are generally considered separate types of businesses for tax purposes. A sale related to a winery cannot utilize the Qualified Farm Property rules to access the CGE. This type of transaction may involve a completely different and even more complicated set of CGE rules. As I mentioned above, nothing is easy when you are dealing with the Income Tax Act.
The above information is a very general summary of complex tax provisions. It is extremely important to obtain professional advice when planning or completing a transaction involving property used in farming. The CGE is meant to be the big win at the end of the day for farmers and you want to make sure you take advantage of it whenever possible.
Peter MacIntosh, CPA, CA is a partner with White Kennedy LLP. White Kennedy has offices in West Kelowna, Penticton and Osoyoos. Peter can be reached at 250-492-9984 or firstname.lastname@example.org.
Reprinted with permission from Peter’s article which originally appeared in Orchard & Vine Magazine
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.