The family farm has been the traditional backbone of agriculture across Manitoba and western Canada. Older generations of farmers may look to their spouse or children to carry on and continue operating what they have built. In planning for this eventuality, there are some strategies to consider in order to minimize the tax liability and maximize your wealth.
The Canadian Income Tax Act allows for the of qualified farm property to your spouse or children on a tax-deferred basis. The lifetime capital gains deduction may also be used when you transfer farm property as well. This blog discusses the tax implications of transferring qualified farm property during your lifetime to a spouse and/or children.
Transfer to a spouse
You may rollover qualified farm property to a spouse at your Adjusted Cost Base (ACB) at any time during your lifetime. The ACB is normally what you paid for the property plus any transaction costs related to that purchase. Your spouse would receive this property at this ACB value.
In the case of depreciable property, it would be equal to the Undepreciated Capital Cost (UCC) of the property. Doing this will allow for the deferral of the tax on the capital gain and recapture of any Capital Cost Allowance (CCA) until your spouse sells the property or passes away.
Qualified farm property that is eligible for the rollover includes land, buildings, machinery, shares of a family farm corporation and an interest in a family farm partnership. Inventory does not qualify for a rollover and must be transferred at fair market value (FMV). Another strategy is to transfer your farming assets (including inventory) into a family farm corporation and then transfer your shares to your spouse on a tax-deferred basis.
Transferring farm property to a child
During your lifetime, you may transfer certain qualified farm property to your child at its ACB or, in the case of depreciable property, at its UCC. The definition of child includes biological children, adopted children, stepchildren, grandchildren, great-grandchildren, and their spouses who are residents of Canada. Alternatively, you may sell this qualified farm property to your child at a value between its ACB and FMV.
To qualify for the transfer to your children, the following conditions must be met:
- Before the transfer, the property was land, depreciable property or certain intangible capital property of a farming business carried on by you in Canada.
- Your children are residing in Canada immediately before the transfer; and
- The farm property is used principally in a farming business in which you, your spouse or any of your children or parents are actively engaged on a regular and continuous basis.
When transferring qualified farm property, such as land, an interest in a farm partnership or shares of a farm corporation, to your children, you may consider triggering a capital gain to use your Lifetime Capital Gains Exemption. This may minimize or eliminate your capital gain tax, and your child will receive the farm property at a higher ACB for tax purposes. It may also make sense to trigger a capital gain if you have unused capital losses to offset your gain. Since your children receive your farm property at a higher ACB, they may realize a smaller capital gain when they later dispose of it. This can result in less overall tax paid by your family.
Before you transfer your farm to your children, you may want to consider whether they are interested in operating your farm. If some of your children are not interested in farming, it may not make sense to transfer the assets to your children in equal shares. Instead, you could transfer the farm assets to the children who have an interest in the business and provide an equivalent of other assets to non-farming children.
This blog barely scratches the surface of this topic. There are other strategies to consider, such as an Estate freeze and the impact of Alternative Minimum tax, that would require more in-depth discussion.
If you would like to know more, please contact Accent CPA to ensure that a transfer during your lifetime meets your financial and personal goals.