Selected Tax Matters Involving Transactions of Farm Properties | Jason M. Stephan
45th Annual Refresher: Real Estate
This paper, presented by Jason M. Stephan, provides a comprehensive overview of tax issues unique to farmland. It reviews 4 tax considerations and planning opportunities that relate to farmland transactions:
1. The use of the capital gains exemption;
2. The use of the intergenerational rollover provisions;
3. Issues and opportunities relating to principal residences on the home quarter; and
4. Any change in use of farmland from capital property to development land inventory.
When dealing with farm properties, one should consider the availability of the lifetime $750,000.00 capital gains exemption. Per s 110.6(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], the capital gain exemption can be earned only on the disposition of a “qualified farm property.” The paper identifies what is required for a property to be ‘qualified’ property, and describes 3 tests that an individual must satisfy in order to use the qualified farm property exemption:
• the “ownership test”;
• the “revenue test”; and
• the “activity test”.
Certain rollover provisions may apply to the disposition or transfer of farmland. A rollover is a transfer of holdings without suffering tax consequences. Some farmland transfers that do not circumvent taxation on dispositions, calculated per fair market value, include:
• a transfer on the death of an owner,
• a transfer on the death of a joint tenant, or
• by gifting (or selling below value) before death.
Nevertheless, there are exceptions where a spousal rollover or inter vivos rollover may apply. The paper describes these rollover provisions and exceptions in detail.
Furthermore, the paper discusses issues and opportunities relating to principal residences on the home quarter, including tax implications relating to the home quarter, which depend on ownership (i.e. whether the home quarter is owned by the farmer/shareholder or by the farm/corporation). The paper also considers the scope of the principal residence exemption in respect of a sale of the home quarter, with reference to particular sections of the ITA and the relevant case law under those sections.
Finally, the paper describes the implications of a change in use of farmland from capital property to development land inventory. Zoning changes affecting farmland may avail opportunities for the subdivision of farmland capital property and the disposal of the resultant inventory parcels for higher aggregate proceeds than otherwise available in an en bloc sale of the farmland for agricultural use. Once the land is changed into inventory, capital gains or losses may be calculated on the basis that a notional disposition of such property occurred at the conversion time. The paper discusses how a conversion time can be established, as there may be more favourable Canada Revenue Agency policies on the triggering of a conversion time for farms.
In summary, the paper provides a detailed discussion of tax issues and tax structuring considerations relevant to farmland owners and tax lawyers.
View sample pages from this paper here.
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