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In this issue...Transferring ownership of your farm to your children - Tax-Free Taxation and deductibility of vehicles used for business |
April 2002 volume 6 issue 1 |
by Jack Shorey, CA, Client Services Partner
The federal government has special legislation to encourage children to operate the family farm after the death or retirement of their parents. These rules allow the transfer of farming assets from one generation to another without incurring a tax liability payable at the time of the transfer. These rules also apply to the transfer of shares of a family farm corporation and the transfer of an interest in a family farm partnership. Although inter-generational transfers usually take place from the parent(s) to the child or children, it is also possible (under very limited circumstances) for the farm assets to be transferred from the child or children to the parent(s).
The rules concerning inter-generational transfers apply either at the time of death or while the owner is living. The latter is known as an “inter vivos” transfer. An inter vivos transfer to children who wish to continue farming may allow parents to plan how to distribute the remainder of the estate among non-farming children.
At the time of making an inter-generational transfer, the farm family should consider using the $500,000 lifetime capital gains exemption that still applies to qualified farm property. The $500,000 maximum exemption is reduced by any portion previously used to offset earlier gains on any type of asset sold in prior years.
If you are a farmer, transferring your farm property under the lifetime capital gains exemption rules will increase the farm’s cost base for tax purposes. This increased cost base to the child is achieved, because the transfer value of the property becomes the child’s adjusted cost base. This should mean a smaller capital gain to be reported by your child when he or she eventually sells the property. As long as the $500,000 lifetime capital gains exemption is still in effect when your child sells the property, he or she may use his or her lifetime capital gains exemption to shelter or reduce future gains or the gains deferred by the parent at the time of the inter-generational transfer.
One key to the inter-generational transfer (or rollover rules) is the definition of “Qualified Farm Property”. The $500,000 lifetime capital gains exemption can only be claimed if you or your spouse, or a qualifying partnership, own the property.
Qualified farm property is defined as one or more of the following:
If you have interest in a family farm partnership or a family farm corporation, certain criteria must be met to transfer this interest to one of your children. More than 50% of the fair market value of all the partnership or corporation’s property has to be used in the business of farming. Also you, your spouse, or your children have to be engaged in the farm business on a regular basis.
Additional criteria govern the use of the farm property. It must be used in the course of carrying on the business of farming by:
To qualify for the $500,000 lifetime capital gains exemption, you must be in one of the above categories and have owned the property for at least 24 months before the transfer. In addition, the gross revenue from the farming business must be more than your net income from all other sources for at least two years during the term of ownership. Alternatively, for the 24 month period, the real property must have been used by a partnership or family farm corporation to carry on the business of farming.
There are also special provisions (which are less restrictive) if the property was acquired before June 18, 1987.
If you choose to transfer your farm property to your child, grandchild or great grandchild during your lifetime, you can set the value of the property at any amount between its fair market value and its cost base for tax purposes. This elected value then becomes your offspring’s adjusted cost base and he or she will be liable for any deferred and or future capital gains tax realized when they dispose of the property.
Parents should consider taking advantage of the capital gains exemption during their lifetime. If they do not, a significant portion of the available exemption could be lost, if tax laws change. If the parent is unable to increase the transfer value of the farm property by using his or her lifetime capital gains exemption, then the result will be a reduction in the adjusted cost base for their children upon transfer. This in turn could mean the child may face a significant increase in their capital gains in the future, when they dispose of the property.
The $500,000 capital gains exemption only applies to the sale of qualified farm assets. Sales of inventory or other non-qualifying farm assets will be subject to full taxation rules in the year they take place.
Transferring your farm property to the next generation by using the inter-generational rollover rules is a viable and noble way to ensure the future of family farming in Canada. Be sure to consult your Wilkinson & Company Client Services Partner to determine the best way to keep this tradition alive in your family, and save tax dollars at the same time.
Jack Shorey, CA was a general practitioner with Wilkinson & Company LLP. A lifelong resident of Thurlow Township, he has a significant number of farm clients, and has been involved in the transferring of local family farms for several years.
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