Last updated: Dec. 4, 2024 

Don’t Be Fooled: The Truth About Interspousal Transfers on Qualified Farm Properties 

You’ve worked tirelessly on your farm. Now, it’s time to reap the rewards… and pay as little tax as possible. 

A good neighbour mentioned that adding your spouse’s name to your Qualified Farm Property (QFP) right before selling is a great way to protect assets and avoid taxes. But is it really? Let’s explore the facts around interspousal transfers. 

As you may know, selling or transferring QFP in Canada makes you eligible for the Lifetime Capital Gains Exemption (LCGE), which was recently increased to $1.25 million. So, in theory, you should be able to add your spouse’s name to the title, sell, and double up on the exemption, right?  

Wrong. 

Adding your spouse or common-law partner’s name to the title of farmland held solely in your name does not automatically double your LCGE. The Canada Revenue Agency (CRA) clearly states that the transfer of land (in full or in part) to a spouse does not bestow the exemption on the spouse.  

The CRA believes this to be tax avoidance and, therefore, subject to anti-avoidance legislation. If you transfer an interest in your property to your spouse, any future capital gains will be attributed to you under gifting attribution rules. 

RELATED: Understanding Capital Gains Exemption for Farm Property 

Tax Implications of Adding a Spouse to Title Before Selling  

Current tax rules prevent someone from gifting the property to their spouse or common-law partner to create an instant $1.25 million tax break. In this situation, the capital gain would be attributed back to the original farmer upon sale, eliminating any tax advantage. 

What if the farmer sells the property to the spouse at Fair Market Value (FMV), charges current interest rates on any loans to the spouse, and does not use the tax-deferred rollover provisions that can apply to a transfer to a spouse? Unfortunately, the sale to the spouse at FMV triggers a capital gain for the farmer, but they get the actual capital gain instead of an attributed gain.  

Transfer of Qualified Farm or Fishing Property to a Spouse or Common-Law Partner 

In Self-employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 6 – Capital gains, the CRA states that a farmer or fisher can transfer property to a spouse, common-law partner, or a spousal or common-law partner trust during the farmer’s or fisher’s lifetime. At the time of transfer, the farmer or fisher can postpone any taxable capital gain or recapture of the Capital Cost Allowance (CCA). 

If the spouse or common-law partner later sells or transfers the property, the farmer or fisher, not the spouse or common-law partner, generally has to report any taxable capital gain. This rule applies in cases where the farmer or fisher is alive when the spouse or common-law partner sells the property. However, there are exceptions to this rule.  

Exceptions to Interspousal and Certain Other Transfers and Loans of Property 

In the CRA’s Interpretation Bulletin IT-511, Interspousal and Certain Other Transfers and Loans of Property, they discuss a comprehensive set of rules intended to prevent a taxpayer and the taxpayer’s spouse from splitting income from the property to reduce the total amount of tax payable on that income.  

The only exceptions are as follows: 

• The spouse pays fair market consideration. 
• The parties are living separately and apart due to a marriage breakdown (i.e., divorce). 
• The amount of income earned – and the capital gains and losses realized on property transferred or loaned from a taxpayer to the taxpayer’s spouse (and on property substituted for that property) – are generally deemed to be the income, gains or losses of the taxpayer and not of the taxpayer’s spouse. 

The bulletin also discusses an anti-avoidance rule that sometimes applies when an individual incurs indebtedness to acquire property, to attribute the income from the property (and on property substituted for that property) to the debtor. The provision also applies to cases where the individual and the debtor do not deal at arm’s length, and one of the main reasons for the indebtedness was to reduce or avoid tax. 

There’s No Shortcut to Tax Savings 

While there are tax strategies that can help you minimize the tax you pay when selling or transferring qualified farm property, doubling your exemption through an interspousal transfer isn’t one of them. 

If you are considering transferring your farm property to your spouse, it is critical to consult a tax specialist to explore the potential tax implications of various scenarios.  

Remember, every farmer’s situation is unique, and what may work for your neighbour may not work for you. A customized tax strategy is your best bet to help you and your family thrive in the years to come. 

Ultimate Guide to Tax Planning and Preparation for Canadian Farmers [Free Download] 

Strategic tax planning and preparation are crucial to maximizing tax savings and building wealth for the future. 

Download Ultimate Guide to Tax Planning and Preparation for Canadian Farmers, Contractors, and Small Business Owners to learn how to implement best practices and take advantage of tax tips so you can reduce costs today and lower your future tax obligation. 

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