Last updated: Nov. 29, 2024 

How the New Capital Gains Inclusion Rate and Related Tax Rules Will Affect Farm Property Sales and Transfers  

Misunderstandings and misinformation swirled around the internet as farmers tried to prepare for the impact of the new capital gains inclusion rates, which took effect in June 2024.  

While the inclusion rate received the most public attention, other recent tax rule changes, such as increases to the Lifetime Capital Gains Exemption (LCGE) and the Alternative Minimum Tax (AMT), could also affect farmers’ taxes when they sell or transfer their farm property. 

Now that the dust has settled, let’s discuss how these three tax rules potentially impact the sale or transition of your farm. We can start by quickly reviewing the inclusion rate change. 

Basic Facts About the Inclusion Rate Change for Farmers 

• More Significant Impact: Individuals benefit from a 50% inclusion rate on the first $250,000 of annual capital gains. Anything over that faces a 66.67% rate. Unfortunately, for family farm corporations, there is now a flat 66.67% rate for all capital gains. 
• Inclusion Rate vs. Tax Rate: The inclusion rate is a percentage of capital gains added to your taxable income in that year, not the tax rate you pay. You will not be taxed at 50% or 66.67% when you sell or transfer your farm. 
• Gifting and Capital Gains: Gifting or transferring an asset triggers a capital gains tax based on its Fair Market Value (FMV), not the sale price – even if no money changes hands. 

• Capital Loss Application: Capital losses cannot be applied to personal use and depreciable property, like farming equipment. The capital cost of depreciable properties can be written off as a Capital Cost Allowance (CCA) over several years, following specific rules and rates.
• Farm Exemptions Remain: Budget 2024 increased the Lifetime Capital Gains Exemption (LCGE) for qualified farm and fishing property from a little over $1 million to $1.25 million. There have been no changes to the rules around intergenerational farm transfers to spouses/common-law partners or children. 

What is a Capital Gain (or Loss)? 

The inclusion rate change does not affect the formula you use to calculate a capital gain or loss. 

If you sell your farm for more than you paid for it originally (minus the expenses incurred to sell the property), this is considered a capital gain. If you sell it for less than you paid, it’s regarded as a loss.  

Gifting, or any other event where ownership of an asset changes, is still considered a “deemed disposition,” triggering a potential capital gain or loss. Remember, you can also claim any outlays or expenses (such as lawyer or realtor fees) against the proceeds of disposition. 

To calculate a capital gain or loss, you can use this basic formula: 

Proceeds of Disposition – (Adjusted Cost Base + Outlays & Expenses) = Capital Gain (or Loss) 

As you can guess, the Canada Revenue Agency (CRA) has complex rules governing taxes on property sales. So, it’s essential to understand that not all capital gains are taxable, and not all capital losses are deductible. 

As mentioned above, as of June 2024, the new rates are: 

• Individuals: The inclusion rate is 50% up to $250,000 and 66.67% on any amount beyond that. 
• Corporations & Trusts: The basic inclusion rate is 66.67%. 

However, other tax code changes may help alleviate some of the burden of the higher inclusion rates, depending on your farm operation, tax history, and the amount of money generated from a potential transfer, such as Lifetime Capital Gains Exemption (LCGE). 

Lifetime Capital Gains Exemption Increase for Qualified Farm Properties 

While the inclusion rate increased, the Lifetime Capital Gains Exemption (LCGE) for qualified farm or fishing properties also increased from $1 million to $1.25 million as of June 25, 2024. The LCGE will continue to be indexed yearly. 

While your farm does not need to be incorporated to claim the LCGE, it must meet specific criteria, including being a qualified farm property. 

RELATED Understanding Capital Gains Exemption for Farm Property 

You should also be aware that claiming LCGE can have other tax implications. For example, as the LCGE is used when you have higher taxable income, it can lead to a full or partial Old Age Security (OAS) clawback or subject you to Alternative Minimum Tax (AMT), a separate tax system that targets individuals with high personal income. 

Also, you cannot simply add your spouse or common-law partner’s name to the title right before you sell the property to double up on the exemption. Transferring land (in full or in part) to a spouse does not bestow the LCGE on the spouse, and the Canada Revenue Agency (CRA) views this as an avoidance and, therefore, subject to anti-avoidance legislation.  

Before transferring or selling your farm property and using your exemption, we highly recommend seeking expert tax advice about your situation. 

Farm Property Sales and the New Alternative Minimum Tax Rules 

As mentioned above, claiming LCGE may help lower your taxable capital gain but could also trigger another tax that many Canadians are unfamiliar with: Alternative Minimum Tax (AMT). 

AMT is a separate tax regime designed to prevent high-income individuals and certain trusts from using tax deductions and credits to avoid paying taxes. While each case differs, it generally kicks in when an individual’s taxable income exceeds the highest marginal tax bracket, as is often the case when farmers go to sell or transfer their farm property. 

This tax system uses a complex set of rules and a different calculation based on adjusted taxable income. Also referred to as the base AMT, the adjusted taxable income includes your net taxable income plus specific tax preference items, like capital gains, including the LGCE.  

Similarly to other tax changes, the government recently changed AMT rules to broaden its tax base and make it applicable to more Canadians. These changes included: 

• Increasing the tax rate to 20.5%. 
• Increasing the capital gains inclusion rate to 100%. 
• Increasing the under-exemption threshold to $173,205. 

Under AMT rules, high-income individuals calculate their taxes using the marginal tax rate (income tax) and AMT – you pay whichever tax is higher. 

Paying AMT may catch many farmers off guard, and it can undoubtedly affect retirement cash flows. The only potential bright spot is that you can recover AMT through future tax credits for up to seven years following the year you pay it.  

The catch is that, like any tax credit, you must generate enough income to pay a tax equal to or greater than the AMT. You will never recover that tax if you stop working or generating income after selling or transferring your farm. 

Read Alternative Minimum Tax (AMT) Changes: Everything You Need to Know 

How the Capital Gains Inclusion Rate and Lifetime Capital Gains Exemption Affect Farm Property Sales and Transfers 

As mentioned above, while the Canadian government increased the LCGE limit, they also recently increased the basic inclusion rate for all capital gains and losses from half (50%) to two-thirds (67.67%) and introduced a new inclusion step for individuals of half (50%) for capital gains under $250,000.  

The upward tick in the LCGE does not impact the rules of farm transfers or sales. However, farmers looking to sell or transfer property should be aware of exceeding their LCGE due to the new $250,000 inclusion rate step for individuals. 

While the new maximum lifetime deduction is $833,333 ($1,250,000 × ⅔) to reflect the new basic inclusion rate of two-thirds, for individuals subject to the first $250,000 inclusion step, it is actually 791,667 ($250,000 × ½ + $1M × ⅔). Under the new inclusion rates, breaking your capital gain over different years will not boost your taxable LCGE – it will reduce it.  

Example – Elly as a First-Time LCGE Claimant 

Elly, a farmer in Canada, recently sold her qualified farm property and realized a capital gain of $1.25 million. She has no other capital gains or losses, or employee stock options. Here is how the LGCE would be applied: 

Calculating the Capital Gain Inclusion Rate: 

• • First $250,000: $250,000 × 50% = $125,000 
  • Remaining 1,000,000: 1,000,000 × 66.67% = $683,333  
  • Total Taxable Capital Gain: $791,667 

 LCGE Deduction: 

To fully offset this additional taxable income, Elly would be eligible to claim a net LCGE deduction of $791,667 in computing her taxable income. However, this deduction would reduce her remaining LCGE limit by the full $833,333 to ensure she cannot exceed her lifetime limit. She has used up her LCGE deduction for her lifetime. 

Capital Gains Inclusion Rate Change and Farm Transition Planning 

As you can see, any number of tax scenarios can play out under the new capital gains inclusion rate change. While the capital gains exemption is designed to help with farm transitions and sales, the reality is that generating a high capital gain could trigger the AMT. The timing of your farm transfer or any potential future sales must be planned, and a tax strategy that works for you and your family must be included. 

Consulting with a tax expert can help you find the best path forward and update your farm transition plan to reflect this. This way, you can still benefit from your years of hard work and set the next generation up for success as they take over the farm or eventually sell. 

If you do not have a relative who wants to take over the farm, it’s just as important to seek qualified tax advice to help you minimize your tax burden as much as possible. 

A Guide to Transition Planning for Farmers [Free Download] 

Transition planning is one item on a farmer’s to-do list that often seems a little more difficult to strike a line through than the rest. 

In this free, 39-page eBook, we examine farm transition in-depth and give you the key insights to consider questions to ask yourself as you ponder the next steps of your farm for generations to come. 

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We deliver industry-specific support for your business, helping you maximize your tax savings, simplify your books, and manage your payroll. 

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