Last updated: Mar. 5, 2024
When the time comes to sell the family farm, understanding capital gains taxes—and capital gains exemptions—can help ensure you keep all of the profits from the sale that you are entitled to.
If you sell your farm for more than you paid for it originally (minus the expenses incurred to sell the property), you may be responsible for paying tax on 50 percent of the profit. This is also known as capital gains. Selling the property for less than you bought it for is considered a capital loss, and you may be able to claim the loss as a tax deduction.
However, the Canada Revenue Agency (CRA) has complex rules governing taxes on property sales, so it’s important to understand that not all capital gains are taxable and not all capital losses are deductible.
Let’s take a closer look at when the sale of a qualified farm property is exempt from capital gains.
What are capital gains exemptions?
In Canada, the lifetime capital gains exemption (LCGE) exempts individuals from paying taxes on a percentage of the capital gains from the sale of qualified farm property.
To be eligible for the exemption, the following criteria must be met:
- The property must be qualified farm property.
- The seller must be a Canadian resident.
- The seller, their spouse, or their common-law partner must meet specific ownership and property use conditions.
The Canadian government establishes the LCGE limit, and it is subject to change. The LCGE is currently $1 million for qualified farm and fishing properties and $971,190 for qualified small business corporation shares. Because only half of the capital gains are included in your taxable income, the cumulative capital gains deductions for the sale of these qualified assets are $500,000 and $485,595, respectively.
Note:Beginning in 2024, 100 percent of the capital gains will be included in your adjusted taxable income for alternative minimum tax (AMT) calculations. A deduction may be claimed for 7/5 of the LCGE that is claimed in the regular tax calculation, which can help reduce the impact of AMT.
It’s also important to note that LCGE can contribute to a higher net income, which may trigger full or partial Old Age Security (OAS) clawbackif your net income exceeds a certain threshold.
If you plan to use the LCGE, it’s advisable to fully understand the implications. The considerations extend beyond simply receiving a tax exemption and may impact your taxable income and government benefits, such as OAS. We recommend working with a tax specialist to ensure you get the most accurate, up-to-date information.
What is considered a qualified farm property?
We’ve been throwing around the phrase “qualified farm property,” but what does that actually mean?
Qualified farm properties that are eligible for the capital gains exemption fall into one of these categories:
- Real property used in the business of farming, such as land, buildings, and other immovable assets, owned by you, your spouse, or your common-law partner
- Share of the capital stock (assets, property, financial resources) of a family farm you, your spouse, or your common-law partner own
- Interest in a family farm that you, your spouse, or your common-law partner own
- Class 14.1 depreciable property, such as milk or egg quotas, used in the normal operation of a farming business in Canada
How do you determine taxable capital gains?
Here’s a high-level breakdown of when capital gains on a farm sale are taxable and when they are exempt.
However, the tax rules are fairly complicated and change frequently, so working with a tax specialist who understands the intricacies of Canadian farm taxes will help ensure you don’t pay more capital gains than you should.
Disposing of Farmland That Includes Your Principal Residence
- If your home was your principal residence for every year you owned it, you generally don’t pay tax on any capital gains when you dispose of it.
- If you sold farmland that included your primary residence, only the gain on the nonresidence land is taxable.
- If your home wasn’t your principal residence for every year you owned it, there may be a taxable capital gain.
Transfer of Farm Property to a Child
You may be able to transfer Canadian farm property to your child, which allows you to postpone paying tax on any taxable capital gain and any recapture of capital cost allowance until the child sells the property.
However, the transfer must meet both of these conditions:
- Your child was a resident of Canada immediately before the transfer.
- The qualified farm property is in Canada; is used as a farming business carried on in Canada; and you, your spouse, your common-law partner, or any of your children were actively engaged in the business on a regular and ongoing basis before the transfer.
There are a few pitfalls to watch out for that can negate your capital gains exemption on an intergenerational farm rollover.
For example, if your farm is being leased to tenants or you’re involved in a sharecropping arrangement, the income from the farm property may be considered rental income, not farming income, and therefore will fail to meet the conditions listed above.
Sale of Capital Property Purchased Before 1972
Capital gains on the sale of property weren’t taxed before 1972. If your qualified farm property was purchased before then, the sale will be subject to special rules, and you will need to complete T1105 Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972.
Incorporated Farming Businesses
If your family farming business is incorporated, the capital gains exemption may be available on the sale of a share of your corporation if certain conditions are met:
- The incorporated farm is a Canadian-controlled private corporation.
- You, your spouse, your common-law partner, or a partnership of which you were a member own the share.
- In the 24 months immediately before the sale, more than 50 percent of the fair market value of the assets of the corporation were used for active business carried out primarily in Canada.
- In the 24 months immediately before the sale, no one owned the share other than you, a person related to you, or a partnership of which you were a member.
Proactive tax planning helps you keep more of your money.
Whether you’re selling the family farm or trying to maximize your corporate tax deductions, working with someone who understands the complexities of Canada’s tax laws—and the complexities of running a small business—will help you keep more of your hard-earned money at tax time.
Speak with someone on the FBC team to learn how we support farmers and other small business owners with services to help maximize your tax savings, simplify your books, and manage your payroll.
Strategic tax planning and preparation are crucial factors if you want to maximize tax savings and build 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.
