Agricultural legacies are opportunities for advisors

By Natasha van Bentum | January 27, 2017 | Last updated on January 27, 2017
6 min read

More than half of Canada’s farmers are aged 55 and older, the 2011 Census of Agriculture revealed. That means there will be a rise in farmland transfers in the coming decades, and, in many cases, there is no family member waiting to take over the farm.

Unless significant numbers of entrants emerge, the overall number of farmers could easily decline by a third by 2031.

At the same time, organizations and people are making efforts to identify challenges in farmland protection and to address them in new ways. These efforts focus on the connections between traditional farmland protection, food security and economic development.

Challenges with succession

In Canada, we face significant challenges related to secure and affordable land access for food production, especially for a new generation of farmers interested in using environmental best practices to enable regional food security.

Farmers also face challenges around transferring land from one generation to another. The majority can’t give the farm away, and they wish to see it protected. While they may sell at a price lower than market value, the transition of land in these cases often requires funds from third parties to support the transaction.

New farm entrants also face barriers, and several recent studies confirm that the cost of farmland is one of the most significant. A survey of new and beginning farmers by Food Secure Canada found the three most significant challenges were cost of land, lack of capital, and lack of available farmland.

Similarly, another national survey of new farmers by the National Farmers Union Youth Caucus found that, of over 15 obstacles faced by new farmers, “affordability of land ownership” was top-ranked.

An easement gift (non-Ecological Gifts Program)

John and his wife Mary* approached a farmland trust organization about their organic farm in Ontario. Diverse natural habitats are found on the property, including wetlands, river corridors and woodlands. There are also two spring-fed ponds on site and an oak swamp forest. Twenty-five acres are productive farmland.

They had farmed the property for nearly four decades and were concerned about its future once they were gone. John wanted to leave the land for future generations of farmers. The farm had several unique agricultural and natural features, which John and Mary hoped would be protected. With their children, they were able to create a farmland conservation easement that has resulted in protecting the land in perpetuity and respects the ecological integrity of the landscape.

In addition to protecting the land for its agricultural value, the easement ensures conservation, maintenance, restoration and enhancement of natural features. The Smith’s children have found several farmers to work the land, keeping the rich loam soil in production. Through an online farmer’s matchmaking tool, they advertised the farm as an opportunity for new and beginning farmers. Luckily, a match was found and tractors are now out on the fields again as a new small-scale farm enterprise takes root, and a legacy in sustainable agriculture carries on.

*Names have been changed to protect the farmers’ confidentiality.

But there are also opportunities. The recently updated Green Legacies Guide, published by Give Green Canada, a project on the Tides Canada Shared Platform, describes some giving options that can create foodland and farmland trusts. Although primarily directed for a B.C. audience, much of the content is applicable across the country.

Example of farmland donation

Let’s look at an example of a farmland donation, courtesy of the Government of Canada: Jack has been involved in mixed farming on land in the aspen parkland region of Saskatchewan for the last 32 years. Although much of this land, which has been in his family for several generations, is in cultivation or used as hay land, two quarter-sections remain in their native condition and include several aspen bluffs and wetlands.

Ducks, geese and other wildlife are abundant on these lands. Jack currently uses these native quarter sections for grazing cattle. He has been captivated since childhood by the wildlife on the land and has a strong personal attachment to it. So, he manages his land sustainably. In speaking with a local environmental group about habitat stewardship practices, he heard about the Ecological Gifts Program with Environment and Climate Change Canada.

Jack’s Easement gift, by the numbers

Calculation Example numbers Notes
Certified fair market value of the conservation easement $12,500 The conservation easement may be valued directly where comparable transactions are available, or its value may be calculated as the difference between the fair market value of the property before ($60,000) and after ($47,500) the conservation easement is put in place. The value must be certified by the Minister of the Environment.
Taxable income $40,000 Income reported for income tax purposes from employment and other sources ($40,000).
Donation limit or eligible amount in the year of the gift $12,500 For certified ecological gifts, the entire fair market value of the donation may be used to claim the related tax credit and reduce the tax payable.
Net federal income tax of the donor $6,383 Amount based on 2016 federal personal income tax rates.
Amount of donation claimed in the year of the gift $12,500 Jack could claim the entire amount in the year of the gift. Alternatively, he could use only a portion of the entire donation amount to claim a tax credit and carry any unused amount forward for up to five years.
Federal non-refundable donation tax credit deducted in the year of the gift $3,598 Based on 15.5% of the first $200 and 29% of the balance of the donation amount claimed in the year (assuming a claim for the basic personal exemption and that there are no other deductions, charitable or otherwise).
Amount available for carry forward $0 Assuming Jack claimed the full tax credit in the year of the gift.

He decides to give the group what’s known as a conservation easement on the two native quarter-sections of land to protect the land from cultivation while still being able to use it for grazing. A conservation easement is a legal agreement between a conservation body and a landowner that determines permissible and restricted land uses on that property. It is tied to the title of the land, sets out the terms of the easement, and is held and monitored by a conservation body. The conservation body can be a federal, provincial or municipal government body, an independent non-profit conservation organization, or a land trust.

The two quarter-sections are in a rural area where there are no significant development pressures. The land, originally valued at $25,000, is now worth $60,000. (For capital gains purposes, in cases where a piece of property was owned prior to December 31, 1971, its adjusted cost base is determined as of that date.) The conservation easement has been appraised at $12,500. Taking into account the easement, the land is valued at $47,500. Jack’s annual income is $40,000.

Jack’s easement gift table shows he could get a $3,598 tax credit for donating the land, thanks to the Ecological Gifts Program.

Current tax benefits around farmland easements (Ontario)

Farm owners can receive tax benefits by entering into farmland easement agreements with charitable land trusts to protect their farms from urban sprawl and other types of non-agricultural development.

Such benefits are intended to make farmland preservation more affordable for farmers and private landowners who choose to make this a part of their legacy.

The financial benefits and impact of a farmland easement agreement is affected by:

  • the taxable income level of the farmland owner;
  • whether the donation qualifies as an ecological gift;
  • availability of the Lifetime Capital Gains Exemption; and
  • whether all or part of the property is included in the farmland protection agreement.

Property value and tax receipt

As a farmland easement agreement is developed between a farm owner and a land trust, an independent appraiser is engaged to determine the extent to which the conditions of the easement will lower the market value of the property.

The farm owner is compensated with a charitable tax receipt from the land trust for the difference between the property’s market value before the easement is in place, and the value after the easement has been registered on the property title. The easement value is treated like a charitable donation to the land trust, despite no change in ownership of the farm or any tangible property changing hands.

Farm succession and tax planning

Every fiscal, family and farm business situation is unique and different. The tax receipt benefits associated with a farmland easement donation can be applied in many creative ways to benefit tax planning, estate planning and farm succession goals. The timing of easement registration and, therefore, the triggering of tax advantages can be an important factor to consider.

Farmers need to work with professional farm advisors, including a certified accountant, to understand fully the financial impact of an easement donation, how to maximize benefits of the easement process and how to create the best possible outcome.

Courtesy the Ontario Farmland Trust

by Natasha van Bentum, CFRE, Director of G2 (Give Green Canada), a project on the Tides Canada Shared Platforms.

Natasha van Bentum