In Part 1 we discussed how farmers can access the lifetime capital gains exemption (LCGE), and in Part 2 we looked at the rules for determining qualified farming property. In this article, we consider another tax advantage for farmers: intergenerational transfers of qualified farm or fishing property (QFFP).
Canadian farmers may transfer land or certain depreciable property to a child on a tax-deferred, or rollover, basis. The Income Tax Act (ITA) places no limit on the value of qualified property that can be transferred under the intergenerational rollover provisions.
Consider the hypothetical case of Paul. Paul is married to Linda, and they have one child, Dana. Paul owns an estate winery in Ontario.
If Paul wishes to transfer the vineyard to Dana on a rollover basis, she must be resident in Canada immediately before the transfer. Additionally, Paul, Linda or Dana must have been actively engaged in farming (this is similar to the LCGE use test described in Part 2), and the property must have been used principally in a farming business. The CRA considers this use test to apply separately to each parcel of land.
LCGE qualification has a 24-month ownership period, but the rollover rules don’t. However, if Paul transferred the vineyard to Dana for less than fair market value (FMV), Dana must hold the property for at least three years before selling and using her LCGE. Otherwise, the CRA may retroactively deny the rollover to Paul, requiring he report the transfer at FMV on his tax return for the year of transfer.
If Paul had rented the vineyard to someone other than Linda or Dana for more than 50% of the ownership period, the rollover would be denied.
Where the property qualifies for the LCGE (see Part 2), Paul could transfer the vineyard to Dana at any value between tax cost and FMV. The value chosen becomes Dana’s tax cost. Paul may wish to transfer the property to Dana at a value in excess of his own tax cost to utilize his own LCGE on transfer. He could take back a promissory note from Dana for the value of the property transfer, and she could repay the amount over time.
On transfers of qualified property to a child, there is an extended reserve provision in the ITA that allows Paul to take the gain into income over a 10-year period, as opposed to only five years available on the capital gain of any other property. If Paul wished to give the property to Dana, he could forgive the loan to Dana under the terms of his will. If he forgives the debt to her during his life, Dana could face tax consequences under the ITA’s debt forgiveness rules.
Rebecca Hett, CPA, CGA, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments.