There are several provisions of the Income Tax Act (Canada) which allow farmers and ranchers to reduce or avoid the capital gains tax payable on the transfer of farmland to their children during their lifetime or upon their death. These provisions are commonly referred to as the “family farm rollover” for farm property which qualifies. These are exceptions from the usual tax treatment of capital assets which are particular to owners of farmland, and which farmers and ranchers need to be aware of when putting together their estate plan.
Typically, capital assets transferred to children either on death or during the lifetime of the owner would trigger a taxable event – capital gains tax would be payable based on the fair market value of that asset. This often leads to the asset itself having to be sold in order to cover the tax owing to Canada Revenue Agency. The “family farm rollover”, provides for farmland to be transferred to the farmer’s children without triggering such tax. This allows the children to receive the farmland and continue the business without having to sell or otherwise break up the farm, and is designed to allow family farms to continue operating even though the value of their land may have significantly increased and therefore had a capital gain.
In order to qualify for the rollover, a few conditions need to be satisfied. One of the most important to be aware of is the historical use of the farmland. At the time the property is transferred, it has to have been used principally in a farming business in which the landowner, their spouse and/or child was actively engaged in on a regular and continuous basis, for at least 50% of the time it had been owned by the family.
The words “actively engaged” generally means that the landowner must either have been farming the land as their own business themselves, or in a partnership or joint venture with another party wherein they took risk and derived a profit. Renting out the land to a tenant does not qualify as “actively engaged” in farming. So if a landowner owned land for 50 years, farmed that land themselves for 20 years, then cash rented it out to a neighbour for 30 years, they would not be able to qualify for the rollover to their children, as they only actively farmed the property for 40% of the time it was owned.
Helpfully, however, the rollover provisions allow for the time the landowners direct blood ancestors actively farmed the land to be added to these numbers. Let’s say the landowner’s father owned the land and farmed it for 20 years, then gifted the land to the landowner. Then, the landowner farmed it for another 20 years, and subsequently rented in to a neighbour for 30 years. Because the landowner and his father combined actively farmed the land for a total of 40 years out of 70 that the family owned the land, or 57% of the time. In this case, the landowner can qualify for the rollover of that land to their children.
In order for our landowner to keep their rollover qualification, however, he only has 10 years to either transfer the land to his children, or become “actively engaged” in farming himself. Otherwise, he will have rented the land out for more that 50% of the time, and lose the rollover qualification.
If you lease out any farmland that you wish to gift to your children, it is important to consider the impact of this 50% rule. This is one of many considerations when planning for the transfer of family farm assets to your heirs. The assistance of a qualified accountant and lawyer who understand the nuances of these provisions of the Income Tax Act is important to ensure that your assets are properly transferred, and a large and avoidable tax burden does not impact your estate or heirs.
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A Partner at Beaumont Church LLP in Calgary, Dan Hawkwood comes from a long line of farmers and ranchers in the Calgary area and brings the experience of his rural upbringing to his practice.
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