As farmland values keep increasing, the tax consequences of selling farmland become more obvious. Many, if not all, producers in their lifetime will sell or transfer farmland. Farmland keeps appreciating in value and this will have tax consequences eventually. The sale of your farm will have taxes on it, it is just going to vary by how much and which kind.
This is one of those situations where you will need to consult with your accountant before you put up the real estate sign or visit the notary to transfer the property to someone. A transfer of the property to another family member will still be deemed a sale and needs to be treated as such. No matter what the situation, an appraisal should be done to determine the value of the farmland and any buildings.
Capital gain: The difference between the proceeds and the adjusted cost base less any outlays or expenses. The adjusted cost base (ACB) is the original purchase price plus any upgrades that were capitalized over the years. Generally, only buildings have capitalized upgrades.
Corporations & Sales Taxes
There are two situations where the taxation of farmland is fairly straightforward; sales taxes and land held within a corporation. All farmland sales are subject to sales taxes which means HST/GST/PST/QST has to be added to the purchase price. If the farm is being sold from one farm business to another, and both businesses are registered, an election can be made to declare the sales tax without the transfer of cash. This is form GST44 and typically one party then reports both the sales taxes deemed collected and the associated sales tax ITC.
If the farmland is owned within a corporation, it will be treated as normal capital gains. If a corporation sells farmland for $1.5million and their ACB was $600,000, their capital gain is $900,000. This is taxable at 50%, so $450,000 is added to taxable capital gains income. Depending on the corporation’s situation, the taxes owing on this will be somewhere between $54,900 and $225,765 (assuming it’s an Ontario corporation). They would also declare or remit $195,000 of HST (Ontario, 13%).
Equipment & Buildings
The taxation on equipment and buildings is fairly similar whether the seller is a corporation or not. If equipment is sold for less than its original purchase price but more than the undepreciated capital cost (UCC) balance, the difference is a recoverable portion that is added to business income. If the equipment sells for more than its original purchase price, the difference between the UCC and purchase price is the recoverable portion and the difference between the purchase price and the selling price is a capital gain. Buildings function much the same way unless it is an individual/partnership selling a home.
The house and the 1.23 acres surrounding it are not considered part of the farm. If there is a house included, it is very important to get an appraisal and assign a separate value to the house. Houses are subject to normal capital gains with the possibility of principal residence exemption if the seller was living in the home while they owned it.
Individuals and Partnerships
This is where the tax situation gets complicated quickly. If an individual or partnership is selling farmland, they have the opportunity to use their lifetime capital gains exemption (LCGE). This limit is currently $1million and once it is used up, it is gone. The first step here is to make sure the farmland is a qualified farm or fishing property (QFFP).
If the farmland meets the criteria for QFFP and the seller has their full LCGE available then the aforementioned farm sale of $1.5million (ACB of $600,000, capital gain of $900,000), would have the LCGE allocated against it for no taxable gain. There will be some tax associated as this type of transaction usually triggers the alternative minimum tax (AMT) (likely around $135,000). The key here is making sure that you have income after the sale as the AMT can be recovered for up to seven years.
The taxes owing would be likely over $225,000 if the farmland does not meet the criteria. In that case, under current capital gain inclusion rates (50%), $450,000 of the gain is taxable.
Qualified Farm Property
If you don’t take anything else away from this article, please know that making sure your farm meets the qualified farm property (QFFP) criteria is important. Never assume that since you’ve been farming the land for twenty years that it will be considered QFFP when it comes time to sell it. Some farmland will automatically qualify if you purchased it prior to June 18, 1987. If that is not the case, there is a detailed list of criteria that needs to be followed:
You (or an immediate family member) need to have been running a farm business on the land in the 24 months before the sale. If you need a refresher on what is considered a farm business, read here. Renting the land out to another farmer who is not your spouse, parent or child does not count.
In those 24 months, the farm business must generate more gross revenue than all other sources of income. If the farm business is a partnership or corporation this revenue test does not apply.
The full details are in the Income Tax Act under sections s.110.6(1) and s.110.6(1.3). The criteria for QFFP is the key to making sure you can use your LCGE if you own the farm as an individual or a partnership.
Summary
Farmland is generally subject to HST. Always make sure HST is in addition to the agreed purchase price. It should not be included in the purchase price.
Get an appraisal done to determine the value of the farmland and any residential buildings included in the sale.
Make sure your farm is actually a qualified farm property. Do not assume you will have access to your lifetime capital gains exemption without verifying this detail.
There is no such thing as a tax-free farm sale. You will be paying something, and you need to plan for that in advance.
As always, this is for information purposes. For your accountant’s sanity, call them before you sell your farm and find out what tax consequences will apply in your situation. Next up we’ll go over why you need to plan transfers to the next generation years in advance.