Family business succession planning involves many components, including family dynamics, leadership training, financial planning, management transition,
legal agreements and – you guessed it – taxes.
Farm businesses are no different, as these common questions and answers illustrate:
Do you want to pay tax?
Of course not!
How much tax do you want to pay? Less!
When do you want to pay the necessary tax? Later!
The intergenerational farm rollover rules allow eligible farmers to transfer eligible assets to eligible children without tax, with less tax and/or with tax payable later. Farming businesses can be prohibitively expensive to start, requiring significant capital, so the government provides farmers with tax planning tools to encourage farm transfers to the next generation. In general terms, these rules are applicable to four kinds of transfers.
1. Eligible property
This is land or depreciable property (e.g., buildings, equipment, tractors, quotas) in Canada that belonged to the parent. However, not all farm assets are eligible, with inventory and financial assets notably absent. Family farm or fishing corporations and partnerships can also qualify, if substantially all the asset value is used in an eligible farm or fishing business.
2. Eligible children
This includes grandchildren, great‑grandchildren, spouses of eligible children (even if the eligible child has passed away) and eligible children of a spouse. The child in question must be resident in Canada and receive the property as an individual, not through a corporation or, technically, a partnership.
3. Used principally
Land used greater than 50 per cent for a farm business meets the “used principally” test. This is done on an asset‑by‑asset and year‑by‑year basis. For example, a parcel of land that was used 60 per cent in farming by an eligible family member (principally farming) in seven out of 13 years of ownership (principal use) should meet this test.
4. An eligible farm or fishing business
This involves the raising and harvesting of animals or plants or their byproducts, but it excludes renting out land, providing custom services to a farmer, trucking, manufacturing, generating solar energy and other non‑farming activities that could take place in a farm context.
Normally, transactions between related persons are deemed to be completed at fair market value for income tax purposes. For example, if a mother gives the family cottage to her child as a gift, she owes tax on the inherent capital gain on the cottage. However, she could give eligible farm property to her child with a deemed transfer price of her cost of the property. In this way, she would pay no income tax when making the gift!
Alternatively, the mother could sell the farm to her child at any price between cost and fair market value. A common example would be to choose a sale price equal to her cost of the property plus her available capital gains deduction and any capital loss balances. In this way, she still pays no permanent income tax on the transfer, but her child inherits a higher cost base on the farm property, which reduces the future capital gain.
These rules are nuanced, and careful planning is required. It may be prudent for a mother to sell the farm property to her child at a price higher than the cash that she wishes to receive, so her child’s tax position can be optimized. Forgiving the unpaid balance of the loan upon the mother’s death may also be beneficial. In other situations, it may be best for her to hold the property until the end of her life, allowing her estate executors to elect a transfer price in the best interest of the family.
The mother should weigh her tax position, her cash needs and her child’s tax position in evaluating her options. A sale of the property by her child within three years could negate this planning, increasing the need for family agreement. There are also HST and land transfer tax implications to consider. Whatever your situation, recommend you consult a qualified advisor.