According to Farm Credit Canada (FCC), farm prices across the country have risen an average of 12 percent per year since 2008. That’s more than double the average of the five years from 2003 to 2007, and several times faster than the rise in home prices during the same period.
With land bringing such big dollars, some farm owners are thinking of getting out of the farming business and selling their property while the market is hot. For those with qualified farm property, there’s an extra incentive — a $750,000 lifetime capital gains exemption (LCGE) when farm property is sold. Because taxpayers pay capital gains tax on only half of their capital gains, the LCGE can reduce the taxable income on the sale by up to $375,000.
Rules for Qualification
To be “qualified” farm property, the property must meet several criteria:
Ownership: The property must be owned by the taxpayer; his or her spouse or common-law partner ; his or her children, grandchildren or great-grandchildren; a personal trust; or a partnership in which the taxpayer or spouse or common-law partner or child, grandchildren or great-grandchildren own an interest (“specified persons”).
In addition, the property must have been owned by one of the specified persons for at least two years, and used principally for farming by at least one specified person or by a family-farm corporation owned by one or more specified persons (“specified users”). Note that the specified user does not have to own the property.
Types of property: Qualified farm property can include shares of capital stock in a family farm corporation, an interest in a family farm partnership, real property (land and buildings), and eligible capital property, such as milk and egg quotas.
Usage: “Principally” used for farming means that the specified user of the property was “actively engaged on a regular and continuous” basis in farming. To meet this definition the income from farming must exceed all other sources of income in at least two years.
If the specified user was a family-farm corporation or partnership, the property must have been used principally in the farm business and a specified person must have been “actively engaged on a regular and continuous basis” in the farm business for at least 24 months.
Property acquired prior to June 18, 1987 may still qualify for the exemption even if it doesn’t meet the requirements above. To qualify under a special exemption, property purchased prior to 1987 must have been used for farming either in the year it is sold or used for farming for at least five years during the ownership period.
This special exemption is especially helpful to farm-owning families in which the farming generation has retired. If the children are not interested in keeping the property as farmland, the owner can still claim the LCGE of the land was used for farming for at least five years.
Because the qualification criteria are somewhat complicated, it’s wise to consult with a tax advisor before the sale. Note that if the farm property is also the taxpayer’s principal residence, the capital gain can be divided into principal residence and farm property. The principal residence exemption would be calculated for the principal residence portion, and the $750,000 LCGE would be used for the farm property.
If you’re considering selling the property soon, ask your tax advisor about whether it makes sense to wait until next year. The 2013 Federal Budget proposes to increase the LCGE to $800,000 in 2014, and index it to inflation in subsequent tax years.