Whenever there is a disposition of an asset or shares, the seller or transferor may have to pay taxes if there has been an increase in the value of the assets or shares from when they were purchased or acquired. This increase is called a capital gain and half of the amount of the gain is included in the income of the seller or transferor. In the case of a family transfer, whether by gift or for a price, the seller or transferor is deemed to receive proceeds at fair market value even if they did not in fact receive any proceeds or received less. The seller or transferor may then have to include half of the difference between the deemed fair market value and their cost for the asset or shares in their income.

For example: Assume property was purchased for $50,000 and, at the time of the transfer from a parent to child, its fair market value is $100,000. This creates a capital gain of $50,000 of which $25,000 would be included in income. It is best to consult your accountant or tax planner to understand your tax implications and best options for your farm.

Any transfer may also trigger recapture tax on depreciated assets.

However, there are a number of exemptions or deferrals of taxes which may be available to reduce this burden. There are a number for farmers in particular.

Further, there may be structuring opportunities available to minimize these taxes. The ideal structure for a particular farmer depends largely on their structure and wishes.

Main tax tools to help defer or avoid tax

Here are some exemptions and deferrals specific to farms:

Inter Vivos Intergenerational Deferral: This applies when a parent, while living, sells or gifts farm property, shares of the farm corporation’s capital stock or an interest in a family farm partnership to their child(ren). If the transfer qualifies, there will be a deferral of tax for capital gains and recapture.

Intergenerational Deferral on Death: This applies when a parent transfers farm property, shares of the farm corporation’s capital stock or an interest in a family farm partnership to their child(ren) on their death. If the transfer qualifies, there will be a deferral of tax for capital gains and recapture.

Capital Gains Exemption for Qualified Farm Property: An exemption may be available for capital gains triggered by the transfer of qualified farm property of up to $800,000. This can be used when the intergenerational deferral is not available or if it makes sense to trigger the capital gain for other tax purposes.

Other important tax provisions which are not specific to farms include:

Principle Residence Exemption: An exemption from payment of capital gains tax may be available for the sale of your home or cottage. You can only designate one property each year per family unit and, in order to qualify, you must own it. Therefore, it’s smart to avoid causing your home to be owned by a corporation as the principle residence exemption may be lost.

Capital gains exemption for small business corporations: An exemption is available for the sale of shares of a qualified small business corporation if (a) the shareholder has held the shares for two years, (b) the company assets have been at least 50% active for those two years, and (c) at the time of the sale, the assets are at least 90% active.

Spousal Deferral: You can defer tax for capital gains and recapture in transfers between spouses.