APPENDIX A: TAXES & REGULATIONS
As part of assessing feasibility (Stage 2), it’s important to understand any legislation and regulations that will impact your decisions. From local to provincial to federal, regulatory frameworks can provide a helpful guide to the most appropriate course of action, as well as inform you about potential risks, and options that just won’t be possible.
A capital gain results when an investment, such as real estate, is sold for proceeds greater than the original purchase price. Land in Canada is subject to a tax on capital gains during sale or transfer (presently, capital gains are taxed at 50% of the taxpayer’s marginal tax rate). Where certain conditions are met, there is a $1 million individual lifetime capital gains exemption (CGE) in respect of Qualified Farm Property. Portions of the property, such as the residence, if it was the principal residence for the owners, may be 100% exempt from capital gains. In addition, it may be possible to transfer Qualified Farm Property to family members on a tax-deferred basis, meaning that capital gains are not taxed until the farmland is sold to an unrelated party. With recent increase in land values, some landholders may be faced with a significant capital gains tax if they do not have a family successor and instead must sell their land.
Qualified farm property includes:
- farmland and buildings;
- interest in a family farm;
- shares in a family farm corporation; and
Qualified farm property must meet the following conditions:
- used principally in a farming business by the individual, their spouse, child or parent (includes grandparents); or
- a family farm partnership or corporation of the individual, spouse, child or parent (can include grandparents).
- The determination of whether a particular property has been principally used in a farming business is a question of fact and the related rules are complex.
- It is essential to talk to an accountant to understand the tax implications before committing to any course of action in a transition plan.
What if the land is being leased?
Farm property may not meet the used principally criteria if the land is being leased or involved in a sharecropping arrangement, as this may be considered rental income. Whether you will qualify for capital gains exemption will depend on the nature of the business arrangement with non-family individuals. A custom work or joint venture agreement where you maintain control over key management decisions (where and what to plant, when to harvest, etc.) may meet the criteria. The expectation is that you have put in enough time, labour and attention to the business to contribute to the success, and assume any associated risks.
Considerations around Capital Gains Tax and Exemption
- The Capital Gains Exemption applies to the individual, not the property.
- Both the farmer and their spouse, if involved in the farm business, can qualify for the $1 million exemption, for a total of $2 million. Both spouses must own the property (be on title) to access both of their capital gains exemptions.
- If you’ve used a general capital gains exemption in the past, it may reduce your remaining exemption.
- When you sell your qualified farm property and use the capital gains exemption, other benefits that you receive may be affected. This can include Old Age Security pension (OAS), Employment Insurance (EI), Guaranteed Income Supplements (GIS) and your Canada Child Benefit (CCB). You may also be at risk of triggering Alternative Minimum Tax (AMT). How you defer or spread the recognition of a capital gain over time will impact which other benefits are affected.
- Through proper planning, with the help of professional legal and tax advisors, you may be able to realize significant tax savings when selling your farm property.
- Talk to an advisor, and plan ahead!
MORE READING ON CAPITAL GAINS:
PROPERTY TRANSFER TAX
Property Transfer Tax (PTT) is a tax that you must pay if you purchase a property (or otherwise gain an interest in a property, usually through a long-term lease). Property Transfer Tax is not the same as annual property taxes, which are paid every year by owners to their local government.
When registering a purchase or interest in a property, a PTT return must be filed with the Land Title Office (LTO), and, if applicable, the PTT tax paid. Taxable transactions can include a right to purchase or agreement for sale, lease or lease modification agreements or crown grant, among others. On leases, PTT is generally owed if the total lease term (including renewal periods) is 30 years or more. If you are adding an entering farmer onto title that is not a family member then PTT would be payable on the percentage of the property that is being transferred.
The amount of PTT due is determined by the fair market value, or the price that would be paid by a willing purchaser to a willing seller for a property (land and improvements) in the open market on the date of registration. How fair market value is determined depends on whether the transfer was an Open Market or Non-Open Market transaction.
In Open Market Transfers, any interested party can make an offer and the purchase price would usually be considered the fair market value. When the transfer does not take place in an open market, the value is then determined by a recent independent appraisal or the BC Assessment property valuation. The current property valuation provided by BC Assessment isn’t applicable in all cases, including on land that is classified as farm land (class 9).
The valuation can be based on a number of factors, including recent transactions of similar property that can reasonably be used as a comparison and potentially the economic value of a property. In the case of a lease this can include the consideration of the value of a lease, but only if the lease rate is at market value. If it is lower than market rates, then the appropriate valuation will likely not be based on the cash flow generated on the property, but on the potential sale value only.
A lawyer or notary can assist with the process of completing the PTT return, since there are several things to consider. If the PTT return is incomplete or not paid on the date of registration, the LTO may refuse to register the purchase or interest. Some pieces of information you’ll want to have handy when going to file your return include whether or not the purchaser is an individual, corporation, or other entity. Questions involving trusts, beneficiaries, corporations and director information (if applicable) are covered.
MORE READING ON PROPERTY TRANSFER TAX:
- Read more: gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax
- The Province of B.C. has an online tool to help estimate property transfer taxes: forms.gov.bc.ca/taxes/estimate-your-property-transfer-taxes/
Local, provincial, and federal legislation regulates many aspects related to farm transition, from on-farm practices and land use to income tax laws. At one point or another you may require another professional service regulated by provincial legislation. Regulations and associated bodies that may be relevant to farm business planning and transition include:
Local and regional bylaws: Local governments, whether municipalities or regional districts, are responsible for most land use regulations. Local bylaws may impact infrastructure and land use planning decisions in a transition plan. Municipalities and regional districts will be able to provide support or information surrounding community planning, agricultural advisory support, subdivisions, development permits, variance permits, OCPs and zoning amendments, temporary industrial or commercial use, to name a few.
B.C. Wills, Estate & Succession Act (WESA): The Wills, Estate & Succession Act (WESA) is a provincial statute that governs the law of inheritance in B.C. This statute is in effect when farmland is gifted to a new farmer through a deceased farmer’s will. Several provisions in WESA can affect the validity of a gift of farmland and can result in that gift being nullified. As a result, WESA should be carefully considered when making a will as a part of a transition plan.
Under WESA, surviving spouses and children can contest a will if it does not adequately provide for them. This makes it challenging to “disinherit” family members in B.C., and means it is essential that all members of the current farmer’s family understand and are onboard with the transition plan.
Courts have the discretion to consider and accept documents that do not meet formal will requirements but that express a will-maker’s wishes, and these documents can be used to either support or refute a gift made under a will. To best ensure that the intentions of a will are given effect, additional documentation, such as a deed of gift, should be considered to help support the gift.
Care must also be given when making gifts to spouses. First, marriage does not automatically revoke a prior will, so wills should be reviewed upon marriage to ensure they still reflect the intentions of the will-maker. Second, gifts made through a will to spouses in a marriage-like relationship with the will-maker may be nullified if it can be shown that the marriage-like relationship broke down prior to the will-maker’s death. Again, additional documentation may be needed to help support such a gift.
B.C. Agricultural Land Reserve: The Agricultural Land Commission (ALC) Act and Agricultural Land Reserve (ALR) Regulation are the legislative frameworks for the establishment, administration, and procedures of B.C.’s agricultural land preservation program. The ALR is a provincial land-use zone in which agriculture is recognized as the priority use, meaning there are specific land use rules, especially around non-farm use.
B.C. Farm Practices Protection Act (also known as the Right to Farm)