Understanding long-term capital gains

Farmland values across the country have reached new heights and continue to trend upward. While there are benefits to a healthy market, the rise has some farmers asking “What will happen when I sell?”

How capital gains, or the difference between your cost base and the selling price of your asset, will impact tax is a common question for farm advisors.

Kyle Lopez, senior tax manager at BDO Canada, says the first step to determining your exposure is to understand the tax exemptions and deferrals specific to farmland.

Capital gains exemption

The Lifetime Capital Gains Exemption (LCGE) provides individuals with a significant tax break when it comes to disposing of assets. It may allow you to realize up to $1 million in capital gains tax free.

The catch is that the LCGE can only be applied against capital gains on qualified farm property, so your asset must meet the definition to be eligible. Qualified farm property can be land, buildings, shares in a family farm corporation, an interest in a family farming partnership or other property, such as quota.

The property must be owned by you and have been used by you, your spouse or common-law partner, parent, child or a family farm partnership or corporation. A “parent” includes grandparents and great-grandparents and a “child” refers to children, stepchildren, grandchildren and great-grandchildren.

If you purchased the property before June 17, 1987, the property must be principally used in a farming business by a qualifying person in the year of the sale. Alternatively, it must have been used for a farming business for any five years during its ownership.

Simply put, the property may not qualify if you’ve often rented it out.

For qualifying properties purchased after June 18, 1987, the situation is more complex. The gross revenue from farming must have exceeded net income from all other sources for at least two years. The property can also qualify if it was used by a family farm corporation or partnership for any two years and a qualified person is actively engaged on a regular and continuous basis in that farming business.

Transfer or sell?

Read More