How To Use The $1 Million Capital Gains Exemption When All Of Your Land Is A Farm Corporation

This is the second part in a new series on Farming & Agriculture. If you haven’t had a chance to read it yet, check out Part 1: How Farm Corporations Win the Land Purchase Game.

 

Is your land all owned by a farm corporation? Find out how to use the $1 million capital gains exemption to your benefit.

We met with a client (Conrad) recently and he informed us that his goal was to retire from farming within the next 5 years.

Conrad has no children and will be selling all of the farm assets. He also farms through a farm corporation and all of the farmland is owned by the farm corporation (no land held personally).

Conrad has done well over the years and the farm corporation has a value of $7 million as follows:

  • Land $4.0 million

  • Equipment $1.0 million

  • Inventory $0.5 million

  • Cash/investments $1.5 million.

Conrad knows he is going to pay a significant amount of tax when he is ready to cash out. His particular question was whether he could use the capital gains exemption (CGE) when he sells the land.

We explained to Conrad that the CGE is available to individuals when they dispose of qualifying farm property (QFP).  The qualifying farm property rules are very complicated, but generally speaking, land that has been actively farmed for many years will be considered QFP.

Conrad was happy with this and explained that he had actively farmed the land for over 30 years and therefore “it will surely be QFP”.

That lead us to some good news, as well as some bad news for Conrad:

  • BAD NEWS:  As the land is in a corporation, Conrad does not directly own the land.  The CGE is a personal tax exemption and corporations do not get the $1 million CGE.  Therefore, if the corporation sells the land directly, it will be taxed fully and Conrad will not be able to claim the CGE.

  • GOOD NEWS:  Conrad owns all of the shares of the corporation and these shares can be considered to be qualifying farm property. Therefore, if Conrad sells the shares of the corporation, rather than the land, Conrad can use his $1 million CGE.

Conrad was fairly happy with this information, but he understood that by selling the shares of the corporation, he would also be transferring all of the corporate assets to the buyer. This means that the buyer would get the equipment, inventory and cash/investments totaling $3 million.

This would make for a complicated sale and Conrad only wanted to sell the land.

We then explained to Conrad that we could separate the Land ($4 million) from all of the other assets ($3 million).  The cleanest way to complete this would be to split the current corporation into 2 separate corporations (land in “LandCo” and other assets in “OtherCo”). This would allow Conrad to sell just the shares of “LandCo” in 5 years time. He would then get proceeds of $4 million and be able to use his CGE to shelter the first $1 million (he would pay capital gains tax rates on the next $3 million).

We confirmed to Conrad that we would need to complete this corporate split several years in advance of sale so that Revenue Canada would allow Conrad to use his CGE.

There are lots of other considerations that we discussed with Conrad, including whether to put the entire $4 million of land into LandCo, or to put less land into LandCo (this depends on what prospective buyers may wish to purchase).

Remember that when it comes to using your capital gains exemption, all is not lost if all the land is in your corporation!

 

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