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Qualified Farm Property

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Business   ->   Capital gains exemption / Capital gains deduction -> Qualified farm property

Qualified Farm Property  - Lifetime Capital Gains Exemption (LCGE)

Income Tax Act s. 110.6(1), s. 110.6(1.3), s. 110.6(2)

An individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $1,000,000 lifetime capital gains exemption (LCGE) when the farm property is sold.  The actual capital gains deduction is 50% of the capital gains exemption.  For annual maximums, see the Capital Gains Exemption / Capital Gains Deduction article.

The 2015 Federal Budget increased the maximum LCGE for qualified farm property dispositions on or after April 21, 2015 to the greater of:

bullet$1 million; and
bulletthe indexed Lifetime Capital Gains Exemption applicable to capital gains realized on the disposition of qualified small business corporation shares.

This means that once the LCGE exceeds $1 million for SBC shares through indexation, the LCGE for farm property will be the same as the LCGE for SBC shares.

Income Tax Act s. 110.6(1) Qualified Farm Property Definition

Qualified farm property of an individual includes property owned by:

bulletthe individual, 
bulletthe spouse or common-law partner of the individual,  or
bulleta partnership, an interest in which is an interest in a family farm partnership of the individual or his/her spouse or common-law partner.

Qualified farm property is:

(a)    real or immovable property, such as land or buildings, (i.e., not machinery & equipment that can be moved) that was used in the course of carrying on a farming business in Canada by:
        (i)    the individual
        (ii)   if the individual is a personal trust, a beneficiary of the trust that is entitled to receive directly from the trust any income or capital of the trust,
        (iii)  a spouse, common-law partner, parent or child of a person referred to in (i) or (ii),
        (iv)  a family farm corporation where any of the persons in (i) to (iii) above owns shares in the corporation, or
        (v)    a partnership, an interest in which is an interest in a family farm partnership of an individual referred to in any of (i) to (iii) above,

(b)    a share of the capital stock of a family farm corporation of the individual or the individual's spouse or common-law partner,

(c)    an interest in a family farm partnership of the individual or the individual's spouse or common-law partner, or

(d)    an eligible capital property (such as production quotas) used by a person or partnership referred to in any of (a) (i) to (v) above, or by a personal trust from which the individual acquired the property, in the course of carrying on the business of farming in Canada.

Note:  (a) above previously said "...used principally in the course of carrying on a farming business...".  The word "principally" was removed.  This amendment applies to dispositions made after May 1, 2006.

Although movable machinery and equipment are not qualified farm property, this type of asset does not generally increase in value, so would usually not generate a capital gain.

Income Tax Act s. 110.6(1.3) Property Used in a Farming Business

There are rules about the period of ownership and the use of real property and eligible capital property in order to meet the qualified farm property requirements:

(a)    throughout the 24 month period immediately preceding the disposition of the property, the property must have been owned by one or more of
       (i)    the individual, or a spouse, common-law partner, child or parent of the individual,
       (ii)   a partnership, an interest in which is an interest in a family farm partnership of the individual or of the individual's spouse or common-law partner,
       (iii)  if the individual is a personal trust, the individual from whom the trust acquired the property or a spouse, common-law partner, child or parent of that individual, or
       (iv)  a personal trust from which the individual or a child or parent of the individual acquired the property;

and

(b)    one of the following requirements must also be met:
        (i)    in at least 2 years while the property was owned by the one or more persons mentioned above,
                (A)  the gross revenue of a person referred to in (a) from the farming business exceeded the income of that person from all other sources for that period, and
                (B)  the property was used principally in a farming business carried on in Canada in which an individual referred to in (a), or where the individual is a personal trust, a beneficiary of the trust, was actively engaged on a regular and continuous basis, or
        (ii)    the property was used by a family farm corporation or partnership  in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time one of the persons mentioned above was actively engaged on a regular and continuous basis in the farming business in which the property was used.

The above means that there is no gross revenue requirement for a family farm corporation or partnership.

If the farm property is real property that was acquired prior to June 18, 1987 and does not meet the above requirements, it still may qualify for the exemption.  To qualify, it must have been used by one of the persons mentioned above, principally in the course of carrying on the business of farming in Canada in the year of disposition, or in at least 5 years during which the property was owned by any of the persons mentioned above.

If the farm property is also the taxpayer's principal residence, the capital gain on disposal may be divided into principal residence and farm property.  The principal residence exemption would then be calculated for the principal residence portion, and the $750,000 capital gains exemption used for the farm property.

More information on qualified farm property can be found in the CRA guide T4003 Farming and Fishing Income.

Tax Court Case re Qualified Farm Property

A Tax Court of Canada case, 2014 TCC 250 Otteson v. The Queen, is an interesting (and educational) case won by the appellant.  The 50.16 acre farm property in question was in Alberta, owned by a married couple.  They started a tree farm operation but then sold the property after the finding of significant amounts of gravel on the property resulted in unsolicited and persistent offers for the land.  The Minister of National Revenue argued that the couple did not conduct their farming business through a partnership, and the gross revenue requirement had to be fulfilled, and was not.  Justice Hogan ruled that the couple was carrying on their farming business as a partnership, and that the actual area farmed (25.91 acres) was qualified farm property.

Resources:

Top Ten Tax Questions on the Capital Gains Exemption - Ontario Ministry of Agriculture, Food and Rural Affairs

Line 254 - Capital gains deduction - Canada Revenue Agency

Tax Tip:    This issue is complicated and can save more than $200,000 in taxes - do it right, plan ahead, and get professional advice!

Revised: October 05, 2017

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