Sell Your Farm Tax-Free

You can realize a tax-free gain on the sale of your qualified farm property by applying the lifetime capital gains exemption to the proceeds, if you meet certain stringent criteria.

Combining Two Tax Breaks Each individual with a stake in a farm has access to the lifetime capital gains exemption, so a common technique is to evaluate whether more than one exemption can be used in the same family.If so, you may be able to maximize the tax benefits of a property transfer within the family by combining rollover rules with the capital gains exemption. Ask your accountant for details.

The rules are complicated so we’ll first describe the basic qualifications. Qualified farm property includes:

• A share of the capital stock of a family-farm corporation, or an interest in a family-farm partnership owned by you, your spouse or your common law partner;
• Real property, such as land and buildings that was used in the course of carrying on a farming business; and
• Eligible capital property used by a person, in the course of carrying on a farming business in Canada, such as milk and egg quotas.

Real or eligible capital property purchased after June 18, 1987, qualifies if the farm is run by you or:

• Your spouse or common law partner;
• Your parents, children, grandparents or grandchildren, as well as those of your spouse or common law partner;
• The beneficiary of a personal trust that holds the property, or the spouse or common law partner, parent, or child of that beneficiary; or
• A family farm corporation or partnership in which any of the above hold a share or own an interest. (However, a family farm corporation owning an interest in the partnership does not qualify.)

In addition, one of the above parties must have owned the property for the 24 months preceding the sale. In addition, the property must have been used 50 per cent or more in a farming business for at least 24 months, and meet one of the following requirements:

• One of the people listed above was regularly and continuously active in the business, and that person’s gross income from farming exceeded all other income in the year.
• The business was run by a family farm corporation or partnership in which you, your spouse or common law partner, child, or parent was actively engaged on a regular and ongoing basis.

Special rules apply if you bought or entered into an agreement to buy the real or eligible capital property before June 18, 1987. In that case, the property qualifies if any of the eligible people listed above, or a family farm partnership or corporation, or a personal trust that sold the property in the first place:

• Used the property 50 per cent or more in a farming business in the year you sell it, or
• Used the property principally in a farming business for at least five years.

If you own farm property, consult with your accountant to see if you can use the lifetime capital gains exemption to get the best tax results.