Ten Top Tax Questions on the Capital Gains Exemption
If you asked me what is the
most common tax question I get asked it would be a no brainer - capital gains.
The $750,000 capital gains exemption to be exact. And yes, it is $750,000 - it
was increased back in 2007. The reason for all the interest is because the exemption
is the single largest tax break that farmers get. Although good tax planning may
yield even larger benefits over time, the capital gains exemption is seen as the
Here is my Top Ten list for farm tax questions regarding
the capital gains exemption, based on the inquiries I get.
type of property qualifies for the exemption?
Land, quota and buildings
all qualify. So does an interest in a family farm partnership or shares in a family
farm corporation. The technical term is "qualified farm property". Machinery
does not qualify, which is OK because machinery does not usually increase in value.
- How much or how long does the property have to be used
in farming to make it "qualified farm property?"
are two sets of rules depending on when the property was purchased. One is easy
to meet the other is harder.
Easy Test: For property purchased
on or before June 17, 1987 the property must be used in farming at the time of
sale or for any five years during its ownership.
for property purchased after June 17th, 1987 the property has to be owned for
24 months and in at least 2 years the gross income from farming must exceed net
income from all other sources. However, this income test is not applied if the
property is used in a family farm partnership or family farm corporation for at
least 24 months and the individual, spouse, common-law partner, child or parent
was actively and continuously involved in the farming business. This fact can
be advantageous for folks who have off farm income and cannot meet the income
- Does the person who owns the property have to
use it in farming?
No. As long as the property was farmed by your
spouse, common-law partner, child or parent you can still access the exemption.
Many children who inherit land from parents are surprised to learn that although
they have never farmed the property, they qualify for the $750,000 exemption.
In other words if it was qualified farm property for your parent, it is qualified
farm property for you and you can use the $750,000 capital gain exemption.
- I used my general $100,000 capital gain exemption back in
1994 when it was eliminated. How does that affect my $750,000 exemption?
It affects it in 2 ways:
*It reduces your exemption, so you now have
$650,000 if you used the full $100,000.
*It may mean that you have to qualify
under the harder test described earlier.
Let me explain. Up until 1994
everyone had a personal capital gains exemption of $100,000 for general property.
The budget that year eliminated this benefit, but allowed individuals to use up
the exemption by simply electing to "bump up" the cost base of the asset.
If however, you elected to use the $100,000 exemption on your
farm property you were deemed to have disposed of and re-acquired the property
in 1994. The result: you must meet the harder post- June 1987 rules for qualified
farm property on a future sale. There is no way to reverse that election
the exemption apply to the individual or the property?
is based on the individual. This means that a parent might use the full exemption
on a transfer to a child and then the child has the same $750,000 exemption available.
Or if there are multiple children then each of them have the full exemption. Spouses
each have the exemption if they are on title together.
I just add my spouse's name to the title before I sell the property and double
up the exemption? If the capital gain in the property is greater than
the $750,000 exemption then this might seem like a good strategy. Unfortunately,
the tax rules prevent you from just gifting the property to your spouse and creating
an instant $750K tax break. What happens is the capital gain is attributed back
to you on the sale. The only way to avoid that is to sell the property to the
spouse at FMV (fair market value), charge current interest rates on any loans
to the spouse and not use the tax deferred rollover provisions that can apply
to a transfer to a spouse. The result
your sale to your spouse at FMV will
trigger the capital gain you were trying so cleverly to move to your spouse. Instead
of an attributed gain you get the actual gain. Those tax policy folks are not
Can the exemption be used upon the death of
Yes, an executor can trigger a capital gain and use
the exemption with the final tax return. This increases the cost base of the property
which benefits the beneficiaries, whether spouse or children. This should usually
be done if the deceased individual has any exemption available.
Can I sell land to my children and then have them sell the land to
"double or triple up" the capital gain exemption?
are two points of discussion on this topic
the assumption is that the sale
to your child was below FMV would use up your exemption, and then when your children
sell it they would use their exemption. Tread carefully here. If you sell the
assets within a 3 year period or even make arrangements to do so, Canada Revenue
Agency will consider this to be tax avoidance and will deem that you sold the
property to your children at fair market value, thus triggering all the gain in
your hands. Get tax advice on this one for sure. Secondly just in case you had
not thought about this, your children really will own the assets, and all the
money they get from the second sale.
Can a corporation access
the capital gains exemption?
A corporation does not have any capital
gains exemption. You might be able to use up your exemption on the transfer of
assets to the corporation, but once the corporation owns it there is no further
exemption. If the corporation sells the asset, 50% of the gain is taxable in the
corporation and the other 50% goes into the capital dividend account from which
tax free dividends can be distributed. Having said that, the shares of a family
farm corporation are qualified farm property and the exemption can be used if
a share sale takes place.
Can a partnership access the capital
Partnerships are not taxed as a separate entity.
Profits flow out to the partners, which means that a capital gain on the sale
of a partnership asset flows out to the partners as a capital gain. If they have
access to the capital gains exemption they can use it. The exemption can also
be applied to the sale of an interest in a family farm partnership.
For further questions you can please refer to my factsheets on the OMAFRA website
at www.ontario.ca/agbusiness and
look under the Financial Management section.
Authored by Jennifer Stevenson,
Finance and Tax program lead, for OMAFRA. She can be reached at firstname.lastname@example.org
or at 519-826-4350.
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