Sowing the seeds of succession: Tax planning for intergenerational farm property transfers

Manitoba has a booming agricultural industry. As many Manitobans now contemplate retirement, it has become more important than ever to consider how the family farm may be transferred to the next generation. 

This article describes in detail the provisions in the Income Tax Act (Canada) (ITA) that deal with intergenerational farm property transfers, particularly in the context of an intergenerational gift of farmland for no consideration. We explore, from a technical  tax perspective, the relevant provisions of the ITA and the tax consequences of such transfers.

At the end of this article, brief mention is made of the capital gains exemption on the sale of qualified farm property. This is because, if the intergenerational farm property transfer provisions of the ITA are inapplicable to a particular transfer of farm property, the transferor may be able to make use of this capital gains exemption. 

Intergenerational Farm Property Transfer

Intergenerational farm property transfers are governed by Subsections 73(3) and 73(3.1) of the ITA.

Subsection 73(3) states:  

(3) Subsection (3.1) applies to a taxpayer and a child of the taxpayer in respect of property that has been transferred, at any time, by the taxpayer to the child, where

(a) the property was, before the transfer, land in Canada or depreciable property in Canada of a prescribed class, of the taxpayer;

(b) the child of the taxpayer was resident in Canada immediately before the transfer; and

(c) the property has been used principally in a farming or fishing business in which the taxpayer, the taxpayer’s spouse or common-law partner, a child of the taxpayer or a parent of the taxpayer was actively engaged on a regular and continuous basis (or, in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect of that woodlot).

The requirements set forth in Clause 73(3)(c) merit a step-by-step consideration:

 A. “Used Principally”

At paragraph 21 of Interpretation Bulletin IT-268R4 [Archived – but still relevant], entitled “Inter Vivos Transfer of Farm Property to Child,” the Canada Revenue Agency (CRA) states that “it is always a question of fact whether a particular property … is used principally in a farming business. In resolving this question the use of the property as a whole must be considered.” IT-268R4 continues at paragraph 22: “Generally, … a property is used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation as opposed to use in concurrent corporate or partnership operations that may even be ancillary or related to the farming operation….”.

 B. “Farming Business”

The CRA states in IT-268R4 at paragraph 23 that “[i]t is also a question of fact whether a particular farming operation constitutes a farming business at any particular time.” This involves a consideration of whether an activity constitutes (a) farming, and (b) a business.

Regarding whether farming activities constitute a “business”, Income Tax Folio S4-F11-C1, entitled “Meaning of Farming and Farming Business, states in part at paragraph 1.18: “[w]hether a [particular] taxpayer’s farming activities constitute a farming business is a question of fact. …  [T]he taxpayer must be actively engaged in either the management or day to day activities of earning income from the business to be considered in the business of farming.” Paragraph 1.19 then continues in part: “However, even where a farmer hires another person … to do almost all of the work of the farm operation, the operation may still be considered a farming business. This could be the case where the farmer, to the extent the operation allows, exercises general management and control of the overall farm operation.”

It is also important to consider whether the farming activities are undertaken in pursuit of a profit, or are simply a personal endeavour (colloquially, “hobby farming”). Paragraph 1.20 of Income Tax Folio S4-F11-C1 notes, in part, that “[w]here there is a personal element to the farm activity, it must be determined if the operation is carried out in a sufficiently commercial manner. If it is, the income or a loss from the activities is generally considered to be from a business and will be treated as such for income tax purposes.” Various factors are laid out in Paragraph 1.21 to assist in determining whether farming was undertaken for profit or as a hobby, including gross income or losses in past years, the extent and type of the property’s use, time spent on the farm operation as compared to other activities, and current development coupled with future plans to expand operations.

We note, as an aside, that in general, the CRA’s position is that farmland that is owned or held in a partnership cannot be transferred to a child under subsection 73(3.1) (see: Views Doc 2010-0383601E5). However, other planning opportunities may be available in such circumstances.

C. “Used Principally in a Farming or Fishing Business”

The CRA states at paragraph 24 of IT-268R4 that: “[t]here is no requirement that the property be used immediately before the transfer in the business of farming. However, if the property is used for some purpose other than farming for some period of time, a question may arise as to whether the property was used primarily for that other purpose rather than in the business of farming.”  

Similarly, Canada Tax Service, s. 73, Inter Vivos Transfers by Individuals, notes that “[a]pplicable to transfers of property that occur after May 1, 2006, paragraph 73(3)(a) was amended to remove the word “immediately” such that the property need not be used in the farming or fishing business immediately before the transfer in order to qualify for a rollover” (Canada Tax Service, s. 73, Inter Vivos Transfers by Individuals).

The CRA has indicated that the principal use test for real property may be measured based on whether the property was used for a qualifying purpose during the majority of years in the relevant period.

Specifically, the CRA states: (Views Doc No 2020-0863671E5)

The determination of whether real property is used principally by a taxpayer in carrying on a farming or fishing business and whether a particular farming or fishing operation constitutes a farming or fishing business at any particular time are questions of fact. Accordingly, such a determination requires a review of all of the facts surrounding a situation including which portions of the farm or fishing property were utilised throughout the period of ownership. Where reference is made to an asset being used “principally” in the business of farming or fishing, the asset will generally meet this requirement if more than 50% of the asset's use is in the business of farming or fishing. Such a determination must be made on a property-by-property basis. Accordingly, the “principally” test would generally be met where the farming or fishing use is more than 50% of the years while the test would generally not be met where the farming or fishing use is less than 50% of the years.

Additionally, in Views Doc No. 2020-0863671E5, the CRA states: “it is our view that for purposes of the “used principally” requirement in paragraph 73(3)(c) of the Act the period of active farming or fishing by one or more eligible persons (i.e., the taxpayer, the taxpayer's spouse (or common-law partner), a child of the taxpayer, or a parent of the taxpayer), does not have to coincide with the period of ownership of the particular property by the taxpayer)”. That is, if a property is leased for a period of time and owned for another, the CRA will also consider the period in which the land was used as part of the “used principally” analysis.

D. “the Taxpayer, the Taxpayer’s Spouse or Common-Law Partner, a Child of the Taxpayer or a Parent of the Taxpayer”

As noted in IT-268R4: “Assuming that a farming business is being carried on and that the property is in fact used in that farming business, it also must be determined on a fact basis whether a particular taxpayer, or the spouse or child of the taxpayer, is carrying on that particular farming business. In this regard, a taxpayer, a spouse or a child is considered to be carrying on a particular farming business when that person, to the extent that the circumstances of the particular farming operation allow, determines, for example, which fields will be planted, the type of crops to be seeded and the times for spraying and harvesting. The fact that the services of another person may be engaged for a negotiated sum of money to undertake all or part of the work associated with the farming activity … would not disqualify a taxpayer (farm owner) from rolling farm property to a child under subsection 73(3).” 

Subsection 252(1) of the ITA defines the term “child” to encompass several categories of persons: a child born within or outside marriage; a wholly dependent person who, before turning 19, was under the taxpayer’s custody and control; a spouse or common-law partner of the taxpayer’s child; a child of the taxpayer’s spouse or common-law partner; and an adopted child of the taxpayer.

Further, subsection 73(6) provides that the definitions in subsection 70(10) apply to section 73. A “child” is defined in subsection 70(10) as including the child of a child, and a child of a child's child, as well as a person who, at any time before attaining the age of 19, was wholly dependent on the taxpayer for support and of whom the taxpayer had at that time, in law or in fact, the custody and control. The “child” definition in subsection 70(10) expands, but does not limit, the definition of a “child” in subsection 252(1).

Note that if property is transferred to a taxpayer's spouse, the spousal attribution rules contained in subsections 74.1(1) and 74.2(1) may apply.

 E. “Actively Engaged on a Regular and Continuous Basis”

 The CRA states at paragraph 27 of IT-268R4 that:

Whether a person is “actively engaged on a regular and continuous basis” is a question of fact. However, the requirement is considered to have been met when the person is “actively engaged” in the management and/or day-to-day activities of the farming business.

Ordinarily the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operation of the business. Whether an activity is engaged on a “regular and continuous basis” is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement.

If farming is not the chief source of income, …  it may be more difficult to demonstrate that the taxpayer, the taxpayer’s spouse or the taxpayer’s child was actively engaged on a regular and continuous basis in the business of farming.”

The CRA expresses a similar view in Views Doc No 2003-0024401E5.

Owning multiple farm properties does not limit a farmer’s ability to transfer the properties. Similarly, the mere fact that a farmer may work on more than one farm does not, in and of itself, lead to a conclusion that the farmer was not actively engaged on a “regular and continuous basis” on any of the farms. However, each property must meet that condition separately. (See CRA Views Doc No 2016-0670841E5).

Tax Consequences

If all of the above requirements of Subsection 73(3) of the ITA are met, then Subsection 73(3.1) applies to an intergenerational transfer of farm property. Subsection 73(3.1) determines the tax consequences of the transfer.

Tax Consequences  – Gift of Farmland

The tax consequences under Subsection 73(3.1) where there is an intergenerational gift of farmland for no consideration (i.e. as a gift) are as follows: The effect of this subsection is that where a parent transfers farmland to a child for no consideration, and Subsection 73(3.1) applies, the parent will be deemed to have disposed of the property for the lesser of the fair market value of the farmland and the adjusted cost base of the farmland. The child will be deemed to have acquired the farmland at a cost equal to the same amount.

Since in many cases the adjusted cost base of the farmland will be significantly less than the fair market value of same, the application of Subsection 73(3.1) results in no taxes being payable on the intergenerational gift of such farmland.

On the other hand, if Subsection 73(3.1) were not to apply, then Subsection 69(1) would apply to the gift. As such, for tax purposes, the gift of the farmland would be deemed to be a disposition of same at fair market value. This gift would result in a capital gain to the transferor if that fair market value exceeded the adjusted cost base of the farmland.

Capital Gains Exemption on the Sale of Qualified Farm Property

The Amount of the Exemption

The capital gains exemption on the disposition of qualified farm or fishing property by an individual (as only an individual can claim the capital gains exemption, not a corporation) who was resident in Canada throughout the year is the amount of $1,250,000 as of June 25, 2024, and will be indexed to inflation thereafter

This is by virtue of Subsections 110.6(2), 110.6(2.2) and 110.6(2.3) of the ITA. 

Qualified Farm of Fishing Property

The definition of “qualified farm or fishing property” is found in Subsection 110.6(1) of the ITA. This definition effectively provides in part that “qualified farm or fishing property” of an individual at any time means a property that is owned at that time by the individual, or the spouse or common-law partner of the individual, and that is real or immovable property that was used in the course of carrying on a farming or fishing business in Canada by the individual or a spouse, common-law partner, child or parent of the said individual.

Further Conditions

 Subsection 110.6(1.3) of the ITA provides further conditions that must be met in order for a property to be considered “qualified farm or fishing property” for the purposes of the capital gains exemption.

Conclusion

Navigating the intricacies of intergenerational farm property transfers under the ITA requires a thorough understanding of the relevant provisions and their implications. By adhering to the requirements outlined in Subsections 73(3) and 73(3.1), farmers can potentially benefit from tax-efficient strategies when transferring their farm properties to the next generation. There may also be other planning opportunities available in conjunction with these provisions of the ITA.

Given the complexity of tax laws and particulars of individual circumstances, seeking professional tax advice is essential to ensure compliance with the tax laws and to ensure that tax-planning opportunities are maximized. For personalized guidance on intergenerational farm property transfers and other tax-related matters, we encourage you to contact a member of Fillmore Riley LLP's Taxation Practice.

Fillmore Riley LLP's Taxation Practice

We offer tax advice to both individual and business clients on a wide range of matters, including corporate and commercial transactions, estate planning, and tax dispute resolution and litigation. For more information, or if you have any questions, please contact a member of the Fillmore Riley Taxation practice.