The Tax Man Cometh

The Tax Man Cometh……. by Scott Dickson

Given the mounting costs of COVID-19 to the future taxpayers of Canada and the perception by the federal government of rising untaxed wealth/equity occurring in Agriculture, I think the time has come for the Ag community to get serious about future tax planning especially if significant changes occurs such as increases in tax rates, increase in capital gains inclusion rate or potential restrictions on future favourable Agriculture tax rules.

For years, the Ag industry has been slow to embrace succession planning primarily because they have always had the ability to utilize the inter-generational farm rollover rules to transfer the true farming assets to the next generation with little or no tax implications. This is to be distinguished from how farmers have the ability to utilize the capital gains exemptions on those same asset transfers to the next generation or sale of property outside of the family.

Most folks are not aware that the rules are different for these two transactions and some of these rules have come under the microscope of the tax man. The appreciation of land and quota values has resulted in billions of dollars of perceived untaxed wealth generation and given a government appetite for increasing future taxes, producers have to be very cautious in their tax planning going forward.

The federal government tax round tables that occurred a couple of years ago, focused on some of these issues as pertains to multiplying capital gain exemptions through multiple generations of family members who don’t realize they qualify for the exemption even though they themselves never farmed. Farming activities of the previous generations made that property qualify for their kids and spouse and grandchildren to use the capital gains exemption. The government has expressed interest in reviewing these rules to see if the current rules are achieving the governments objectives. As mentioned, Ag rules have allowed for the transfer of qualified farm property to the next generation of farmers so that is not the target of any potential changes….. yet. The request for this article was more around what happens when there are no successors or there is no appetite to rent the farmland forever and sale is the final option. It is important to note, renting farmland can have all kinds of tax implications depending on who the owner is, history of the land and impact on qualifications for either the lifetime capital gains exemption or the intergenerational farm rollover rules.

History becomes very important and your heirs need to know the history of the farmland they could or have inherited. Some questions that needs to be asked includes

What is the fair market value of the land today? (Do you need to do an appraisal to independently provide a support of the value you feel is the value today).

What is the cost base of the land?

Did someone claim the capital gains exemption since 1984 to bump up the cost base of the land to the next generation?

Was a 1994 election made to increase the cost base of the land?

Who did it come from and when? (because of long term ownership maybe before 1972 when capital gains taxation came into effect in Canada).

Who has been actively farming the land during the family ownership period?

Is the land held personally or inside a company? (company shares have to be sold to access capital gains exemptions),

If owned personally who’s name is on title and since when? Quota is another asset that can create capital gains, but the rules are different again.

To many farmers have not acted upon their estate or succession planning. A number of reasons for this inaction exist including the four D’s (disaster, divorce, death, disability). In my experience, farmers want to do this once, pay for it once, and be done with it forever. The problem with this thinking is that their world changes as time marches forward and those changes impact best made plans. People don’t die in order, successors to the farm don’t materialize or too many of them materialize but cannot get along, tough conversations are avoided until death happens that force the issue.

Lots of opportunities exist to reduce taxes but back to my comments that started this article, pre planning is required and if the tax rules change going forward, some of these opportunities could be diminishing if the current government continues to target Ag with no cost or fear of lost votes.

What happens when future rates increase for corporate and personal tax rates, will this force farmers into doing something as we all know how much they love paying any taxes let alone more taxes!! B