The simplest part of tax compliance and planning for a farm should be the family home. However, tax issues related to farmhouses abound! Let’s unpack a few of the more common concerns.

Farmhouse owned by an individual farmer

Consider an individual who purchases a 100 acre farm property consisting of 80 acres of workable land, a barn with 18 acres of bush and barnyard and a house with 2 acres of laneway and yard. This farmer moves into the farmhouse, using the farmland and buildings in a farm proprietorship business for several years.

Farmland is generally subject to GST/HST, so the farmer should register for GST/HST before the closing date. The farmer would then self‑assess GST/HST on the commercial portion of the purchase price, which is often the entire non‑residential portion of the value.¹ Allocating the purchase price between taxable (commercial farm property) and exempt (residential property) can be challenging when no itemized appraisal is available. While it’s generally the vendor’s responsibility to determine the portion of the purchase price subject to GST/HST, it’s wise to allocate the purchase price first, to the portion of the property that can be valued most reliably (such as a comparable house on a half hectare lot or a value per workable acre for comparable farmland). The farmer can then allocate the remaining purchase price between the remaining assets.

What is the tax impact when the farmer disposes of this farm by sale, intergenerational gift or on death? The sale price of the property would again need to be apportioned between farmland and farm buildings potentially eligible for the lifetime capital gains deduction² and the residential portion eligible for the principal residence exemption. The land available for the principal residence exemption is generally limited to 1.24 acres (half a hectare). More land may be accepted, if necessary for the use of the residence, for example, where a municipality dictates a minimum lot size or a long laneway is required to access the residence.³

Instead of apportioning the sale price between the principal residence and other property on the farm, a special rule permits a farmer to claim $1,000 per year of ownership as the capital gain eligible for the principal residence exemption.⁴ Most houses in Canada increase in value by more than $1,000 per year, so this election is rarely beneficial in this century, but it could still be of value in unusual circumstances.

Farmhouse owned by a farm partnership

Consider the same fact pattern as above, except a farm couple purchases the property to operate a farm partnership business. The GST/HST issues remain the same: the couple would register for a partnership GST/HST account and self‑assess the GST/HST.

However, the question then arises whether the farmhouse is an asset of the partnership or jointly owned by the individuals. Perhaps the couple excludes the house from any farm partnership financial statements and tax returns, suggesting that the house is not a partnership asset. However, the purchase of the property is typically all financed together, including the farmhouse with the farmland and farm buildings as collateral against the mortgage. Land title would not distinguish between the farm partnership portion and the personal farmhouse. A trust relationship would not likely be created where the couple holds legal title to the farmhouse for the benefit of the same couple. Therefore, the farmhouse is often considered a partnership asset when acquired in situations like this one.

On disposition, the partnership would realize a capital gain or loss on each component of the property. Since a partnership is not a taxpayer in Canada, these tax implications flow out to the partners and are reported on the individuals’ T1 personal tax returns. While the Income Tax Act is unclear, the Canada Revenue Agency’s position is to treat a partnership’s disposition of a partner’s principal residence as eligible for the principal residence exemption as though the property was owned personally.⁵ Therefore, each partner would claim the principal residence exemption on his or her portion of the residential part of the gain.

Meeting the definition of a family farm or fishing partnership eligible for the capital gains deduction or intergenerational farm rollover rules could also be impacted in this structure.⁶ To qualify for these tax‑preferential rules on the farm partnership interest, the farm couple would need to show either that the farmhouse is provided to them primarily for the purpose of operating the farm business, or that the value of the farmhouse is no greater than approximately 10 per cent of the total value of the partnership assets.

Holding the farmhouse in the farm partnership raises an additional issue since Dec. 31, 2022. Each individual who owns a residential dwelling in their capacity as a partner of a partnership needs to file the new Underused Housing Tax Return and Election Form, UHT‑2900.⁷ As a result, this couple would need to file two of these forms each year to report their farmhouse ownership and claim the specified Canadian partnership exemption from this tax.

Farmhouse owned by a farm corporation

Consider the same fact pattern as above, except that the farmers incorporate a family farm or fishing corporation to purchase the property and operate a farm business.

The GST/HST issues remain the same: the corporation would register for a GST/HST account and self‑assess the GST/HST.

Corporations are entitled to neither the principal residence exemption nor the capital gains deduction, so any capital gains on the future sale of the farm would be fully taxable. In addition, the farm couple would need to pay fair market value rent annually for the use of the farmhouse. The Canada Revenue Agency’s general rule is to accept 5 per cent of the assessed value of the house as fair market value rent,⁸ so this rental charge can add up quickly.

Corporate‑owned farmhouses can also impact access to the capital gains deduction and intergenerational farm transfer rules.⁹ The Canada Revenue Agency takes the position that a farmhouse may be considered an eligible farm asset of the corporation only where its primary use is “accommodation for persons who are actively employed in the farming business or their dependants. Furthermore, the residence must be provided to the persons in their capacity as employees, rather than as shareholders”.¹⁰

For these reasons, it is often desirable to hold the farmhouse personally. Where it is not practical or desirable to hold the entire farm property personally, the farm couple may be able to isolate the house from the farm property in one of the following ways:

1. The farm couple may be able to purchase the farmhouse from the corporation at fair market value, ideally supported by an independent appraisal. To support this ownership structure, the farm couple should enter into a properly drafted agreement of purchase and sale as well as a long‑term land lease agreement with the corporation for the land subjacent and contiguous to the farmhouse, as well as the residential portion of the yard and laneway as described in the first scenario above. The land lease payments should be at fair market value and be exempt from GST/HST. On future sale of the property, the corporation would sell the farmland, while the farm couple would sell the farmhouse personally to the buyer and claim the principal residence exemption directly.¹¹
2. The farm couple may be able to acquire beneficial ownership of the farmhouse and related land from the corporation at fair market value, ideally supported by an independent appraisal. By purchasing a beneficial interest in the land along with the house, a lease agreement should not be necessary. However, a trust agreement would be advisable to document that all rights of possession and alienation pass to the farm couple, although legal title remains with the corporation. The farm couple should then address their terminal wishes for the farmhouse in their wills and claim the principal residence exemption directly on any disposition. The Canada Revenue Agency has not published a positive opinion on this tax planning approach, but it has opined that scenarios lacking the right to sell or transfer the house would not be eligible for the principal residence exemption.¹²

Holding the farmhouse in a corporation also requires annual filing of the new form UHT‑2900 to report the farmhouse ownership and claim the specified Canadian corporation exemption from this tax.¹³ The first planning approach provided above to remove ownership of the farmhouse from the corporation under a long‑term lease agreement for the land should exempt the corporation from filing form UHT‑2900,¹⁴ but the second approach would create a bare trust arrangement and require annual filing of both form UHT‑2900 and a T3 trust income tax and information return.

How should you best structure your farmhouse ownership?

The best structure for your farm business depends on many considerations, as outlined in a recent Farm Alert. Fitting the ownership of the farmhouse into the desired business structure also requires careful planning. Your Baker Tilly advisors can help you determine the best option for you.

1. ¹ To self‑assess GST/HST, the farmer would typically report GST/HST deemed collected on line 205 and GST/HST deemed paid on line 108 on the GST/HST return for the filing period, including the purchase date. Where the entire commercial (farm) property will be used in the commercial activity of the purchaser, both amounts are equal to the applicable GST/HST rate times the purchase price, so there is no net impact on GST/HST payable for the period.
2. ² You can find a discussion of select issues related to qualified farm or fishing property eligible for the capital gains deduction here.
3. ³ See paragraph (e) of the definition of “principal residence” in section 54 of the Income Tax Act and the Canada Revenue Agency’s interpretation of these rules in Income Tax Folio S1‑F3‑C2, “Principal Residence”, paragraphs 33‑35 (accessed Nov. 2, 2023).
4. ⁴ See subparagraph 40(2)(c)(ii) of the Income Tax Act and related Regulation 2300. The Canada Revenue Agency’s commentary on this election is found in Income Tax Folio S1‑F3‑C2, “Principal Residence”, paragraphs 44‑46 (accessed Nov. 2, 2023).
5. ⁵ The preamble to the definition of “principal residence” in section 54 of the Income Tax Act specifies that the property must be “owned, whether jointly with another person or otherwise, in the year by the taxpayer”. The Canada Revenue Agency’s relieving administrative position concedes that a partnership is not a taxpayer and is found in Income Tax Folio S1‑F3‑C2, “Principal Residence”, paragraph 73 (accessed Nov. 2, 2023).
6. ⁶ You can find an introduction to the intergenerational farm rollover rules here.
7. ⁷ You can find an introduction to the application of the Underused Housing Tax here. Although UHT‑2900 filings are due by April 30 of the following year, the Canada Revenue Agency has administratively extended the filing deadline for 2022 from April 30, 2023 to Oct. 1, 2023 and again to April 30, 2024. On Nov. 21, 2023, the federal government proposed relieving the filing obligation for 2023 and future years for specified Canadian partnerships, corporations and trusts.
8. ⁸ See Underused Housing Tax Notice UHTN7 for the Canada Revenue Agency’s comments on fair market value rent in another context. Tax court cases have ruled that fair market value rent could be higher than 5 per cent and calculated as a reasonable return on equity for the investment in the house.
9. ⁹ You can find more details on issues connected with corporate‑owned farmhouses here.
10. ¹⁰ Canada Revenue Agency Interpretation Bulletin IT‑268R4, “Inter Vivos Transfer of Farm Property to a Child”, paragraph 22. This position was recently confirmed in Canada Revenue Agency Technical Interpretation 2016‑0652921C6, with the clarification that the farmhouse residents must be employees of the corporation and not only shareholders.
11. ¹¹ The Canada Revenue Agency accepts this approach in Income Tax Folio S1‑F3‑C2, “Principal Residence”, paragraph 91 (accessed Nov. 2, 2023).
12. ¹² Canada Revenue Agency Technical Interpretation 2017‑0687961E5 cites this negative position as its “longstanding view”.
13. ¹³ See note 7.
14. ¹⁴ The definition of “owner” in section 2 of the Underused Housing Tax Act excludes a person that leases out its land under a continuous long‑term or life lease.

Meet the Author

Bud Arnold
Guelph, Ontario
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