December 18, 2023 by Bud Arnold

Pick the right structure for your farmhouse

When purchasing a farm, sometimes the property includes a house for the farm family to use as their primary residence. Families in this position often overlook the tax complications of buying a farmhouse that is part of their farm property, but how they decide to hold that farmhouse could significantly impact their tax obligations. This article outlines several farm business structures and the farmhouse tax obligations in each case.

Individual farmer

Being classified as an individual farmer is the most basic option available, but you should consider the GST/HST components of the property to ensure the residential portion is exempt. The income tax implication is also worth noting, as a principal residence exemption is available on a farmhouse and up to half a hectare of land connected to the house. In some cases, this could apply to more land, but defending this approach can be challenging.

Farm partnership

Tax issues get a little more nuanced with a farm partnership because the farmhouse could be looked at as either an asset of the partnership or an asset outside the partnership that’s personally owned but happens to be on the same parcel of land as the partnership property. Again, it’s important to consider the residential portion that is GST/HST exempt and eligible for the principal residence exemption for income tax purposes. There are two additional issues that are relevant for partnerships that individual farmers can ignore. First, you should consider the impact of the farmhouse on accessing the intergenerational farm rollover and capital gains deduction rules. Second, if a partnership owns the house, be sure to complete any necessary Underused Housing Tax (UHT) form.

Farm corporation

This is where things get much more complex. If a corporation owns the farmhouse, the farm business is obligated to charge fair market value rent to the farmer. This can create a significant cash flow issue if you have to pay rent to your corporation. If you are not paying rent, you have to pay tax on the value of that rent and address the same considerations related to the capital gains deduction and intergenerational farm rollover that apply to a partnership.

Keeping the farmhouse out of the corporation

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 by purchasing the farmhouse from the corporation at fair market value. Even without a severance, it may be possible to separate ownership of the farmhouse (by the farmers) from the land (owned by the corporation) with a lease agreement for the underlying land. Another possibility may be to acquire beneficial ownership of the farmhouse and related land from the corporation at fair market value. A trust agreement would be advisable to document that all rights of possession and alienation of the farmhouse pass to the farmers, although legal title remains with the corporation.

Consider all the angles

Regardless of how you choose to approach farm ownership, it’s important to recognize this is more than a real estate transaction. With significant tax consequences involved in the way you structure a farmhouse purchase, you should also include your tax advisor in the process. For more on this topic, see the recent Farm Alert: “Tax issues at home: Farmhouses.”

Meet the Author

Bud Arnold Bud Arnold
Guelph, Ontario
E .(JavaScript must be enabled to view this email address)