June 10, 2020 by Marla Bilokreli

How rental farm property qualifies for the capital gains exemption

If you inherit a piece of farm property and continue the farming activity on that land, you should qualify for the capital gains exemption when you go to sell. However, even if you choose to rent out that property – rather than farm it yourself – you could still qualify if the land you inherit is from a spouse, common-law partner, child or parent (for the purposes of this article, any member of these groups will be referred to as a “family member”).

In order to qualify, you must meet two criteria. In at least two years while you – or the family member you inherited the property from – own the property:

  1. Gross revenue from the land has to exceed any of the owner’s other sources of income.
  2. The property’s history relative to you has to be principally in a farming business carried on in Canada where you (or the family member) were actively engaged on a regular and continuous basis.

In other words, if you inherit farm land from a family member and you are only interested in renting the land, you may still take advantage of the capital gains exemption upon selling if your predecessor (a) was a family member, (b) used this farm as their main source of income for at least two years and (c) the farming business was their principal reason for owning the land. With all of that in mind, here is some guidance to consider when trying to rent farm property and still qualify for the capital gains exemption.

Keep it in the family

The farming history of the property’s previous owners can only help you access the capital gains exemption if it has not left the family lineage since the qualifying activity. Once someone outside the family takes over as owner of this property, the earlier farming business by members of your family can no longer be used to help you qualify for the capital gains exemption. However, if the property hasn’t left the family lineage, you are not the only generation who may qualify for the capital gains exemption due to the earlier generation’s work farming this land. As long as the property stays in the family, subsequent generations may also benefit from farm work that predates your ownership.

What’s in a name?

In the event you inherit this property from a family member and it ends up in your name, your spouse would not qualify for the capital gains exemption if you were to pass away before selling the property. When the land changes ownership to your spouse, the family lineage is broken. For this reason, it is wise to seek professional advice before deciding whose name you should use for the purposes of any farm property ownership.

The value of documentation

In trying to help clients access the capital gains exemption, we often have a difficult time finding documentation of the land’s original cost. If you inherit the land from a parent who has passed away, it’s important to determine if the land was shown as a disposition on the parent’s tax return and what value was used for this disposition. In many cases, clients do not have access to those details. When they go to sell the land and we don’t have any record of their cost base, it is difficult to determine the land’s value when it gets transferred.

Get qualified

If both you and any family member in the lineage who previously owned the farm property rent (rather than farm) the land, you will not have access to the capital gains exemption. If you transfer the property to another family member, the same rule applies, but there is a way to get qualified. If you make the farm your main source of income for at least two years and ensure your farming business is the principal reason for owning this land, you should gain access to the capital gains exemption.

Seek advice

The capital gains exemption rules are complex, so it is always best to speak with your accountant before selling farm property. This will prevent you from encountering any surprises when you go to file your tax return.

The rules above refer to farmland that was inherited after June 17, 1987. If you inherited land from a family member before that date, a different set of criteria must be met.

Meet the Author

Marla Bilokreli Marla Bilokreli
Yorkton, Saskatchewan
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