Most farmers understand that there are many tax advantages to owning farmland. However, more complicated structures are sometimes needed for those advantages to be realized. One such structure involves owning farmland in a holding company.

In our experience, the four most common situations in which having a holding company own farmland might be appropriate are:

1. the taxpayer wants to roll in personally owned farmland to a company;
2. the taxpayer wants to move farmland out of an existing company;
3. the taxpayer wants to make a new farmland acquisition; and
4. the taxpayer wants to make a new farmland acquisition by purchasing the shares of an existing company rather than purchasing the farmland directly.

This article discusses why a farmland holding company should be considered in each scenario, with some important considerations.

1. Rolling in personally owned farmland to a company

The most common reason for rolling in personally owned farmland is that the taxpayer has not yet used their $1,000,000 capital gains deduction (CGD) and wants to use it to obtain a tax-free shareholder loan to pay for personal expenditures with corporate dollars or to transfer personal debts into a company.

Taxpayers may file special CRA forms to elect to roll in farmland to a company at a price that will use up exactly whatever CGD they have left. In such cases, the taxpayer will receive a shareholder loan credit allowing the company to pay tax-free distributions. Alternatively, the company might also use the credit to absorb any personal debts the taxpayer might have.

A disadvantage occurs, however, when the company also owns other assets, such as other pieces of farmland, quota and equipment. After farmland is moved into a company, the taxpayer may not then gift this individual farmland to their children, nor can they use up more of their CGD on a future sale. They may only gift or sell the shares of the whole company, which must include all other assets it owns whether the taxpayer wants to do this or not.

The taxpayer may address this problem by setting up a holding company for the farmland. The holding company will own only the farmland and no other asset. The farmer may then sell, gift or bequest the shares of the farmland holding company without also being forced to transfer the other assets of the farm. 

The downside of this holding company strategy is that the taxpayer incurs the additional administrative cost and complexity of setting up and maintaining another company. Additionally, the taxpayer must ensure that rent is paid from an active farming business owned by the taxpayer or qualified family members to ensure it maintains qualified family farm corporation status.

A secondary benefit of owing farmland in a company is the potential avoidance of estate administration tax (probate) in some provinces. A secondary corporate will is required to achieve this benefit. The estate tax savings vary by province. (In Ontario, for example, the estate administrative tax is usually 1.5 per cent.)

2. Moving farmland out of an existing company

If farmland already exists in a farming company with other assets, it remains possible for the taxpayer to move the farmland into a holding company to obtain the benefits discussed above, though doing so will involve more cost and complexity.

Taxpayers may file corporate to corporate CRA rollover forms—similar to the individual to corporate rollover forms—to move land from one company to another without paying tax. However, doing so involves more steps as compared to the individual to corporate rollover.

In addition, there are special rules that generally prevent sales or transfers for a period of time after the rollover is completed. This holding period is so strict that a future sale may not be negotiated until sufficient time has passed. Consequently, this strategy often is not a practical option.

Some provinces also impose a land transfer tax on farmland transfers between corporations even if they are related. Usually, there is a land transfer tax exemption on farmland that is transferred from an individual to a corporation (within the same family), but there is no similar exemption between companies.

Due to the additional cost and complexity of the steps listed above, it is helpful to set up a holding company from the start. But if this was not done, there are options to access the benefits of a holding company after the fact.

3. New farmland acquisitions

If possible, it is preferable for a taxpayer to purchase farmland as an individual rather than in a corporation. Doing so represents the simplest and least expensive way to access the CGD or to gift the property to the taxpayer’s children or grandchildren.

However, it is not always economically possible to purchase the new property as an individual, for example where a corporation owned all the farm assets and earned all the farm income, and there was no shareholder loan available. In this scenario, the individual must pay significant personal taxes to extract income from the company to make the loan payments on the new farmland purchase. In such situations, the individual may purchase the land in a company instead. If the company qualifies for the small business deduction, it will pay only the 9 to 13 per cent in corporate tax (depending on the province), leaving significant after-tax income to make loan payments on the new farm.

Additionally, owning the new property in a holding company separate from the main farming operation provides many of the same benefits of owning it individually. Shares of the company may be sold to use the CGD, or the shares may be gifted to the taxpayer’s children or grandchildren. 

Note, however, that the shares of the holding company must be sold in order to access the CGD. It might thus be more difficult to find a buyer for the company as the buyer must be willing to purchase the shares of an existing company. However, if the company is a holding company with no other assets than farmland, it might be an easier sell as there is less risk and uncertainty for the buyer—though still not as easy as with an asset sale.

A further benefit of owning land in another company is the ability to avoid the automatic merging of titles that occurs in some municipalities when adjoining properties are held or purchased in the name of the same purchaser.

4. Acquiring farmland by purchasing shares of an existing company

As more individuals become familiar with the benefits of farmland holding companies, we are likely to see more sales of corporations that own farmland rather than selling the farmland as an asset sale.

The benefit to the seller on a share sale, as noted above, is that the seller can access their CGD on the sale of shares. From the buyer’s perspective, the only benefit to buying shares is possibly saving the land transfer tax (LTT) in provinces that have such tax. The savings would depend on the LTT rate of each province. For example, in Ontario the marginal LTT rates are as follows:

Notwithstanding the LTT savings, the buyer incurs additional risk and cost on a share purchase that should be considered before entering an agreement.

First, the buyer usually is required to incorporate a new company of their own before buying shares, and then amalgamate the new company and the purchased company after closing. This is the only way to be able to bump up the value of the farmland in the company to what is actually paid. (These rules are outlined in section 88(1) of the Income Tax Act.) Otherwise, the buyer will be stuck with the value of the land that the company originally paid, and future capital gains calculations will be based on that lower value (unless the buyer can find someone willing to purchase shares in the future).

Secondly, the buyer will only be able to bump up the value of farmland to what they paid; they may not bump up the cost of farm buildings, houses or other assets. The buyer may plan accordingly and negotiate a separate asset-purchase agreement just for inventory, equipment and other assets. However, the house and farm buildings must be left at the lower original depreciated tax value, meaning fewer write-offs that the buyer can use in the future, and thus potentially higher taxes to pay. 

If the company has losses carried forward, however, the buyer might ask the seller to bump up the current value of some of the depreciable assets before closing to use up losses and capital losses carried forward that exist in the company. (These rules are outlined in section 111(4)(e) of the Income Tax Act.) Otherwise, capital losses carried forward are lost when the company is acquired, and non-capital losses may only be used for a same or similar business.

Thirdly, the buyer will be liable for all the “baggage” of the old company. For example, if some undisclosed liabilities (such as CRA debts) come out of the woodwork, the buyer will be responsible for them. A properly prepared share purchase agreement will help protect the buyer from such undisclosed debts and lawsuits (though it might still prove difficult to resolve these issues).

Finally, additional professional fees must be incurred for due diligence on the accounting and legal side before the purchase. A share purchase agreement involves more time and effort than an asset purchase agreement due to the liability risks.

A buyer of shares incurs many additional costs and risks as compared to a buyer of assets. Consequently, buyers willing to purchase shares have leverage to negotiate a lower price. Buyers should do the math to calculate how much estimated tax the seller will save and how much extra cost they will incur by selling shares, and bring those factors to the negotiation table.

This article touches only briefly on some of the many benefits and complications involved in owning farmland through holding companies. If you think that your business may benefit from any of these ideas, contact your nearest Baker Tilly office to speak with a farm tax expert. We can help walk you through your situation and examine the risks and rewards of this complex area.

Meet the Author

Thomas Blonde
Elora, Ontario
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