When farm producers exit the industry, they are often left with valuable farmland. This is particularly true in recent years, as the fair market value of farmland has increased significantly. In light of this development, producers are increasingly choosing to keep their farmland in the family, even if it’s for non-farming children. This gives them a source of income during the transitional period after leaving the industry, but there are several important considerations to keep in mind when deciding to rent your land.
Rental agreements
It’s important to get any rental agreement in writing, as this reduces the risk involved in being a landlord. More specifically, this will help you mitigate any risk associated with crop failure, and it will clearly define who pays the expenses, who receives the income, when payments are due and whether GST is applicable. If terms are not clearly defined in writing, these issues can cause significant conflict.
Crop share vs. cash rent agreements
There are two popular types of farm rental agreements. The first is a strict cash rent agreement, and the second is a crop share arrangement. Cash rent is arguably the simplest approach, as it assigns all the risk and reward of farm production to the renter. Under this type of agreement, the renter takes on the risk related to how the crop performs and all the related expenses, while the landlord gets a set amount of rent per year, all of which makes it less risky for the landowner. This approach also gives the landlord a clear sense of cash flow, as they typically cover property taxes related to the land, and no other expenses. However, in a crop share arrangement, the landlord and the renter share the risk and reward of farm ownership. Typically, the landlord will get one-third or one-quarter of the production profits, and they also share in paying the related expenses. If the crop falls short of expectations, their earnings will be lower than expected, but if it’s a bumper crop, their earnings will be higher than expected.
GST considerations
If the farmer who owns the land is already registered for GST or required to register for GST because annual taxable revenue is over $30,000 and they engage in a cash rent arrangement, they have to collect GST on the land they are renting. This is not the case in a crop share arrangement, as the crop is typically zero-rated, which means there is no GST requirement.
The lifetime capital gains exemption
As the landlord’s relationship to the land changes, they should keep in mind their continued eligibility for the lifetime capital gains exemption. For instance, cash rent is not usually considered qualifying farm property. If the land is sold later on, this could affect your ability to claim the capital gains exemption on that sale because the landowner needs to be actively involved in the farm operations on the land to maintain its status as qualifying farm property.
AgriInvest and AgriStability
If you are seeking AgriInvest or AgriStability funding, it’s important to note cash rent is a non-allowable source of income, so there is no coverage for this. However, depending on the amount of crop share income you receive, the revenue from that crop could still be eligible for AgriInvest and AgriStability coverage.
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