Minimizing tax impacts of a farm sale

Selling a farm is a major milestone, whether the buyer is a neighbor, family member or other party.

Careful and thorough planning is essential to ensure the sale is tax-efficient and meets your specific goals. 

Allocation of proceeds 

To begin, how you allocate the sale proceeds among various assets (land, buildings, equipment, quotas, inventory) carries significant tax consequences for both seller and buyer. Here, we break down the main allocation considerations. 

Principal residence exemption: Under the principal residence exemption, the portion of the sale price attributed to the farmhouse and up to half a hectare of surrounding land is exempt from capital gains tax. Sellers should maximize this allocation to reduce taxable income, while buyers may prefer a lower allocation to preserve future tax-free gains. 

Farm equipment, buildings and quotas: Sellers typically want to minimize allocation to depreciable assets (equipment, buildings, quotas) since any proceeds above the depreciated value – after claiming Capital Cost Allowance (CCA) – are taxed as regular income. Conversely, buyers benefit from higher allocations to such assets by maximizing future depreciation claims. 

Lifetime Capital Gains Exemption (LCGE): As of 2025, the LCGE for qualified farm property is $1,250,000 per individual. This applies to qualifying assets such as farmland and certain quotas, but not inventory. Sellers should maximize allocations to qualifying assets to use any remaining exemption, while buyers may prefer lower allocations to preserve their own future exemption. 

Given these conflicting interests, both parties should agree on allocations and explicitly document them in the purchase and sale agreement. If agreement isn’t possible, obtain third-party evidence (such as a real estate agent’s opinion letter) to support reported allocations. The Canada Revenue Agency (CRA) may challenge inconsistent reporting. 

Capital gains reserve 

A capital gains reserve allows sellers to defer recognizing the capital gain over several years—up to five years for most sales, or up to 10 years if selling to a child. To use the reserve, the seller must take back a loan or installment payment as part of the sale. The gain is then reported as proceeds are received. 

This strategy is especially useful if the lifetime exemption doesn’t cover the entire gain, allowing the seller to spread the tax liability over several years and potentially benefit from lower marginal tax rates. Even if the exemption covers the gain, a reserve may help minimize the Alternative Minimum Tax (AMT), which can apply even when regular tax is offset by the exemption. For more on how the AMT can impact farmers, click here. 

RRSP planning 

Often, farmers have substantial unused RRSP contribution room due to years of reinvesting in their business. A lump-sum RRSP contribution in the year of sale can offset taxable income, defer tax and allow for systematic withdrawals to minimize future taxes. 

Asset vs. share sale 

Many farms are held within corporations rather than personally. In such cases, it may be more tax advantageous to sell the whole farm company rather than the farmland asset within the company. However, it could be more challenging to negotiate a sale of shares as buyers may not want to deal with administrative hassles or worry about unknown liabilities (including taxation) they could be exposed to by acquiring the full corporation.  

These concerns could be alleviated through a robust share purchase agreement, accepting a lower price that still provides an after-tax benefit and pointing out the buyer would have some advantages, including tax losses carried forward and avoiding land transfer tax in some provinces by buying shares instead of assets.    

Replacement property rules 

Under the Income Tax Act, replacement property rules allow farms to defer tax consequences on a farm sale if they reinvest in a qualifying replacement property. Note that the property must be used for the same or similar business purpose. For example, you cannot sell land and purchase production quotas or farm buildings to use the deferral.  

Generally speaking, the replacement property must be purchased in the fiscal year of sale of the previous property or the following year. If purchased in the following year, the tax on the sale must first be paid and then an amended return must be filed to request a refund. As this often results in long delays and CRA audit inquiries, replacement properties should be purchased within the same fiscal year if possible.   

Sale timing  

Consideration should also be given to the timing of the sale closure. If you can delay the sale until just after the next fiscal year, taxes payable could be deferred for a full year.  Additionally, arranging to sell different segments of the farm in different years – for example, selling the land in a different year than the equipment or inventory – could help not only delay tax but also reduce the overall tax payable if this can keep income under the lower tax brackets.   

Conclusion  

Selling a farm involves many moving parts and tax considerations. While we’ve highlighted some key planning areas here, every situation is unique. For tailored advice to ensure your transaction is handled properly, consult your Baker Tilly advisor.