Reaping the benefits of farm gifting

Succession planning remains a top concern for Canadian farm families, especially as nearly half of all farmers are now 60 or older.

Rising land values have increased the complexity of estate equalization, particularly when balancing the interests of active and non-active children. Fortunately, there are rules under the Income Tax Act (ITA) to help with this. Unlike other types of business, it is possible to gift certain farming assets to the next generation without tax consequences.   

Key considerations for gifting  

Transferring farm property to the next generation by way of a gift can help reduce estate and probate fees, provide control over who receives the assets and potentially enable income splitting with adult children. However, gifting also means loss of control over the assets and possible income attribution back to the transferor under certain tax rules. 

Tax-deferred transfers under the ITA 

The ITA allows qualified farm property to be transferred to the next generation on a tax-deferred basis. Farmers may also use their remaining $1,250,000 lifetime Capital Gain Exemption (CGE) on such transfers. Key provisions include: 

• Subsections 73(3) and 73(4): These sections govern the transfer of farm property, shares of a family farm corporation or interests in a family farm partnership during the owner’s lifetime. Similar rules apply on death in subsections 70(9) and 70(9.2). 

• Eligibility: Farm assets must be located in Canada, the recipient child must be a Canadian resident and assets must have been used principally in farming (more than 50 per cent of the time). The definition of “child” is broad, encompassing  grandchildren, in-laws, adopted and stepchildren, and their spouses. 

• Family farm corporation/partnership: To qualify, at least 90 per cent of the fair market value of the property must be used for farming in Canada. 

Transfer limits 

The following table outlines the limits for transferring farm assets: 

 (ACB: Adjusted cost base  UCC: Undepreciated capital cost) 

It is important to note inventory is not eligible for this tax-deferred rollover. Other planning options may be available in some cases, including sale for a cash-basis promissory note, rollover to a farm partnership or rollover to a farm corporation. 

Estate planning flexibility 

While Interpretation Bulletin IT-268R4 is somewhat dated, it highlights options such as partial dispositions, severing land for a child’s residence, undivided shares among children, joint tenancy and retaining life interests for the transferor or spouse. 

CGE multiplication and attribution risks  

Although gifting can multiply the CGE, Section 69(11) prevents leveraging the exemption if the main purpose is to obtain a tax benefit. To avoid this rule nullifying intergenerational rollovers, the child should wait at least three years before disposing of the property. Intergenerational transfers to a minor child may also result in gains being attributed back to the transferor, with significant tax consequences for the transferor.  

Ontario land transfer tax exemption 

For Ontario land transfers, the land transfer tax exemption applies only if the land is farmed by eligible family members or an eligible family farm corporation before and after transfer. 

Practical advice 

Farm tax specialists can clarify rules for transferring eligible farm assets at less than fair market value, but the challenge remains in family dynamics and ensuring fairness among children. Every succession plan should be tailored to the family’s goals, with professional guidance to navigate tax issues and avoid pitfalls. 

To ensure your succession plan is both tax-efficient and equitable, contact your Baker Tilly advisor. Our team can help you structure transfers, maximize exemptions and – most importantly – support your family’s long-term objectives.