Tax Considerations when using your Capital Gains Exemption on Qualified Farm Property

I am often asked by farming clients to provide tax advice when they are considering selling qualified farm lands. Most individuals believe there is an easy, one solution fits all, response but this is not the case. In fact the one thing that I would caution clients on, is that for decisions of this magnitude they need to visit their tax advisor. With that out of the way I will try to outline some of the considerations.

  • While the capital gain exemption may be available to fully offset the capital gain, remember that the capital gain is included in net income, and the exemption is deducted in calculating taxable income. Therefore, items that depend on net income such as benefits for children, provincial senior’s benefits and the clawback of Old Age Security could be affected.
  • Alternative Minimum Tax (AMT) can also result when triggering a capital gains exemption. To avoid this result, you may wish to plan the transaction so that a capital gains reserve is available to reduce the amount of capital gain reported in the year by ensuring there are deferred proceeds. For example, a note payable due 30 days after demand vs. note payable on demand. No reserve is available on a sale to a controlled corporation.
  • Always consider the impact of the Goods and Services Tax on any proposed transaction. In the case of shares, there may not be a significant concern. However, for the transfer of other property, you may wish to ensure the purchaser is a registrant for GST purposes before proceeding with any crystallization.
  • The General Anti-Avoidance Rule (GAAR) is always a concern in tax planning. Information Circular 88-2 provides that the crystallization of a capital gain exemption is an avoidance transaction since it is undertaken primarily to achieve a tax benefit. However, it is not a misuse of the Act, nor is it an abuse with regard to the Act as a whole. Therefore the Canada Revenue Agency would not seek to apply GAAR to normal transactions undertaken to crystallize the capital gain exemption.   

  • Did a $100,000 capital gains election taint property for the purposes of the $800,000 capital gains election?
    • If a taxpayer used the $100,000 capital gains election on their 1994 personal tax return on property that would have otherwise qualified for the $800,000 Capital Gain Exemption, the taxpayer should be aware that the election could affect his/her ability to claim the enhanced capital gains exemption in the future.
    Use of the 1994 election resulted in a deemed sale and reacquisition of the property. Therefore, the farm property would have to meet the more stringent tests that apply for property acquired after June 17, 1987, to be eligible for the enhanced capital gains exemption in the future.

    Some uncertainty also exists over whether a new 24-month "holding period" would also need to commence on February 22, 1994. Since the answer is not clear, one might try to meet the 24-month test after February 22, 1994, before attempting to trigger the $800,000 exemption.
    • Can land be transferred to a company to crystallize the exemption followed by immediate transfer back out to the individual who owned the land originally?
      A strategy followed by some taxpayers would be the sale of land to a company at fair market value for a note. The land would then be withdrawn by the individual from the company against the note payable. The hope would be that that land would now have a higher cost base as a result. It is very likely that the Canada Revenue Agency would find this type of transaction offensive and treat it as a sham or use the General Anti-Avoidance
      Rule to remove the benefit of the transactions. In either case, the result would be no use of the exemption and no increase in the cost base.
    Note, however, situations do occur where there are bona-fide reasons for land to be sold to a company and then sold back to the original seller. The company should then report a gain if the land value increased while held by the company (with no offsetting exemption). The Canada Revenue Agency should not be able to attack this type of transaction with the General Anti-Avoidance Rule.
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    PURPLE GASThe A...


    The Alberta fuel benefit program is designed to offer fuel to Alberta farmers at prices competitive with those paid by farmers in other parts of North America. This allows Alberta farmers the ability to purchase gasoline and diesel at reduced prices. In order for farmers to qualify the must:

    A) Be actively and directly farming by controlling farming assets and making the day to day management decisions;

    B) Have annual farm commodity productions worth at least $10,000 (or $5,000 - $9,999, if the only other significant source of income are CPP or OAS).

    Eligibility must be renewed every three years.

    When incorporating operations, it is important to ensure that the individual revises applications to ensure receipt of benefit by corporate entity.

    For farming vehicles that are transferred to the corporation, maintaining farm plates is essential to maintaining access to purple gas. Registration of vehicles will need to be revised to the corporate name, and identification of eligibility for farming plates. The farmer also runs the potential loss of benefit on personal vehicles, as the individual is no longer an active registrant in the program.
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    Old Age Security Eligibility

    The Economic Action Plan puts the Old Age Security (OAS) program on a sustainable path by proposing legislation to raise the age of eligibility for OAS and Guaranteed Income Supplement (GIS) benefits gradually from 65 to 67 starting in April 2023. This will be fully implemented by January 2029.

    About the Initiative

    The age of eligibility for OAS and GIS will be gradually increased from 65 to 67, starting in April 2023, with full implementation by January 2029. An 11-year notification period, followed by a 6-year phase-in period, is being provided to ensure that individuals have significant advance notification to plan their retirement and make adjustments.

    Who Will Benefit

    The changes announced in Economic Action Plan are necessary to ensure that the OAS program remains on a sustainable path. They will ensure OAS remains strong and is there for future generations when they need it, as it is for all seniors who currently receive these benefits.

    Initiative Update

    The legislation has passed, and the age change will start to take effect in April 2023.
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                                                  2013 INCOME TAX DEADLINE

    Well Canada Revenue Agency (CRA) is pleased to report that all of its online systems have been restored to full service as of April 13, 2014. Individuals, businesses and representatives are now able to file returns, make payments, and access all other e-services available through the CRA’s website, including all our secure portals.

    CRA was informed of an Internet security vulnerability named the Heartbleed Bug that had the potential to affect technology systems around the world. This represented a serious challenge for CRA, which has worked around the clock with Shared Services Canada to apply a “patch” or solution that addresses this vulnerability. Its effectiveness has been rigorously and successfully tested on CRA systems, resulting in restoration of our e-services.

    The Minister of Revenue, Kerry-Lynne D. Findlay  said  "I would like to reiterate that interest and penalties will not be applied to individual taxpayers filing their 2013 tax returns after April 30, 2014 for a period equal to the length of the service interruption. This means individual tax returns for 2013 filed by May 5 will not incur interest or penalties."
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    The Registered ...

    The Registered Disability Savings Plan

    The Registered Disability Savings Plan (RDSP), is a unique savings program that allows savings to grow in a tax-deferred environment and provides matching federal contributions of up to 300% annually. Canada is the first country in the world to have a RDSP, which helps those living with a disability and their families save for the future. An estimated 50,000 people across Canada will benefit from this initiative, and future impacts of the RDSP go well beyond a simple planning tool.

    Although the RDSP is the most powerful financial tool for Canadians with disabilities and their families to secure stability for the future, the biggest challenge has been getting the information about to RDSP to the families that need it the most; it is Ascend Financial’s goal to inform families with disabilities about the RDSP in order to help create a good life and a strong financial future.

    The Registered Disability Savings Plan (RDSP) is a long-term savings plan to help Canadians with disabilities and their families save for the future.

    Contributions to RDSPs may be supplemented by a Canada Disability Savings Grant and a Canada Disability Savings Bond.

    The beneficiary of the RDSP is the person who will receive the money in the future.
    The RDSP is delivered by: Canada Revenue Agency (CRA)
    The Grant and Bond are delivered by: Employment and Social Development Canada (ESDC)

    Eligibility Information

    Any person who:

    •is eligible for the Disability Tax Credit (disability amount);
    •is a Canadian resident;
    •is under 60 years of age (if 59, the individual must apply before the end of the calendar year in which he/she turns 59); and
    •has a social insurance number.

    If the person is a minor, their parent or legal representative may establish the RDSP for their benefit.

    Additional information

    The lifetime contribution limit for an RDSP is $200,000, with no annual limit. Anyone can contribute to the RDSP with the written permission of the plan holder.
    Contributions are not tax-deductible and are not included in income when paid out of an RDSP.
    Investment income earned in the plan accumulates tax-free. However, grants, bonds, and investment income earned in the plan are included in the beneficiary's income for tax purposes when paid out of the RDSP.
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