Land transfer taxes – know the rules to avoid extra costs
Details of land transfer taxes differ across the country and like in many provinces, Ontario’s Land Transfer Tax can be a significant additional expense for those buying and selling farmland. Experts say it's important to know when and in what circumstances the tax applies.
Indeed, exemptions to LTT in Ontario are possible, they state, and stem from two main factors: family involvement, and whether the land has been and will continue to be farmed by the family.
Family connection required
During a seminar given at the Canadian Association of Farm Advisors' Farm Tax Update conference, Mary-Lou Fletcher, a tax lawyer and dairy farmer from Drayton, Ont., said the specific purpose of exemptions is to allow families to continue farming the land. For this reason, exemptions to LTT only apply in some types of inter-family transactions.
There are three primary land-transfer circumstances where LTT does not apply:
- From an individual to another individual (or individuals) who are all within the same farm family
- From an individual to a family partnership or family farm corporation
- From a family farm corporation to one or more family members
Fletcher says LTT exemptions do not apply when a family farm corporation transfers ownership to another family farm corporation. This is in part a result of how family member is defined for land transfer deals.
More specifically, that definition means one layer past immediate family. Indeed, Fletcher says a grandparent is “as far afield as you can go,” and adds that a fiancé does not qualify.
Land must be used for farming
Aside from family, there is an added complication relating to land use.
The land being transferred, that is, must have been predominantly used for farming – by the family members themselves – prior to the transfer. The purchasing family members must then continue farming the land themselves in some way.
Leasing the land does not count, therefore, but sharecropping does. For this reason, Fletcher stresses that family members who are working on and benefiting from non-rental farm-sourced income need to keep records detailing that involvement.
Look beyond LTT
Terry Betker, an agrologist and president and chief executive officer of Backswath Management Inc., a farm business management company based in the Prairie provinces, reiterates the importance of ensuring land is indeed being farmed by those involved in the transfer.
However, he also says transfers should not be designed simply to avoid LTT. Making LTT avoidance your primary concern can lead to situations where the result does not reflect what makes the most business sense.
“First figure out what you want to accomplish from within the family," Betker says, "Then figure out within that framework how best to minimize the impacts.”
Know the rules and deadlines
While the details within each type of exemption are many, Fletcher adds the presence of anti-avoidance rules is another important factor to consider.
For example, the idea that a family farm corporation transfers land to an individual family member, and the individual member immediately transfers that same land to their own family farm corporation can't be done.
“You can’t do indirectly what can’t be done directly,” Fletcher says.
Fletcher adds that filing for exemptions must be done on-time – within 30 days of the initial transfer. Missing that time frame can result in financial penalties.
Land transfer tax rules vary across the provinces. Tax experts say it's important producers know the rules and deadlines involved when going through the process in order to avoid unnecessary expenses.
Article by: Matt McIntosh