Land transfer taxes – know the rules to avoid extra costs
A farm’s location is the primary driver for how land transfers, and relevant taxes, affect producers across Canada. Here are six key Canada-wide points to keep in mind with land transfer taxes:
1. Have a plan
Have a strong, clear plan of what your overall goal is before you put any pen to legal paper with a formal land transfer.
Jon Ponath, a lawyer with Felesky Flynn who focuses on general tax planning and advising, including for farmers, says many circumstances go into decisions beyond simple finances. History of the land, its uses over time and different family considerations are all appropriate parts of a land transfer discussion. It’s important to know every aspect and have a solid plan.
2. Know the tax rules when gifting land
Generally, when a farmer is going to dispose of farmland, there is a seller and a buyer and a negotiated price that will dictate the taxes. In some cases, people will want to simply gift the land or sell it at a discount to family members to avoid tax. However, a Canada-wide tax rule says that when there’s a transfer of property to a person who is related to you, the taxes will be calculated on the fair market value, regardless of the actual selling price.
“These days, the price of farmland can be quite a lot,” says Ponath. “Even though you would not receive any cash, you’d potentially have a tax bill if you decided to gift land to a family member without proper planning.”
3. Know the exceptions to the rules
A farmer can transfer property to a spouse, which can be done on a rollover basis without adhering to the fair market valuation practice.
A farmer may also opt to transfer the property down to a child or grandchild on an intergenerational transfer if the farmland qualifies. So, if a farmer bought land for $1,000 an acre in 1985, they would be able to transfer it at the same cost price.
4. Know if the farmland is “qualified?”
A key principle of land transfers is knowing the history of the land – what it was used for, by who and for how long.
According to tax rules in some provinces, farmland can qualify for an intergenerational rollover if used principally as a farming business for most years of the ownership. The use must also be by the owner, the owner’s spouse, their child or grandchild. That means leasing farmland to be farmed by someone else is not considered a farm business.
5. Start now
Farmers preparing a succession plan that includes a land transfer to a child, grandchild or third party, should immediately begin to give the proper attention and time this important process deserves. Understanding land transfer tax rules is essential to ensure a smooth process where there are no unnecessary penalizations. Consult with your tax or legal team to understand the best course of action for you and your farm.
6. Rules differ across the country
Even though these rules are Canada-wide, there are provincial nuances to all tax rules. Be sure to consult with your legal team and find out the rules, so you’re operating legally and being mindful of unnecessary taxation.