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Does your farmland qualify for the Capital GainsExemption?

With land prices these days, many farmers are counting on the CGE to eliminate tax on the sale of their farmland, be sure you understand the details before you take the plunge. Here are some points you need to consider:

  • The exemption covers an accumulated lifetime amount of qualifying capital gains of $750,000, set to rise to $800,000 as of 2014. Any gain incurred over this lifetime limit will not be covered by the exemption
  • To qualify, farmland must have been "used in the course of carrying on the business of farming in Canada" by the individual, his spouse, any of his children or parents, by a family farm corporation or partnership in which he, his spouse or any of his children or parents has a share or interest or a personal trust of
    which any of them is a beneficiary.

For land purchased after June 17, 1987, two tests determine whether the land is considered to be "used in the business of farming" (see note at bottom of article regarding land purchased before this date)

  • Ownership test: Must be owned for at least 2 years prior to disposition by one of the permitted individuals above.
  • Revenue test: In at least two years of ownership by a family member or personal trust who is a permitted user described above, the gross revenue of the person from the farming business in which the property was principally used must have exceeded income from all other sources. However, this test is not applied if the land was used in a partnership or family farm corporation for at least 24 months and the individual, spouse, common-law partner, child or parent was actively and continuously involved in the farming business.

If the land meets the above tests and you have the exemption available you still need to consider other potential implications, including:

  • Cumulative net investment losses
  • Business investment losses
  • Payment of Alternate Minimum Tax
  • Elimination of Guaranteed Income Supplement
  • Claw Back of Old Age Security
  • Reduction of Child Tax Benefit
  • Reduction of Goods and Services Tax Credit

The Capital Gains Exemption is a tremendous tax planning tool for farmers, but due to the complexities involved careful consideration of the rules and implications need to be examined and should be discussed with your tax advisor.

Note: For land purchased prior to June 18 1987 there are other tests that are generally more easily met than those above, but need to be considered.