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Big Tax Saving Opportunities for Estate Wineries

19/10/2015


The 2015 Federal Budget proposes to increase the lifetime capital gains exemption on dispositions qualified farm property to $1 million per person. If you are the owner of a vineyard that has appreciated in value, that should get your attention.

There are three valuable tax planning opportunities available if you own an estate winery in Canada:

  1. The lifetime capital gains exemption for qualified farm property (QFP)
  2. The lifetime capital gains exemption on qualified small business corporation (QSBC) shares, and
  3. The tax deferred inter-generational transfer of a farm business

These exemptions can save you big – particularly on a sale to a third party. For a couple selling QFP with a gain in excess of $2.0 million, the savings could be as high as $450,000, or $225,000 per owner (assuming the BC combined tax rate for individuals on capitals gain, which is currently 22.9%).

There are many situations in life where close is good enough. Tax planning is not one of them. If you are only close to fitting one of these planning opportunities, you don’t get a tax break. So careful advance planning and attention to detail is critical. So this is a good time for a “tax disclaimer”:

The following materials are intended for information purposes only. The specific tax consequences of any transaction are best determined by a comprehensive review of your personal or corporate tax situation.

MNP disclaims any liability arising from any individual’s reliance upon the information contained in these materials.

What is Qualified Farm Property (QFP)?

Generally speaking it is property owned by an individual that is:

  • Real or immovable property (land) “used” in a farming business by an “eligible user”
  • Shares of “family farm corporation”
  • An interest in a “family farm partnership”

This definition is not as straight forward as it appears, particularly when determining whether land has been used in a farming business by an eligible user.

Why is the QFP Exemption Important?

Farm land tends to appreciate, and your vineyard may be the most valuable asset in your operation. Often land is held personally rather than in a corporation and its important to note that the capital gains exemption is only available to individual vendors. In addition, purchasers typically want to buy land directly versus buying shares of company that owns land. If you can’t claim the QFP the exemption on the land, it may not be possible to get the exemption on your other business assets.

An estate winery is a mix of farming, manufacturing, wholesale / retail activities. The land is certainly used for farming, but how your business is structured may spoil the QFP exemption.

One of the following conditions must be met for land to be QFP:

  • The land has to be used for a period of at least 24 months by a corporation or partnership that is a family farm corporation or           family farm partnership. The land owner (or immediate family) must be actively engaged in such a corporation or partnership, or
  • The land owner (or family member) must meet the chief source of income test. At least 50% of their gross income must be from farming in two taxation years during ownership.

Inter-Generational Transfer

It is possible to transfer farm land, farm partnership interests, and farm corporation shares to the next generation on a tax deferred basis. This opportunity is not available to other types of businesses and offers real tax savings when the desire is to keep the business in the family. There is no dollar limit to the transfer.  A $12 million vineyard can be transferred without a penny of tax.  These provisions are paramount to the survival of a multi-generation family farm.  Don’t take them for granted and don’t assume you qualify.

In order to access this tax-deferred rollover for farm land, all of the following conditions must apply:

  • The property must be transferred to a child resident in Canada
  • The owner, their spouse or child must be “actively engaged” in the farming business
  • During the ownership period, the property must be “principally used” in a farming business in which person above was actively engaged
  • “Principally” is defined as more 50%, and has two dimensions: ownership period (years farmed compared to total years owned) and physical use (proportion of property used for farming)

To drive this point home, consider a couple who purchased a vineyard property years ago for $100,000 that is now worth $3 million. They want to pass the property on to their children who are involved in the business. They have a rental house and a small winery business on the property. They do no planning and assume the property can be transferred on the death of the second spouse tax free as farm property. If they are wrong, the tax on the resulting capital gain (the property is deemed to be disposed of at fair market value on death) could be as much as $652,500! This type of tax bill could easily result in the kids having to sell the property to pay the taxes.

In practice, we see many types of business structures for estate wineries and there are a couple of key points to keep in mind:

  • The tax-saving opportunities discussed above pertain only to individuals. Land and other farm property sold by a corporation will not qualify
  • In order to access these opportunities, care must be taken to ensure the farming (vineyard operation) is kept separate from the rest of the winery operation. Generally the farming business may be carried on by a farm partnership or by a separate family farm corporation, but if it is combined with the winery business, you likely have a problem
  • Other types of uses such as personal use, rental and operating a winery business can throw a property offside 

By reviewing your structure and planning in advance, your advisor can help you adjust your structure and reporting to ensure that your property qualifies for these valuable tax breaks. The potential tax savings are real and very significant .

​Geoff McIntyre, CPA, CA and Brian Posthumus, CPA, CA are partners in MNP’s Kelowna office. Geoff advises the BC Wine Industry. Brian is a tax specialist with extensive experience assisting farm businesses.  To find out what Geoff & Brian can do for you, contact them at 250.763.8919 or  [email protected].