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A client “Bob” recently received an offer to purchase his farmland. Bob acquired his farmland in 1990 and actively farmed the land for 13 years. In 2003 he decided to rent the land to a 3rd party. He wanted to retain ownership of the land and viewed the rent as a source of income for his retirement. It wasn’t until he received an offer on the farmland that he considered how his decision to rent affected his ability to utilize his capital gains deduction. Each individual has $750,000 of capital gain deduction (see the February 17, 2011 blog post by Kim Drever) that can be used to offset capital gains realized on certain qualifying property, including land that is qualified farm property.
Bob was concerned that since he was not currently farming his farmland, there was no way that the farmland would be considered qualified farm property.
The Income Tax Act has requirements that must be met for farmland to be considered qualified farm property. The individual must meet an ownership test in that the farmland must have been owned for at least 24 months preceding the sale. Bob owned the land for years so this test was not a worry. Different rules apply depending on whether the farmland was acquired before or after 1987. The farmland in question was purchased subsequent to 1987. As such, in at least two years while the farmland was owned, Bob’s gross revenue from farming must have exceeded his income from all other sources. As Bob’s only source of income was from farming, this test was easily met.
The final requirement which Bob needed to meet was a use test. Contrary to Bob’s expectation, the use test does not require that the farmland be used in farming in the year of its disposition. Instead the test that must be met is that the farmland was used “principally” in farming. This particular requirement is met if more than 50% of the farmland’s use was in the business of farming. Bob farmed the land for 13 years and rented the land for 9 years so more than 50% of the farmland’s use was in the business of farming and the test was met. Bob was relieved to find out that his decision to rent did not eliminate his ability to shelter his capital gain on the sale with his capital gains deduction!!
As each circumstance is unique, it is important to review all requirements of the Income Tax Act before concluding farmland is qualified farm property.
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