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Renting Out Corporate Farmland? Are Your Shares Eligible for the Rollover?

27/03/2013


As a generation of farmers begins to reach the age where they consider scaling down their operations into a semi-retirement mode, many farmers are renting out corporate owned farm land to neighbours or the next generation looking to move back to the farm.

For Example

Farmer A, after cash renting out his corporate owned land for the past five years, has decided to sell the shares in his Farm Corp. to his neighbor. Since Farmer A has been cash renting his land for the past five years, he has already disposed of all of the capital equipment in Farm Corp. and land represents 90% of the FMV of the assets in Farm Corp. and has never been less than 50% of the FMV of the total corporate assets over the duration of Farm Corp.

Capital Gains Deduction

Farmer A is familiar with the concept of the Capital Gains Deduction (CGD) and schedules a meeting with his local tax advisor to go over the potential options to minimize his taxes on a proposed sale. At the meeting Farmer A informs his tax advisor that the land has been held in his corporation for 22 years, 17 of which were actively farmed by Farm Corp. and the last 5 where Farm Corp. cash rented the land.

Under this scenario, can Farmer A utilize his CGD on the sale of his shares?

In order to qualify for the CGD, the shares of Farm Corp. must qualify as “shares of the capital stock of a family farm corporation”. In general terms this means that the shares owned by Farmer A must:

  1. throughout any 24 month period ending before the determination time (sale date), more than 50% of the value of the property owned by Farm Corp. was attributable to property used by Farm Corp. principally in the course of carrying on the business of farming in Canada in which Farmer A was actively engaged in on a regular and continuous basis; and
  2. all or substantially all of the fair market value of the property owned by Farm Corp. at the sale date was attributable to property that was used principally in the course of carrying on the business of farming in Canada by Farm Corp.

Principally has been administratively defined by the CRA to mean more than 50% in these circumstances. At issue here is whether the land held by Farm Corp. qualifies as a farming asset used principally in the course of carrying on active farming operations? Since Farmer A has indicated that he has actively farmed the land in Farm Corp. for 17 of the 22 total years of Farm Corp., the land generally is considered as having been used principally in the course of carrying on the business of farming so long as the number of years the land was actively farmed by Farm Corp. exceeds the number of years that the land is cash rented, thereby enabling the shares of Farm Corp. to be eligible for the CGD on a sale.

The determination factor is for Farmer A to track the years actively farmed vs. cash rented years to determine the options available. At any time if a farmer determines that they are closing in on the 50% level, it would be prudent to set up a meeting with their local tax specialist to discuss the planning options available before they are lost.