Gifting farmland: How a well-intentioned transfer can trigger unexpected taxes

A common and increasingly relevant scenario unfolding across many family farms involves discussions around the transfer of farmland to the next generation. These conversations often include both farming and non-farming children – some of whom may not be involved in the day-to-day operations of the farm.

While parents may wish to transfer farmland to non-farming children, it is critical to address several key considerations beforehand to avoid triggering unintended and potentially adverse tax consequences immediately after the transfer.

Family farm transfer scenario

Consider this example where parents have decided to gift a quarter-section of land to a non-farming child:

Both parents are familiar with the general concept of farmland transfer where in most cases, the land can be passed down to the next generation on a tax-deferred basis.

The land was purchased 30 years ago and has been farmed full-time since then. As such, the fair market value of the gifted land is $500,000 and the cost base of the land is $30,000. Both parents have fully utilized their lifetime capital gains exemptions.

On January 1, 2025, the parents transfer the farmland to their non-farming child at its base cost. The parents will not incur any income taxes owing as a result of the transaction because the land has been transferred to the child at its cost base. It is important to note that the child doesn’t have to pay their parents the $30,000 for the land.

In early 2026, the non-farming child decides they want to sell the gifted land to purchase a resort property near their family home. They subsequently sell the land to one of their farming siblings at its fair market value of $500,000 – resulting in a capital gain of $470,000.

The non-farming child plans to use a portion of their lifetime capital gains exemption to offset the gain and receive the full $500,000 tax free.

At tax time, the non-farming child’s business advisor informs them that the gain on the sale of the farmland must be reported on their parents’ personal taxes for 2026. According to the Income Tax Act (Canada), any gain on the sale of gifted farmland sold by a child within three years of receiving the gift will attribute back to the parents. The non-farming child has received $500,000 in proceeds, tax free, while their parents must pay the taxes owing on the $470,000 capital gain from the sale.

Assuming a high bracket tax rate (such as the 47.5 percent rate in Saskatchewan), the parents will owe $111,625 in taxes on the sale. This doesn’t include other potential consequences such as old age security benefit claw backs and reductions in other income tested assistance programs.

Planning ahead to avoid unforeseen outcomes

While farmland transfers to non-farming children happen often, they don’t have to have such severe consequences. Having open discussions amongst family members about how to transition farming assets to the next generation is a vital first step. MNP has a full complement of transition and tax advisors to help craft a thoughtful plan to help you identify and take action to avoid any potential pitfalls that could affect the security of any family members financial situation in the years ahead.