Tax regulations making it easier to sell the family farm to your children

Many farming business owners want to keep the business in the family after they retire. However, the tax implications of selling farm shares to the next generation were punitive until June 2021, when the government introduced new tax rules that provide relief to farmers.

Private Member’s Bill C-208 resolves many of the tax complications that discourage the sale of your family corporation to a child’s corporation. Most notably, it resolves an anti-avoidance rule in the Income Tax Act (ITA) that penalized the legitimate transfer of your family farming corporation to the next generation. Under the old provisions, the proceeds were taxed as dividends when you sold shares to a child’s corporation — which come at a higher rate — rather than capital gains. This treatment would have prevented you from claiming the lifetime capital gains exemption, which significantly reduces tax rate on the sale — and made selling to an unrelated purchaser the far more favourable option.

The Bill C-208 eliminates these restrictions and eases intergenerational transfers if you meet the following conditions:

• You’re transferring shares of a Qualified Small Business Corporation (QSBC), a family farm, or a Family Farm or Fishing Corporation (FFFC)
• The corporation purchasing the shares is controlled by your children or grandchildren, who are at least 18 years of age
• The corporation purchasing the shares does not dispose of them within 60 months of purchase
• You must be able to provide the Canada Revenue Agency with a signed affidavit and a third party attesting to the disposal of the shares; and an independent assessment of the fair market value of the shares being transferred

Bill C-208 offers significant relief but in order to qualify your corporation must meet the definition of an FFFC.  One of the considerations that must be met is >90% of the total fair market value of the assets owned by the corporation must be considered active farming assets at the time of the sale. Typical “inactive” assets can include Guaranteed Investment Certificates (GICs), portfolio investments, excess cash, etc.

This bill makes the transfer of your family farm corporation to the next generation in a tax efficient manner possible as it evens the playing field with a sale to unrelated third parties. However, you will need advice and guidance from a trusted professional on how Bill C-208 may apply to your farming operations.