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Sales Tax and Buying Farmland with a Spouse

2020-02-26


The ability to expand your farm operation by purchasing more land opens more than opportunities. When buying farmland with a spouse, both of the joint owners need to pay their portion of the sales tax attached to the property, as well.

The taxable sale of real property – in this case, farmland – is just that: taxable. The buyers are “technically” required to pay, individually, the goods and services tax (GST) or the harmonized sales tax (HST) to the seller. Or if they are GST-registered, to the Canada Revenue Agency (CRA) via self-assessment.

Joint Tenants vs Tenants in Common

Typically, couples have two options to jointly hold a property, each with immediate and long-term impacts:  joint tenants or tenants in common. Essentially, the difference is the right of survivorship.

If the property is held as joint tenants, the interest in the property will transfer to the surviving owner when the other owner passes away and will not become a part of the person’s estate.

If the property is held as tenants in common, when one of the owners passes away, the interest in the property will become a part of deceased’s estate and will be distributed based on their will.

Acquiring Farmland as Joint Tenants

Generally, when a farmer who is a GST-registrant acquires farmland (as the sole owner) that will be used in their farming operations, the farmer would self-assess the GST and claim an offsetting input tax credit (ITC), unless a specific exemption applies.

When the farmland is acquired as joint tenants (or the farmer transfers an interest to their spouse), the farmer would self-assess the tax equal to their interest in the farmland and claim an offsetting ITC. The spouse, who is not engaged in the farming operation and is not GST-registrant, is not eligible to claim an ITC with respect to their interest in the farmland, which will result in a tax liability.

Technically, the correct way to recover the full ITC on a farmland purchase is to have both joint tenants be GST-registered and claim their respective ITC. However, the CRA has taken an administrative position to allow the farmer to deal with GST as if the farmland is solely held by the farmer.

CRA Administrative Position and Conditions

Currently, it is the CRA’s administrative position to allow the farmer to report the full value of the farmland and claim the offsetting ITC if the following conditions are met:

  • The farmer is listed as the purchaser / joint tenant and signed the purchase and sale agreement;
  • The spouse is not a GST-registrant and would only register for a GST account to claim the ITC. If the spouse is a GST-registrant but is not involved in the farming operation, the farmer may claim the ITC if the farmland is used in a commercial activity;
  • The spouse does not receive any income from the farming operation that would be reported as business income on their T1 tax return. However, if the spouse is an employee of the farmer and receives employment income, the farmer may claim the ITC.
  • The farmland must be acquired as joint tenants by the farmer who is a GST-registrant and operates the farm and, and by one or more “related individuals” (as defined by the Excise Tax Act) who are not eligible to be GST-registrant(s) in respect to the farming operation.

If the purchase and sale agreement and the land title is in the solely in the name of the farmer’s spouse, the spouse is the sole owner of the farmland and may supply the farmland by the way of lease, license, or similar arrangement, to the farmer to use in their farming operation. As the lease of the farmland is generally a taxable supply, the spouse would register (or voluntarily register if the $30,000 threshold has not been exceeded) for GST and claim the GST / HST paid on the acquisition of the farmland as an ITC.

It is important to note that, while CRA may administratively allow the farmer to self-assess tax on the GST on the full value of the farmland and claim the offsetting ITC, CRA may change its position at any given time. If this is the case, the spouse may have potential tax exposure.

Acquiring Farmland as Tenants in Common

When the farmer and their spouse acquire farmland (or the farmer transfers an interest to the spouse) as tenants-in-common, each person will be responsible for their portion of the GST. In this scenario, the farmer, who is a GST-registrant, will self-assess the tax and claim an offsetting ITC. However, the spouse, who is not a GST-registrant, would pay GST to the vendor and not be eligible to claim an offsetting ITC.

If the farmer uses the whole farmland for their farming operations, the spouse is deemed to supply the farmland by the way of lease, license, or similar arrangement to the farmer, which is a taxable supply. As a result, the spouse may register for GST and claim the GST / HST paid on the acquisition of the farmland as an ITC.

In either situation, it is recommended both parties register for GST prior to the acquisition (or transfer) of the farmland.

For more information on indirect tax matters, contact Edward Chow, Manager, Indirect Tax, at 778.372.5365 or [email protected]