The Income Tax Act contains several provisions that allow for farmers to ensure that their farmland or farm corporation shares can be transferred from one generation to the next in a tax effective manner. One of the most important and most commonly relied upon provisions is referred to as the Intergenerational Farm Rollover provision (referred to hereafter as the “Farm Rollover”). These rules allow for qualifying assets (Qualified Farm Property or Family Farm Corporation Shares) to be transferred from a taxpayer to their children or grandchildren on a tax deferred basis provided that certain criteria are met.
A transfer under the Farm Rollover provisions can be available in respect of a transfer either during a taxpayer’s lifetime, or on their passing. Ensuring that farmland or farm corporation shares meet the relevant criteria for the Farm Rollover provisions to apply, and allow for a tax deferred transfer of the asset on the taxpayers passing, can be a critically important part of a farmer’s estate plan. In order for the Farm Rollover provisions to be available in respect of a transfer of property on death, the following conditions must be met:
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The recipient of the property must be a child or grandchild of the deceased transferor, and must be a resident of Canada immediately before the transferor’s death;
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As a consequence of the transferor’s death, the property must have transferred to and become vested indefeasibly in the recipient within 36 months after the transferor’s death;
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The property must meet one of the following specific sets of criteria to be considered an eligible property for the purposes of the Farm Rollover:
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Farmland - The land must be farmland in Canada, and it must have been used principally in the business of farming by eligible persons (taxpayer, spouse, children, parents, or grandparents). The concept of “used principally”, is defined as more than 50% and refers to both the total area of land (i.e. more than 50% of the total acres used for farming), as well as the time the land was historically used in farming (i.e. actively farmed by eligible persons for more than 50% of the total years owned).
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Farm corporation shares – At the time of the transferor’s passing, all or substantially all of the fair market value of the corporation’s assets (typically at least 90%) have been principally used in the business of farming (see discussion of “used principally” in respect of farmland above).
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Although for many farmers it may seem obvious that their farmland or farm corporation shareholdings should meet the above criteria, the following are some important traps that can often catch taxpayers off-guard, and in many cases can result in a significant tax exposure to their estate:
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Too many years of inactive ownership (i.e. cash rental or crop-sharing) – Often at the time a farmer retires from active involvement in farming and begins cash renting their lands, they have farmed their lands for many years and there is minimal concern with whether the land has been “principally used” in farming, with more farming “good years” than inactive “bad years”. If land continues to be rented for many years though, this can cause the land to fall offside for these criteria and no longer qualify for the Farm Rollover. Caution must also be made that for crop-sharing arrangements where the landowner has minimal or no involvement in farming activities to be considered, the CRA views these arrangements the same as cash rental for the purposes of rollover (i.e. would not qualify as a “good year” for the used principally test).
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Recipient is not a resident of Canada – In order for the Farm Rollover to be available, the recipient of the property must be a resident of Canada at the time of the transferor’s death. For this reason, many farmers choose to avoid leaving farming assets to non-resident children, and instead leave non-farming assets to their non-resident beneficiaries, provided that this fits with their other estate planning objectives.
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The property does not transfer as a consequence of the transferor’s death – In order for the Farm Rollover to be available on death, the transfer must occur as a result the transferor’s death, and not as a result of some other transaction or condition being satisfied. It is very important to consider the impact of including conditional bequests (i.e. “Child A is to receive land at NW 12-34-56, on the condition that they pay $100,000 to Child B”) or purchase options in your will or estate planning, as this can often result in a loss of the Farm Rollover provisions on death.
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The property does not vest with in the required 36-month period - In order for the Farm Rollover to be available on death, the property must have transferred to and become vested indefeasibly in the recipient within 36 months after the transferor’s death. In order to meet this “vesting” criteria, the transferee must receive a 100% beneficial ownership interest in the property, which cannot be defeated by a current or future condition or event. This condition can be a concern if there is a delay in administering the estate which prevents the transfer of property to beneficiaries prior to this 36-month deadline, or if the transferor’s will provides for the property to be held in a Trust (unless the Trust has certain specific terms that allow for beneficial ownership to vest indefeasibly in the beneficiary).
If you have questions about how the Intergenerational Rollover Provisions could apply in your estate planning, or for assistance in completing your estate planning to ensure these provisions are available to you, contact GH&A’s Tax and Estate Planning Team.
Disclaimer
The information in this publication is current as of December 17, 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Gregory, Harriman & Associates LLP to discuss these matters in the context of your particular circumstances. Gregory, Harriman & Associates LLP, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.