Nuances in Farm Rollover Rules
The general principles related to the preferential treatment afforded to
farming (and fishing) property are well known. Nonetheless, certain
nuances are worthy of attention—particularly the details of the
requirement that, for intergenerational rollover purposes, the property
have been used principally in a farming business and the potential
difference in income tax results between the transfer of such property
to a spouse and the transfer of such property to a child. The rules are
often very different from those that apply to a capital gains deduction
because the two sets of rules were developed at different times. GST
implications must also be considered, since rollovers under the Act may
not be rollovers for GST purposes.
Subsections 73(3) and (3.1) allow for a tax-free inter vivos rollover of
certain farm property from a parent to a child when the following
conditions are met:
Property is transferred from a parent to a child.
The property is land in Canada or depreciable property in Canada of a prescribed class.
The child is resident in Canada immediately before the transfer.
The property has been used principally in a farming business in
which the taxpayer, the taxpayer's spouse or common-law partner, a child
of the taxpayer, or a parent of the taxpayer was actively engaged on a
regular and continuous basis.
The CRA has expressed the view that "used principally" in this context
generally means more than 50 percent of the years (2007-0240321E5,
October 9, 2007). However, the ownership requirement tied to the "used
principally" test is not very specific. For example, farm property that
has only recently been acquired by a taxpayer, yet was historically
farmed by the taxpayer or a qualifying family member for a significant
period of time, could qualify. The CRA has confirmed that subsection
73(3) is available to a taxpayer if the taxpayer's spouse, who
previously owned the property, had used it principally in the business
of farming on a regular and continuous basis (2008-0294051I7, November
10, 2008). In addition, there is no specific ownership period for this
test. Contrast this with the two-year ownership period for the capital
gains deduction in subsection 110.6(1.3).
Another nuance is the different income tax consequences that arise when
farm property that qualifies for the capital gains deduction is
transferred to a spouse and when it is transferred to a child.
Subsection 70(6.2) allows the spouse of a deceased taxpayer to elect out
of the application of the spousal rollover provisions in subsections
70(6) and (6.1), which may result in (1) a capital gain to the deceased
and (2) the spouse receiving the property with an ACB equal to FMV.
However, the CRA's longstanding position has been that any election
under subsection 70(6.2) must be applied on a property-by-property
basis, with no fractionalization (2012-0442921C6, June 12, 2012). Thus,
any transfer of real property under this election can only be done on an
all-or-nothing basis. Similarly, for property that is shares of a
corporation, one could transfer 5 or 6 shares, but not 5.5 shares.
In contrast, paragraph 70(9.01)(b) allows the representative of a
deceased taxpayer to elect to designate qualified farm property to a
child at an acquisition value between the ACB and the FMV of the
property. Thus, when farm property is transferred to a child, the
paragraph 70(9.01)(b) election allows the deceased to elect at an amount
between ACB and FMV to trigger a capital gain that fully utilizes any
remaining capital gains deduction without triggering any additional
capital gains; in contrast, a transfer of the same property to a spouse
may result in a capital gain greater than any remaining capital gains
deduction, due to the requirement that the transfer occur at ACB or full
S. Dane ZoBell
Felesky Flynn LLP, Edmonton