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:
  1. Property is transferred from a parent to a child.

  2. The property is land in Canada or depreciable property in Canada of a prescribed class.

  3. The child is resident in Canada immediately before the transfer.

  4. 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 FMV.

S. Dane ZoBell
Felesky Flynn LLP, Edmonton

Canadian Tax Focus
Volume 7, Number 2, May 2017
©2017, Canadian Tax Foundation