Answer: It depends on a number of factors. If a corporation owns farmland and later sells it at a gain, the corporation doesn’t get the capital gains exemption (CGE). Only an individual can use the CGE. Therefore many farmers own a significant portion of their land personally rather than corporately. But if you don’t intend ever to sell land for cash proceeds, the chance to turn your $1,000,000 CGE into ready tax-free cash may seem frustrated. A possible idea, which may or may not be appropriate, is to transfer some land to your corporation, “crystallizing” gains to use your CGE. It’s possible to transfer some land to the corporation, receiving shares in exchange, but also receiving a promissory note (creating a shareholder loan account) from the corporation to the extent of the original cost base of the land plus any capital gains you trigger using certain tax elections. When the corporation later realizes farm income or recapture income from the sale of inventory or equipment, the sale proceeds, after the corporation’s low tax, could be paid to you tax-free to repay your shareholder loan.
However, this isn’t appropriate in every case because of several potential issues including:
- “Trapping” future appreciation in value inside the corporation, which on a future sale will not qualify for the CGE;
- Interference with succession planning such as a desire to pass land to your child personally to allow future use of the CGE;
- Tax consequences if the land is ever to be transferred out of the corporation to shareholders;
- Complexity in transferring land to children when it is owned corporately (they may prefer to receive parcels of land directly rather than together receiving shares of a corporation); and
- Difficulty in convincing a future purchaser to buy shares of your corporation (so you can use the CGE) rather than purchasing the land directly out of the corporation (however, this does work in some cases).
Be sure to get advice from a reliable advisor, such as The Retiring Farmer, before undertaking any such transaction. Especially if you’re not yet incorporated, there may be better planning ideas to look at before this one.
Donavon K. Tofin CPA, CA, CFP
The Retiring Farmer Wealth™ Management Process & Assante Financial Management Ltd.
*Don Tofin is a Senior Financial Advisor with Assante Financial Management Ltd. Please contact him and his team at The Retiring Farmer™ to discuss your particular circumstances prior to acting on the information above.
Donavon Tofin is at the centre of The Retiring Farmer ™ Wealth Management Process. As the original creator of The Retiring Farmer™ as a concept, he believes in the importance of financial planning for farmers, ranging from the management and monitoring their financial and tax affairs, to assisting with their estate matters.
He has over thirty years’ of experience working with farm families and the Canadian agriculture community, concentrating on farm succession and restructure strategies integrating his expertise in income tax, investment, insurance, retirement and estate planning.
Don received his Bachelor of Commerce degree with distinction from the University of Saskatchewan in 1979, his Chartered Accountant designation in 1981, and his Certified Financial Planner designation in 1999. He practiced with an international firm of Chartered Accountants until 1983 after which time he managed his own public practice as well as being involved in private industry. Don joined Assante Financial Management Ltd. in 2000 to integrate professional investment counselling into The Retiring Farmer™ concept.