By Gary Sliworsky
Ag rep, Emo
Rob Gamble is a finance and tax program lead for the Ontario Ministry of Agriculture, Food and Rural Affairs.
If you asked him what is the most common tax question he gets asked, it would be a no-brainer: capital gains.
The $750,000 capital gains exemption to be exact. And yes, it is $750,000 (it was increased back in 2007).
The reason for all the interest is because the exemption is the single-largest tax break farmers get. Although good tax planning may yield even larger benefits over time, the capital gains exemption is seen as the “big one.”
Here are the first four from Gamble’s “Top Ten” list for farm tax questions regarding the capital gains exemption, based on the inquiries he gets (the other six will appear next week).
•What type of property qualifies for the exemption?
Land, quota, and buildings all qualify. So does an interest in a family farm partnership or shares in a family farm corporation.
The technical term is “qualified farm property.”
Machinery does not qualify, which is okay because machinery does not usually increase in value.
•How much or how long does the property have to be used in farming to make it “qualified farm property?”
There are two sets of rules, depending on when the property was purchased. One is easy to meet, the other is harder.
Easy Test: For property purchased on or before June 17, 1987, the property must be used in farming at the time of sale or for any five years during its ownership.
Harder Test: For property purchased after June 17, 1987, the property has to be owned for 24 months and in at least two years the gross income from farming must exceed net income from all other sources.
However, this income test is not applied if the property is used in a family farm partnership or family farm corporation for at least 24 months, and the individual, spouse, common-law partner, child, or parent was actively and continuously involved in the farming business.
This fact can be advantageous for folks who have off-farm income and cannot meet the income test.
•Does the person who owns the property have to use it in farming?
No. As long as the property was farmed by your spouse, common-law partner, child, or parent, you still can access the exemption.
Many children who inherit land from parents are surprised to learn that although they have never farmed the property, they qualify for the $750,000 exemption.
In other words, if it was qualified farm property for your parent, it is qualified farm property for you—and you can use the $750,000 capital gain exemption.
•I used my general $100,000 capital gain exemption back in 1994 when it was eliminated. How does that affect my $750,000 exemption?
It affects it in two ways:
—It reduces your exemption, so you now have $650,000 if you used the full $100,000; and
—It may mean that you have to qualify under the harder test described earlier.
Let me explain. Up until 1994, everyone had a personal capital gains exemption of $100,000 for general property.
The budget that year eliminated this benefit, but allowed individuals to use up the exemption by simply electing to “bump up” the cost base of the asset.
If, however, you elected to use the $100,000 exemption on your farm property, you were deemed to have disposed of and re-acquired the property in 1994.
The result? You must meet the harder post-June, 1987 rules for qualified farm property on a future sale.
There is no way to reverse that election
Dates to remember
•April 24—Rainy River Cattlemen’s Association spring sale, Stratton sales yard.