Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Tax implications of a transfer of taxpayer's farm property to her children.
Position: None taken.
Reasons: General comments.
March 14, 2011
XXXXXXXXXX
Dear Colleague:
Thank you for your correspondence (your file XXXXXXXXXX ) of January 27, 2011, enclosing a letter from your constituents, XXXXXXXXXX , regarding the capital gains tax as related to their mother's farmland. I can only give you the following general information, as you have not provided written authorization from your constituents.
I understand that in XXXXXXXXXX your constituents' father, either solely or jointly with their mother, acquired XXXXXXXXXX of land situated in XXXXXXXXXX . Ownership of the entire property went to their mother when their father passed away. It is unclear how the land was used by the owners in the distant past, but it is currently being used as hay land and pasture.
Your constituents fear that the transfer of the property to them while their mother is living or as a consequence of her death will trigger a capital gain, resulting in a substantial tax liability. While your constituents want to keep the farm property in the family, they feel that the property may have to be sold to settle the tax liability. As such, they are looking for a solution that would allow them to keep the property in the family. They are also concerned about how to determine the tax cost of the property as of December 31, 1971, which is a tax requirement for calculating the capital gain on the disposition of a property acquired before 1972.
The Canadian tax system is one of self-assessment under which all taxpayers are responsible for their own tax affairs. While the Canada Revenue Agency (CRA) is responsible for the administration of the Income Tax Act, it does not provide tax planning advice. Taxpayers should seek tax planning advice, particularly in complex situations, from independent professionals. Therefore, it is not appropriate for me to advise taxpayers on how to arrange their tax affairs. However, the following general comments can be helpful in your constituents' case.
Under the Act, the general rule is that a taxpayer is deemed to dispose of all property immediately before death, which will trigger the reporting of capital gains without an actual sale having occurred. When such a deemed disposition of property occurs, the legal representative of the deceased can elect to pay the resulting tax liability in 10 equal consecutive annual instalments, provided acceptable security is posted with the CRA.
The Act also contains various rules, some of which are mentioned below, that permit the reduction or elimination of a capital gain, or the deferred recognition of such gain, using tax rollover provisions.
According to the Act, an individual (other than a trust) who is resident in Canada throughout a tax year can claim a lifetime capital gains exemption of up to $750,000 on capital gains from the disposition of certain capital properties, including a property that meets the statutory definition of a qualified farm property (QFP). Generally, the real property of an individual is included in the definition of QFP if it is principally used in a farming business in Canada by the individual, or by the individual's spouse or common-law partner, parent, or child. As well, the business operator's gross revenue from farming during a period of at least two years must exceed the income from all other sources.
There is a special rule for property last acquired by a taxpayer before June 18, 1987. Under this special rule, a property will generally qualify as QFP if it was used principally in a farming business either in the year of disposition or in at least five years during which the property was owned by certain qualifying owners, which may include the taxpayer, or the taxpayer's spouse or common-law partner, parent or child. For example, a property that is principally used in a farming business for several years by a full-time farmer and is transferred to, or inherited by, the farmer's spouse or common-law partner and then by their child is generally expected to qualify as QFP in the hands of each mentioned new owner.
There are also rules in the Act that permit taxpayers to transfer, while living or as a consequence of death, their capital property to their spouse or common-law partner, or their farm property to their children, on a tax-free rollover basis. These rules also allow taxpayers to choose to recognize a gain at the time of transfer in order to claim, for example, the lifetime capital gains exemption in respect of a QFP.
As many Canadians are aware, the Act does not tax a capital gain on a principal residence. Taxpayers are allowed to claim a principal residence exemption to reduce or eliminate a capital gain on the disposition of their principal residence.
Before January 1, 1972, capital gains were not taxed in Canada. To eliminate any capital gain that accrued before 1972, certain transitional tax rules apply when taxpayers dispose of capital property acquired before 1972. Generally, these transitional rules require determining the fair market value of the property as of December 31, 1971.
Please note that there are CRA publications dealing with issues that may be of interest to your constituents. These publications are available on the CRA Web site and include the following:
As I already mentioned, the CRA is unable to provide tax planning advice. However, CRA officials will assist taxpayers by explaining the tax rules that apply in particular situations. Therefore, I am forwarding a copy of our correspondence to XXXXXXXXXX of the XXXXXXXXXX Tax Services Office. XXXXXXXXXX will be pleased to discuss in greater detail with your constituents the tax rules that apply to their situation. He can be reached at XXXXXXXXXX . The CRA accepts collect calls.
I trust that the information I have provided is helpful.
Yours sincerely,
Keith Ashfield
c.c.: XXXXXXXXXX
Tim Fitzgerald, CGA
2011-039420
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