Business -> Capital gains exemption / Capital gains deduction -> Qualified farm property
Qualified Farm Property - Lifetime Capital Gains Exemption (LCGE)
Income Tax Act s. 110.6(1), s. 110.6(1.3), s. 110.6(2)
An individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $1,000,000 lifetime capital gains exemption (LCGE) when the farm property is sold. The actual capital gains deduction is 50% of the capital gains exemption. For annual maximums, see the Capital Gains Exemption / Capital Gains Deduction article.
The 2015 Federal Budget increased the maximum LCGE for qualified farm property dispositions on or after April 21, 2015 to the greater of:
This means that once the LCGE exceeds $1 million for SBC shares through indexation, the LCGE for farm property will be the same as the LCGE for SBC shares.
Income Tax Act s. 110.6(1) Qualified Farm Property Definition
Qualified farm property of an individual includes property owned by:
Qualified farm property is:
Note: (a) above previously said "...used principally in the course of carrying on a farming business...". The word "principally" was removed. This amendment applies to dispositions made after May 1, 2006.
Although movable machinery and equipment are not qualified farm property, this type of asset does not generally increase in value, so would usually not generate a capital gain.
Income Tax Act s. 110.6(1.3) Property Used in a Farming Business
There are rules about the period of ownership and the use of real property and eligible capital property in order to meet the qualified farm property requirements:
(a) throughout the 24 month period
immediately preceding the disposition of the property, the property must have been owned by
one or more of
(b) one of the following requirements
must also be met:
The above means that there is no gross revenue requirement for a family farm corporation or partnership.
If the farm property is real property that was acquired prior to June 18, 1987 and does not meet the above requirements, it still may qualify for the exemption. To qualify, it must have been used by one of the persons mentioned above, principally in the course of carrying on the business of farming in Canada in the year of disposition, or in at least 5 years during which the property was owned by any of the persons mentioned above.
If the farm property is also the taxpayer's principal residence, the capital gain on disposal may be divided into principal residence and farm property. The principal residence exemption would then be calculated for the principal residence portion, and the $750,000 capital gains exemption used for the farm property.
More information on qualified farm property can be found in the CRA guide T4002 Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Tax Court Case re Qualified Farm Property
A Tax Court of Canada case, 2014 TCC 250 Otteson v. The Queen, is an interesting (and educational) case won by the appellant. The 50.16 acre farm property in question was in Alberta, owned by a married couple. They started a tree farm operation but then sold the property after the finding of significant amounts of gravel on the property resulted in unsolicited and persistent offers for the land. The Minister of National Revenue argued that the couple did not conduct their farming business through a partnership, and the gross revenue requirement had to be fulfilled, and was not. Justice Hogan ruled that the couple was carrying on their farming business as a partnership, and that the actual area farmed (25.91 acres) was qualified farm property.
Top Ten Tax Questions on the Capital Gains Exemption - Ontario Ministry of Agriculture, Food and Rural Affairs
Line 254 - Capital gains deduction - Canada Revenue Agency
Tax Tip: This issue is complicated and can save more than $200,000 in taxes - do it right, plan ahead, and get professional advice!
Revised: January 24, 2018
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