The Farm Transfer Tax Bill C-208 Explained
As you may have recently heard, Bill C-208 is proposing to amend the federal income tax act so farm sales to children aren’t taxed at a higher rate when compared to selling the farm to a third party.
Many articles explain that farm sales to third parties qualify for capital gains tax treatment while selling a farm to a child is deemed to be taxed as a dividend. This is leading to some confusion because many farmers were under the impression that they could sell their farm to their child, and it would qualify as a capital gain.
Capital gain vs. dividend
As many of you know, capital gains are taxed at a lower rate when compared to dividends. The tax rate on capital gains is roughly 25%, whereas dividends are taxed at approximately 47% (based on the highest tax rates). So given a choice, you’d want your farm sale treated as a capital gain vs. a dividend for tax efficiency and because you’d be able to use your $1 million lifetime capital gains exemption to reduce your taxable income significantly.
Selling my farm to my child
As it stands today, you are correct; you can sell your farm to a child and have the payment qualify as a capital gain provided funds from your child comes from them as individuals. However, this specific bill addresses situations when you own a farm corporation, and your farming child is looking to buy your farm corporation not personally but rather with their corporation. Julien Grenier, Partner and Ag Manager at Talbot & Associates, explains,
“currently when a child’s corporation is purchasing their parent’s farm corporation, from mom & dad’s perspective, that payment is treated as dividend income rather than a capital gain. This rule is in place because the government is trying to avoid instances where related corporations remove earnings from their corporation via a sale.”
At the moment, this bill seems to be making its way up the chain; however, it is getting some pushback from the Liberals. Let’s hope this can come to fruition as I don’t believe it’s fair for farmers to be punished from a tax perspective when they sell their corporation to their child’s corporation. Furthermore, with farms getting larger and larger, more and more farmers are incorporating to reduce their annual tax bill, so selling to the next generation will become a bigger and bigger tax problem over the years if this bill doesn’t pass.