If you are contemplating the sale of your farmland and the expected capital gain will be in excess of your capital gain exemption ($750,000) and your spouse’s ($750,000), or alternatively you and your spouse have utilized your capital gain exemptions in the past, you may be tempted to transfer the farmland to your children in order for them to utilize their capital gain exemption on the disposition. It is important to beware of 69(11) of the Income Tax Act (“ITA”) in such a transaction or the resulting tax consequences will be an unpleasant surprise.
If the farmland has met certain requirements, it is eligible to be transferred to your children with no resulting tax consequences. You will be deemed to dispose of the farmland for proceeds equal to its adjusted cost base and your child will be deemed to acquire the farmland for the same amount. This defers the inherent capital gain to your children to be realized when they eventually sell the land.
If the children sell the farmland before owning it for three years, the resulting capital gain will not be taxable in the children’s hands. Instead the parent is deemed to have disposed of the farmland at fair market value at the time it was transferred to the children. This results in a capital gain to the parent on the original transfer instead of to the children on their subsequent disposition. 69(11) only applies to non-affiliated persons. For purposes of the ITA, children are not affiliated to their parents (spouses are affiliated).
If you plan to transfer farmland to your children in order to access their capital gain exemption on a sale, it is very important that this planning occurs in advance. It is imperative that the children own the farmland for three years prior to a sale to avoid the unpleasant consequences of 69(11).
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