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The family farm.

Farmers who are considering estate planning have a multitude of options available. This article will focus on two of the three main estate planning issues which will arise when deciding on which options to use for a particular situation:

* Inter-Vivos Transfers (transfers between living people);

* Testamentary Transfers (transfers through a will); and

* The $500,000 Capital Gains Exemption (this will be dealt with in a subsequent Tax Law column.

In general, when making either an inter-vivos transfer or testamentary transfer there are three questions that one should ask when transferring property:

* What is the nature of the property involved in the transfer?

* Are we dealing with the person at arm's length?

* Are there any rollover provisions available?

Inter-Vivos Transfers

Passing the farm to the next generation when the farmer-owner is still alive (an inter-vivos transfer) has both advantages and disadvantages. This type of transfer allows a farmer to show clear intent; there will be no misunderstanding of the farmer's wishes, and the value of the farm assets will be taken into account. An inter-vivos transfer is an appropriate choice if the farmer does not need a future income stream. One should note that if the farmer is transferring property which is considered a "homestead", under Alberta's Dower Act, consent is needed by the spouse of the farmer, prior to the disposition of such property. Another issue to be considered is that there may be tax implications when the transfer of property takes place, if there are no rollover provisions available.

Additionally, if the transfer of property is to a non-arm's length party, the application of subsection 69(11) of the Income Tax Act (the Act) and attribution rules need to be considered (see below).

Nature of the Property--Income

Generally, if a farmer uses a cash basis method of reporting farm income and is dealing at arm's length with a purchaser, a transfer of property will not be included in income until the purchase price is paid. Alternatively, if a farmer uses an accrual method of reporting farm income and is dealing at arm's length with a purchaser, there will be an income inclusion in the taxation year of the sale and a deduction for the purchaser in that year.

However, if a farmer is not dealing at arm's length with the purchaser (suppose the purchaser is a sibling for example), one will need to consider section 78 and section 69 of the Act. Section 78 deals with unpaid amounts between non-arm's length parties. The charts on the following pages may help clarify these rather complex matters.

Additionally, under section 69, if a taxpayer has acquired property from a person with whom he or she was not dealing at arm's length and has paid more than the fair market value, the taxpayer will be deemed to have acquired it at fair market value. Thus, the taxpayer may not be able to deduct an amount greater than the fair market value.

Furthermore, if a taxpayer has disposed of property to a non-arm's length party, for no proceeds, for proceeds less than fair market value, or by way of a gift inter-vivos, the taxpayer shall be deemed to have disposed of the property at fair market value. Thus, the taxpayer may have to pay taxes on that fair market value. The recipient of the property will also be deemed to have acquired the property at fair market value.

Nature of Property--Capital Property

In general, if a farmer transfers capital property in an arm's length transaction, the proceeds of the sale will equal the adjusted cost base of the property minus costs to sell the property, similar to non-farmers (Adjusted cost base can roughly be defined as the original cost to the farmer, plus gains in value as defined by the Income Tax Act and minus any losses or costs defined by the Income Tax Act.). If a farmer transfers property in a non-arm's length transaction, section 69, as discussed above will come into play. However, there are a number of rollover provisions available under the Act which may defer income tax. Some of these rollover provisions are available to both farmers and non-farmers, while other rollover provisions are only available to farmers.

Rollover Provisions

There are three inter-vivos rollover provisions available to farmers under the Act. In general, rollover provisions allow property to be disposed of for proceeds of disposition equal to the adjusted cost base of the property and acquired by the transferee for an amount equal to the proceeds of disposition (adjusted cost base).

1. Subsection 73(1): Inter-vivos transfers by individuals. This rollover is available to both farmers and non-farmers. Criteria which much be fulfilled in order to meet this rollover provision are as follows:

a. The Property must be transferred in a qualifying transfer;

b. The individual and the transferee are resident in Canada at the time of the transfer;

c. Qualifying transfer is defined under subsection 73 (1.01): A Qualifying transfer occurs when property is transferred by an individual to:

i. The individual's spouse or common-law partner;

ii. A former spouse or common-law partner in settlement of rights arising out of their marriage or common-law partnership; or

iii. A trust created by the individual under which

* the individual's spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse's or common-law partner's death and no person except the spouse or the common-law partner may before their death receive or obtain the use of any of the income or the capital or the trust,

* the individual is entitled to receive all of the income of the trust that arises before the individual's death and no person except the individual may before their death receive or obtain use of any of the income or capital of the trust or

* the individual or the individual's spouse (or common-law partner) is, in combination with the other, entitled to receive all of the income of the trust that arises before the later of the death of the individual or the death of the spouse (or common-law partner) and no other person may, before the later of those deaths, receive or obtain use of the income or the capital of the trust.

2. Subsection 73(3): Inter-vivos transfer of farm property to child. This rollover provision is only available to farmers and provides a rollover of farm property to a child, grandchild, etc. due to the extended meaning of child in subsection 70(10). Requirements for this rollover are as follows:

a. Property is situated in Canada;

b. Transferred by the taxpayer to a child of the taxpayer;

c. The taxpayer's child was a resident of Canada immediately before the transfer; and

d. The property was, before the transfer, used principally (50%) in a farming business in which the taxpayer, the taxpayer's spouse or common-law partner, or any of the taxpayer's children was actively engaged on a regular or continuous basis. (in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect to that woodlot).

3. Subsection 73(4): Inter vivos transfer of family farm corporations and partnership. To fall within this rollover provision the following criteria must be met:

a. A taxpayer has transferred property to a child of the taxpayer;

b. The child of the taxpayer was a resident in Canada immediately before the transfer; and

c. The property was immediately before the transfer a share of the capital stock of a family farm corporation of the taxpayer or an interest in a family farm partnership of the taxpayer. (The terms "share of the capital stock of a family farm corporation" and "interest in a family farm partnership" are defined in subsection 70(10) of the Act).

Testamentary Transfers

As with non-farmers, when a farmer dies, the farmer is deemed to have disposed of their property immediately before his or her death, under subsection 70(5) of the Act. There are however, a few rollover provisions within the Act, which allow the tax burden that would otherwise be triggered upon death to be deferred. We will focus our attention exclusively to testamentary rollover provisions available to farmers.

1. Subsection 70(9)--Transfer of farm property to a child: The following requirements must be satisfied in order to use this rollover:

a. The transferred property is situated in Canada;

b. Before the taxpayer's date of death, the property was used principally (50%) in the business of farming in which, the taxpayer, spouse or child was actively engaged on a regular and continuous basis (in the case of property used in the operation of a woodlot, was engaged to the extent required by a prescribed forest management plan in respect to that woodlot);

c. The property is transferred as a consequence of the taxpayer's death;

d. Immediately before the taxpayer's death, the child was a resident in Canada; and

c. The property vested indefeasibly in the taxpayer's child within 36 months or longer with the Minister's discretion (written application for an extension is required) [The ownership of the property by the child is not able to be voided].

2. Subsection 70(9.1)--Transfer of farm property from trust to settler's children: This provision provides for a subsequent rollover of farm property if the following conditions are met:

a. The transferred property is situated in Canada;

b. The property was originally transferred to a trust under subsection 70(6) (spousal or common-law partner trust) or 73(1.01.) (See 1 (c) (iii) of Rollover provisions under Inter-Vivos Transfer).

c. The property, immediately before the death of the taxpayer's spouse, was used in the business of farming;

d. The property is transferred to a child of the taxpayer as a consequence of the spouse's death

e. The child was a resident of Canada immediately before the death of the spouse; and

f. The property vests indefeasibly in the child.

3. Subsection 70(9.2)--Transfer of family farm corporations and partnerships: The necessary requirements for this rollover are the following:

a. Property of the taxpayer immediately before the taxpayer's death was a share in the capital stock of a family farm corporation or an interest in a family farm partnership;

b. As a consequence of death, the property was transferred to the taxpayer's child;

c. The child of the taxpayer was a resident of Canada immediately before the taxpayer's death; and

d. The property vested indefeasibly in the taxpayer's child within 36 months or longer with the Minister's discretion (written application for an extension is required).

4. Subsection 70(9.3)--Transfer of family farm corporation or partnership from trust to children of settler: The requirements for this rollover provision are as follows:

a. Property was transferred or distributed to a spousal trust, by way of an inter vivos transfers by individuals as it read before 2000 (subsection 73(1)) or a spousal trust described in subsection 73(1.01);

b. Immediately before the transfer the property was a share of the capital stock of a family farm corporation or an interest in a family farm partnership of the taxpayer;

c. Immediately before the death of the taxpayer's spouse or common-law partner who was a beneficiary under the trust the property was

i. A share in the capital stock of a Canadian corporation of the taxpayer where all or substantially all of the fair market value of the property owned by the corporation was attributable to property that has been used by

* the corporation or any other corporation, a share of the capital stock of which was a share of the capital stock of a family farm corporation of the taxpayer, or of a spouse or common-law partner, child or parent of the taxpayer,

* a corporation controlled by a corporation referred to above,

* the taxpayer,

* a spouse, common-law partner, child, or parent of the taxpayer or

* apartnership, an interest of which was an interest in a family farm partnership of the taxpayer, of a spouse, common-law partner, child or parent of the person, principally in the course of carrying on a farming business in Canada or

f. shares of the capital stock or indebtedness of one or more corporations all or substantially all (90%) of the fair market value of the property to property described in (i).

ii. An interest in a partnership that carried on the business of farming in Canada in which it used all or substantially all (90%) of its property.

d. The property has transferred to the child of the taxpayer as a consequence of the death of the spouse or common-law partner;

e. The taxpayer's child was a resident in Canada immediately before the death of the spouse or common-law partner; and

f. The property has become vested indefeasibly in the taxpayer's child.

In addition to these rollovers, the Act also allows ways to minimize taxes at death. First, a taxpayer's principal residence is exempt from tax under paragraph 40(2)(b). However, farmers have an alternative principle residence exemption in paragraph 40(2)(c). If the farmer's residence is located on land used in a farming business carried on by the farmer, the farmer may elect to have a gain of $1,000 per year exempted on the entire property rather than have the gain on the residence exempt under paragraph 40(2)(b). Second, life insurance proceeds are exempt from tax if the beneficiary of the policy is the spouse of the taxpayer.

Property can also be kept out of a farmer's estate at their death. This can be done through owning property as joint tenants. A joint tenancy allows the right of survivorship. At one of the joint tenants' death, the surviving joint tenant will take the entire property. For example, when a farmer dies and they own the farm in a joint tenancy with their spouse, the spouse will receive the farm and it will not become a part of your estate.

Finally, there is a $500,000 capital gains exemption for "qualified farm property", but this will be discussed in a subsequent Tax Law column.
 Farmer-Seller Non-Arm's Length Buyer

Year of Sale of Sells farm for a Incurs the expense of buying
Farm purchase price, but the farm, and it is a
 does not receive the deductible expense for tax
 money purposes

Year 1 after Sale

Year 2 after Sale Amount is still owing

Year 3 after Sale Amount is included in the
 tax payer's income for this
 year


Chastine M. Taerum is a lawyer with the firm of Felesky Flynn LLP in Edmonton, Alberta.
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Title Annotation:SPECIAL REPORT on Farming and Ranching
Author:Taerum, Chastine M.
Publication:LawNow
Date:Aug 1, 2005
Words:2435
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