Friday, February 26, 2016

Canadian Tax Primer 16: Capital Gains Exemption on Farming and Fishing Property

As noted in Tax Primer 14 (please click here to read it), a Canadian-resident individual can realize up to $1 million in tax-free capital gains on the sale of qualified farming and fishing property.

City slickers should not necessarily skip over this tax primer discussion.  In some circumstances, farming property can include property that is not currently used as a farm.  For example, assume that your parent (or grandparent, or even great-grandparent) operated a farm and left the farmland to you prior to June 18, 1987.  As long as that ancestor operated a farm on that property for a total of at least five years (consecutive or not), that previous use of the property can allow you to claim a capital gains exemption of up to $1 million on a sale of that real estate.

The date of acquisition is important in the case of farming property.  If you acquired your interest in the farming property on or after June 18, 1987, more stringent rules govern whether you can claim the exemption.  For farming property acquired on or after June 18, 1987, you must satisfy a two-year gross revenue test.  In at least two years, the gross revenue (before deduction of expenses) from the farming operation must have exceeded the operator’s income (after deduction of expenses) from all other sources.  The test can still be satisfied by gross revenue realized during two years while your parent (or grandparent, or great-grandparent) owned the property.  However, no gross revenue test applies if you acquired your interest in the farming property prior to June 18, 1987.

In the case of fishing property, the two-year gross revenue test must be met (no matter when you acquired your interest in the fishing property).

Remember that the capital gains exemption exempts only the capital gain that arises on a sale.  For example, assume that you are selling farmland that includes barns and other structures that have been depreciated for income tax purposes (read Tax Primer 7 for a discussion of tax depreciation by clicking here).  The capital gains exemption will not apply to any part of the sale proceeds that constitutes a recovery of tax depreciation that has been claimed in past years on the barns and other structures.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.