In Canadian agriculture, the Lifetime Capital Gains Exemption (LCGE), also referred to as the Farm Capital Gains Exemption by farmers, is far more than a mere financial advantage; it serves as a lifeline.
From capital gains basics to eligibility requirements and hypothetical examples, Crowe MacKay’s Agricultural industry experts provide a comprehensive guide discussing the intricate details of the LCGE tax benefit, shedding light on how it helps the lives of Canadian farmers.
Capital gains are the gains you make when you sell something valuable, such as real estate, stocks, or, in the context of this guide, farm properties. They're the result of your investment, and while they can be lucrative, they also attract the attention of the Canada Revenue Agency (CRA).
Canada has a robust taxation system that ensures capital gains are not overlooked when paying taxes. When you sell a property for more than its purchase price, you have a capital gain, and the CRA is keen to receive its share of taxes. However, this is where the Lifetime Capital Gains Exemption (LCGE) enters the scene.
Taxation can pose a significant challenge for Canadian farmers, but they can overcome it with the proper knowledge. The Farm Capital Gains Exemption is a valuable tool, offering protection against excessive tax burdens and supporting the sustainability of agricultural businesses.
The LCGE is a tailored financial safety net for Canadians, especially farmers. It allows them to shelter all or a portion of the capital gains earned from the sale of farm properties from taxation. In essence, it is a tax benefit designed to support people such as farmers in Canada.
A person who possesses farm property, including land or buildings, has an interests in a family farm partnership or owns shares in a family farm corporation may potentially qualify for an LCGE of over $1 million ($1,016,836, to be precise) when they decide to sell the farm property. It's important to note that the actual deduction for capital gains equals 50% of the exemption. This will be explained in more detail towards the end of the article.
The eligibility for the LCGE hinges on whether a property meets the definition of "qualified farm property." To qualify, real property like land and buildings must be actively used for agricultural purposes in Canada by one of the following:
Depending on the year of acquisition, two separate tests determine whether your property qualifies: the 5-year usage and the 2-year gross revenue tests.
Under the 5-Year Test, if you purchased or entered into an agreement to buy the property before June 18, 1987, it may be deemed as qualified property if it was primarily used for farming in Canada either in the year of disposal or for at least five years during its ownership by any of the individuals or entities mentioned above.
Alternatively, the 2-Year Gross Revenue Test stipulates that for a minimum of two years during which the property was owned by you or any of the individuals or partnership mentioned earlier, they must have been actively engaged in farming on a regular and ongoing basis, with their gross income from the business surpassing all other sources combined. Furthermore, at the time of the property sale, you or any of the individuals or partnership mentioned above must have owned the property for at least 24 months, known as the "basic holding test."
One of the primary advantages of the Capital Gains Exemption is evident in its name - tax savings. Thanks to this exemption, farmers can pocket a significant portion of their hard-earned sales proceeds.
For many farmers, ensuring the continuity of their family farm is a top priority. The Capital Gains Exemption is a lifeline in this regard. It allows them to pass on their farm properties to the next generation without burdening them with excessive capital gains taxes. This smooth transition secures the legacy of Canadian farming families.
Agriculture is the backbone of Canada's economy, and the government recognizes its importance. The Farm Capital Gains Exemption encourages investment in agriculture by reducing the tax burden on property sales. This, in turn, attracts new entrants and maintains the vitality of the agricultural sector.
While the Capital Gains Exemption offers substantial tax relief, it comes with a cap. The lifetime limit, set by the CRA, dictates the maximum amount of capital gains sheltered from taxation. As of the latest update, this limit stood at $1,016,836.
Understanding the implications of the lifetime limit is crucial for farmers. Exceeding this limit can result in unexpected tax liabilities, so careful planning is essential to maximize the benefits without triggering excessive taxes.
To qualify for the Farm Capital Gains Exemption, the person must be a Canadian resident and own a farm property. This ensures that the exemption supports Canadian farmers and their contributions to the nation's agriculture.
Being a passive investor in farm properties won't cut it when it comes to this tax exemption. Active involvement in farming activities is a prerequisite, reinforcing the government's intention to benefit those genuinely dedicated to agriculture.
The CRA has set strict anti-avoidance rules to prevent misuse of the exemption. Farmers must adhere to these rules to ensure that they stay within the boundaries of tax compliance.
Keeping track of property details, sales records, and other relevant documents ensures a smooth application process.
File your income tax return by the deadline, typically June 15th for self-employed individuals, unless it falls on a weekend or holiday. Missing these deadlines can result in missed opportunities for tax savings. The interest rate for late payment of taxes is 10%, compounded daily.
Capital gains tax calculations involve a specific formula that considers the selling price, purchase price, and eligible expenses related to the property.
Proceeds of disposition – Adjusted cost base (ACB) = Capital Gains / 2
The Farm Capital Gains Exemption directly reduces the tax liability associated with capital gains on farm properties. This means that eligible farmers can enjoy significant tax savings. See the example below.
To illustrate the practical impact of the Lifetime Capital Gains Exemption, let's consider a hypothetical scenario.
| Item | Amount ($) |
| Sale Price of Family Farm Shares | $2,500,000 |
| Original Purchase Price of Shares | $800,000 |
| Capital Gain (Sale Price - Cost) | $1,700,000 |
| Lifetime Capital Gains Exemption | $1,016,836 |
| Capital Gain Exceeding LCGE | $683,164 |
| Capital Gains Tax Rate (highest marginal rate) | 48% |
| Tax Owed (approximate) | $164,000 |
A Canadian and Alberta resident, Sarah has been a shareholder in a family farm corporation for 20 years. She decides to sell her family farm shares for $2,500,000. The original purchase price of the shares was $800,000, resulting in a capital gain of $1,700,000.
While the capital gain exceeds the $1,016,836 LCGE limit, Sarah can still apply the exemption to reduce her capital gain. In this case, her capital gain after applying the exemption is $683,164 ($1,700,000 - $1,016,836).
Assuming that Sarah has other sources of income such that she would not be subject to Alternative Minimum Tax (see below), her estimated tax owing on the property sale would be approximately $164,000.
Recent changes to the Alternative Minimum Tax (AMT) rules could result in some farmers paying some tax on the sale of their farm property, even if the entire gain is offset by the exemption. AMT is generally recoverable in future years but should be considered nonetheless. For more information on the new AMT rules, please see our article.
The Lifetime Capital Gains Exemption provides an opportunity of financial stability for farmers. Its ability to reduce tax burdens, facilitate succession planning, and encourage agricultural investment underscores its significance in farming. As we understand capital gains tax in Canada, the exemption emerges as a major tool in securing the financial well-being of Canadian farmers.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
If you are in the Agriculture industry and require personalized support from a financial expert, Crowe MacKay’s advisors have the knowledge and expertise to support farming and agriculture businesses.
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