Loopholes for Farmers

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LOOPHOLES FOR

FARMERSTM

20142015A tax planning checklist

for farmers

" Tax Planning Professionals"

[email protected]@[email protected]

Toll free 1-888-818-FARM

www.farmtax.ca

Loopholes For Farmers is a tool that can be used to reduce the o verall taxes that you pay. This isnot an exhaustive list of tax planning ideas, but is simply a summary of the more significant savingsand planning opportunities available today in British Columbia. Professional advice should besought to ensure that a particular idea is applicable to your personal situation.

Please review the checklist, and if any of the items seem to relate to your situation, please do

not hesitate to call.Copyright 2015 Rossworn Henderson LLP $12.95 + GST (complimentary for clients)All rights reserved.

ROSSWORN HENDERSON LLPChartered Professional Accountants

Tax Consultants


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LOOPHOLES FOR FARMERS

Tax Law Planning Point

Rossworn Henderson LL P

Chartered Professional Accountants

Tax Consultants

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HOW TO USE THIS CHECKLIST:

This Loopholes for Farmers guide has been divided into the following sections:

Page

General information 2

Deductible expenditures 5

Using your vehicle for farming 9

Capital expenditures 10 Farming in a corporation 11

Selling a farm & transfers to children 13

Government programs 19

There are very specific tax laws that relate onlyto farmers. It is very important that you areaware of how to use these rules to your advantage. If a tax rule is missed or misused, thiserror could easily cost you hundreds of thousands of dollars. This is especially true when you areselling your farm or transferring it to children.

1. Read each section that applies to you. Check the box of each loophole that could be used inyour circumstance.

2.

BE SURE TO TAKE NOTE OF THE NEW TAX RULES FOR THIS YEAR, WHICHHAVE BEEN HIGHLIGHTED IN BOLD.

3.

Bring this booklet with you when we are doing tax planning for you or preparing your income taxreturn and we will show you how to get maximum benefit from those planning points.

4.

These loopholes are simply the most common methods to use existing tax laws to your greatest

advantage. As a taxpayer, you should always look at the tax rules from different angles and

structure your tax planning in a way that will result in a benefit for you and your family.

5. For further information regarding your tax issues, please contact our offices at:

Armstrong: 250-546-8665 Enderby: 250-838-7337

Lumby: 250-547-2118 Salmon Arm: 250-832-5129Sorrento: 250-675-3440 Out of town (toll free): 1-888-818-FARM

Email: Chris Henderson [email protected]

Dustin Stadnyk [email protected] Merrill [email protected]

GENERAL INFORMATION


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On April 1, 2013 BC returned tocharging GST at a rate of 5%(previously HST at 12%).

Farmers are classed into three

categories:

Fu ll-ti me farmers

Full-time farmers are not subject to alimit on the amount of losses that aredeductible.

Part-time farmers

Part-time farmers are defined asthose whose gross farming revenuesdo not exceed their other sources ofincome (i.e. Pension, employmentincome, investments, etc.). Themaximum loss that may be claimedin one year is $17,500.

Hobby farmers Hobby farmers cannot deduct any

farming expenses as CRA viewsthem as being entirely for personal

benefit.

Business losses created on or after2006 can be carried forward for 20years. Losses occurring prior to2006 are limited to a 10-year carryforward.

Be sure your record keeping systemcaptures all the GST paid onexpenses. There are some sales itemsthat GST must be charged on byfarmers. For example, farmers mustcharge GST on the sale of equipment,land and hay for horse consumption.

You should try and establish yourfarm operation as full-time.

If possible, set your farm operationup as a partnership as each partnerwill be eligible for a maximum lossof $17,500.

Never advise CRA that you consideryour farm a hobby. Ensure you havedocumentation supporting a

reasonable expectation of profit.

If your business has losses that areabout to expire, it may be possible torenew these, so that they are availablefor another 20 years.


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If you or your spouse are self-employed, you have a June 15deadline for your personal incometax returns, however, any taxesowing are still due on April 30 andCRA will charge interest for unpaidtaxes as of April 30.

Partnerships that have more than

$5 million in assets OR revenues

plus expenses greater than $2

million will now be required to file

a T5013 Partnership Return.

Partnerships with less than 6

partners are not required to file a

T5013 Partnership Return. If no

T5013 is filed, CRA could take the

position that the Partnership

Return is never statute-barred.

A farmer can use deductions such asCCA for Guaranteed IncomeSupplement (GIS) purposes.

If you had a profit from your farm

last year and had to pay taxes at theend of the year, CRA will likelyrequire that you make instalment

payments for this year.

Taxpayers with gross revenue of lessthan $30,000 are not required toregister for GST.

You may want to consider making alump-sum instalment before April 30to cover the estimated taxes owing ifyou cannot file your return by thatdate.

The T5013 must be filed by March

31steach year. Please note, the

assets are calculated as the cost of

all assets both tangible and

intangible excluding any

depreciation. If you think that this

may apply to you please contact

our office.

You may want to consider filing a

T5013 Partnership Return even if

not required to do so to ensure that

your Partnership Return is statute-

barred.

You should deduct CCA for GISpurposes but not for income taxpurposes. This way you do not wastepersonal exemptions.

Individual farmers are allowed to

make one annual instalment due onDecember 31. Farm Corporationsare required to make monthlyinstalments.

Consider registering voluntarily, asyou will not charge GST on mostfarming income, but then you canrecover the GST paid on your

purchases.


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Easement sales qualify for the

capital gains deduction. ALR

swaps may also qualify for the

capital gains deduction. The first

year changes on surface leases also

may qualify for the CGE.

Properties with farm status havelower rates of municipal taxes and

property insurance. The BCAssessment Authority determinesyour status.

There is a new farm class for retiredfarmers under BC Assessment

The government has announced asystem of Carbon Credits. Farmerscan earn Carbon Credit by adopting

practices that reduce emissions, suchas no-tilling and direct seeding.

Partnerships provide a lot offlexibility with respect to future tax

planning and the ability to access theCapital Gains Exemption. However,there are very complex tax rules thatcan apply. Joint ventures offer highincome farms the possibility of

increasing the amount of income thatis taxed at low rates.

Siblings may break the ownership

line for the capital gains exemption.

There are income tax issues if lifeinsurance policies are not properlystructured.

If possible, consider using the

ACBadjustment instead of using

the capital gains deduction.

Try to have your property assessed asfarm. Farm property taxes are

considerably lower than residential.There are developing farmclassifications for starting farms.

Provided you meet all of the criteria,your property may still qualify asfarm property without having the

prescribed amount of sales.

Carbon Credits can now be boughtand sold on an open market, whichwill be taxed as income to the farm.

In situations where you are adding anew partner, removing an old partner,moving a partnership into a company,or dealing with a partner, you shouldalways consult with a knowledgeableadvisor.

Take this into consideration when

structuring farm ownership andsuccession.

Ensure the payor and the holder ofthe life insurance is the same or thereare taxable benefit issues.


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You can earn up to $3,500 of

employment income before it

affects your Guaranteed Income

Supplement.

Consider issuing yourself and your

spouse a T4 $3,500 each.

DEDUCTIBLE EXPENDITURES

Farmers may report income on either acash or accrual basis.

Any expenses relating to the farm are

deductible, including:- livestock purchases-

containers and twine-

fertilizer and pesticides

- seeds and feed-

property, equipment, and cropinsurance

- custom contractor fees-

machinery rentals-

utilities- office and supplies- professional fees-

rent and property taxes- wages- motor vehicle expenses-

veterinary and breeding fees-

machinery, fence and building

repairs-

fuel

-

licenses- small tools

The portion of expenses that relate topersonal use (i.e. slaughtering a cow forthe freezer or using hay for your hobbyhorses) is notdeductible by the farm.

Consider using the cash basis foryour farm operation, as it is generally

easier to manipulate the incomereported in any given period.

Cash basis farmers should purchase

supplies at year-end to increaseexpenses for the year if a farming

profit was generated in the year.Credit card payments qualify as

paid in the year. A note payableissued to a supplier may also qualifyas paid. The purchase of additional

livestock will be beneficial if in aprofit position, but will not bepermitted as an expense if doing sowill create a farm loss. Leasing

cattle can sometimes get around

these farm inventory rules.

Generally, it is easier to increase yourreported farming income to includewhat that farm would have receivedhad these items been sold to someoneelse.


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50% of meals and entertainment expensesare deductible.

A portion of home office expenses suchas rent, mortgage interest, property taxes,utilities, telephone, minor repairs and

home insurance are deductible. In-homeoffice expenses cannot be used to

increase a loss but can be carried forwardindefinitely and used in a year when thefarm has a positive income.

A farm can pay individuals assubcontractors, saving you the cost ofCanada Pension Plan (CPP) andEmployment Insurance (EI)

remittances.

The federal personal exemption for

2015 is $11,327 (BC $9,938), under

which no income tax is paid on

earnings.

Expenses incurred for clearing, leveling,

and draining land are 100% deductible.

Keep good records to support yourclaim, including who you attendedwith and for what purpose.

If possible, increase farm revenue ordecrease other expenses ensure yourhome office expenses get claimed.

There are specific criteria to considerif a worker is a subcontractor or anemployee. Ultimately, the risk of anyadditional tax liability resulting from

an incorrect assessment falls on you,so be sure before you start.

Pay reasonable wages to family

members (especially children) to

take advantage of these tax-free

limits. The children can then

contribute to an RRSP or RESP

with the funds. Ensure your

children file a tax return to

maximize their RRSP room for

future use and to claim the

Working Income Tax Benefit tax

credit.

Try and have farm expenses

characterized as land leveling andland clearing. You do not have todeduct all the costs for clearing landin the year they were paid. Youshould carry forward any or a part ofthe costs to a year you are taxable.


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CRA gives tax credits for legitimateresearch under the Scientific Researchand Experimental Development Program.It is designed to help small businesses doresearch to improve their products.Farmers who qualify for the program canget a 100% tax deduction for the money

spent on research and refundable credits.

If you use your life insurance policy ascollateral for a loan related to your farm,you may be able to deduct a portion of

the premiums paid.

Interest on money borrowed to earnfarming income is deductible. The

purpose of a loan is what determineswhether a loan is deductible.

CRA has recently changed their view,

stating that payments of mixed debt

must be split pro-rata based on the

personal and business percentages.

Leasing equipment is an alternative topurchasing, and the lease payments are100% deductible.

Test plots and machinery experimentscould qualify for this tax break.Check if contributions used forResearch and Development are alsoeligible for the refundable tax credits.Any expenditures that result in atechnological advance qualify. See

if you can get yours to qualify, itsworth it!!

When arranging financing, ask thebank for a letter saying that you needlife insurance to ensure the payments

are deductible.

Always structure loans to be for abusiness purpose, which makes them

deductible. If required, personalassets can still secure the loan.

This has not yet been tested in tax

court. You might consider splitting

your financing in to separate loans

(business vs. personal) and pay

down the personal loan first.

Ensure it says lease if you wantlease treatment. It can be structured

just like a loan with a $1 buyout and

still qualify. If you buy out the leasethen sell the equipment for a profit itmay be classified as business incomeand there will be no capital gains.

Watch out forthe lease rates. Theyare often much higher than

financing costs.


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$3,500 per year can be paid into a retiringallowance for employees, includingspouses and children, if you retire, foryears that they worked in your businessoperation before 1996.

Cash basis farmers that report a net loss

are required to decrease their loss basedon the amount of purchased inventory(livestock, fertilizer, chemicals, feed, seedand fuel) that is on hand at the end of the

year. This Mandatory InventoryAdjustment (MIA) will be deductible inthe next year.

Leased cattle are not subject to the MIA.

Cash basis farmers have the option ofreporting additional income up to the fairmarket value of the inventory on hand atthe end of the year. This is called anOptional Inventory Adjustment (OIA)and is deductible in the next year.

Transfer this retiring allowance intoan RRSP to avoid immediate incometaxes on it. CRA has said that wagesdont even have to be paid to the

spouse. The spouse and children onlyhave to have worked on the farm.

You are only required to include 70%

of the cost of Specified Animals(horses or animals registered undertheAnimal Pedigree Act). All horsesare considered to be specified

animals.

You should consider this as an optionif you wish to create a farm loss.

In many cases, it is beneficial to havea moderate amount of profitgenerated by the farm. For example:- to utilize non-refundable tax

credits, which would otherwiseexpire

- to have earned income forcalculation of your RRSPcontribution limit

- to designate the farm asQualified Farm Property, whichis eligible for the $813,600capital gains exemption

-

to average taxes over multiplelow profit years at low marginalrates as compared with no tax incertain years and very high ratetax in years when the farm doeswell.

USING A VEHICLE FOR FARMING


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Expenses relating to a vehicle used forfarm purposes are deductible based onthe percentage of kilometers driven for

business purposes, which must besupported by a travel log. CRA

auditors have stated that if a log is not

available, they consider the vehicle to

be 100% for personal use, and nodeductions are available.

Employers are permitted to deduct atraveling allowance paid to employees

for vehicle use, which is non-taxable tothe employees. For 2015, the rate in

B.C. is $0.55/km for the first 5,000

kilometers and $0.49/km thereafter.

If an employee uses a farm vehicle forpersonal use, the employer is required tocalculate an operating benefit and a

standby charge based on the number

of personal kilometers and include theseamounts on the employees T4. For

2015, the operating benefit rate is

$0.27/km. The standby charge is

2/3 of the annual lease cost or 24% of

the original cost.

A vehicle which meets the CRA

definition of automobile has specialrules that reduce the allowabledeductions for depreciation, lease costs,and interest. For 2015, the maximum

cost for depreciation is $30,000, the

maximum lease cost is $800/month,

and the maximum interest is

$300/month. If not determined to be anautomobile, the full expenses are

deductible.

Allowable expenses include fuel,repairs, insurance, loan interest, lease

payments, and depreciation. Receiptsmust be kept to support these amounts.

If you are audited and do not have a

log, you may be able to prepare a log

after the fact based on timesheets,

appointment books, or other means,and appeal the reassessment.

If actual vehicle expenses paid by theemployee exceed this allowance, the

employee can choose to include theallowance in income and deduct theactual expenses, resulting in a l argertax deduction. Make sure to keep all

vehicle receipts for the year to be ableto make this choice when preparingyour tax return.

The standby charge is reduced ifpersonal use is less than 50% and lessthan 20,000km/year in total. Becausethe standby charge is so onerous, avehicle should generally only be owned

by a business if it is used more than90% for business use and personal usewill be less than 1,000km/month.

A vehicle is not an automobile if:

It seats 3 people and is used morethan 50% for business use, or

It seats more than 3 people and isused more than 90% for business.This vehicle must be a van, pick-

up or similar vehicle and used totransport goods, equipment, or

passengers to earn income.These tests only apply in the year ofacquisition, therefore it may be

beneficial to acquire new vehicles just


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prior to the end of the year and ensure itmeets the test for this short period,thereby guaranteeing full expensedeductions for all future years.

CAPITAL EXPENDITURES

CRA allows farms to deduct an amountfor the depreciation of equipment used inthe farm, referred to as the Capital Cost

Allowance (CCA). The amounts fordifferent types of equipment are set by

CRA, although only of the annualamount is permitted in the year ofacquisition.

Tools with a cost less than $500 areconsidered Class 12 additions for tax

purposes, and are fully deductible in theyear of purchase.

Certain manufacturing assets andtechnological equipment can be put into aseparate class when acquired so that whendisposed of, a tax savings can be realizedif the selling price is lower than the taxvalue.

Machinery and equipment purchased isnormally included in CCA Class 8 and iseligible for a 20% CCA claim. For

manufacturing and processing

machinery and equipment purchased

after March 19, 2007 through to 2014,

the CCA claim will be temporarily

increased to 50%.

Trucks purchased that are used to haulfreight with GVW of larger than 11,788kg are included in Class 16.

To maximize your CCA deduction,consider making capital purchasesclose to the end of the year. In thisway, you have of the annual CCAeven if only owned for a short period.

Also, consider waiting until thebeginning of a new year to dispose ofequipment as there is no CCA claim

permitted in the year of sale.

It is important to ensure these areappropriately recorded, as the

alternative is Class 8, which is adeduction at 20% per year.

Dairy farms may be considered to bemanufacturers. Consider putting

these assets into these special classes.

Ensure manufacturing and

processing machinery and

equipment included in the

appropriate CCA class to take

advantage of this increased

deduction.

The rate of depreciation for Class 16is 40%. Be sure your truck isrecorded in Class 16 and not Class10, which is only depreciated at 30%.


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Construction costs for a paved road are acapital asset added to Class 17. The costsfor unpaved roads are deductibleexpenses.

If an asset has had too much CCAclaimed on it over the years, the tax valuewill be lower than the fair market value.

When sold, such an asset will result in anincome inclusion called recapture.

Leave the roads built on the farmunpaved, as the cost of building themis fully deductible.

Transfer Classes 2-12 to Class 1 inorder to defer the recapture of capitalcost allowance when you sell assets.

The purchaser, including children,can put the purchase into normal

classes.

FARMING IN A CORPORATION

The main reasons to incorporate a farmare as follows:

Lower tax rates

Separate legal entity

Ability to plan and control personalincome

Income splitting

Simplicity

Succession planning

Effective 2013, the corporate tax rate is13.5% on the first $500,000 of activeincome as compared with 46% whentaxed personally.

Eligible dividends are taxed at a

significantly lower tax rate than regulardividends.

A tax court decision has determined thatdividends can be paid to one class ofshare and not another.

Each of these reasons must beexamined in relation to your currentsituation and your expectations for

the future. There are additional coststo having an incorporated farm, so itis important to ensure the benefitswill outweigh this cost.

If you can leave excess cash in acompany there will be significantlymore after-tax dollars to invest ormake the farm grow faster and paydown debt.

If your company has active income in

excess of the $500,000 small business

limit, you should review whetherpaying eligible dividends is more

tax advantageous than managementbonuses.

When setting up your company, besure and give both spouses differentclasses of shares as it provides moreoptions for remuneration. Jointownership of shares with a spouse


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A dividend that has been declared, but notyet paid is reported on a separate taxreturn when you pass away and results in

the ability to get nearly tax-free money toyour estate.

When incorporating, cash basis accountsreceivable cant be rolled tax-free.

A corporation does not qualify for the

principal residence or the ProvincialHomeowner Grant.

Corporate losses cannot be transferred toan individual.

should be considered to avoidpossible probate if one of the spousesdies. This may reduce the ability todividend sprinkle.

If you are of ill health or elderly,consider declaring a dividend in yourcompany, but not paying it to

minimize some estate taxes.

Consider purchasing cattle inventoryin the proprietorship/partnership toreduce the impact of these accounts

receivable. The inventory can berolled to the company and the incomefor the sale of the inventory will beused to offset the deduction from the

accounts receivable.

You should attempt, by trust

declaration, to transfer the house and1 acre into your own name. Then, byregistering a 1/1000 interestownership of the property or a life-estate jointly into you and yourspouses names you can claim the

principal residence exemption andalso claim the B.C. Home OwnersGrant.

When starting a farm and you areexpecting start-up losses, operate as a

proprietorship or partnership. These

start-up losses can be used againstother income and can even be carried

back to prior years.


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SELLING A FARM & TRANSFERS TO CHILDREN

The Lifetime Capital Gains Exemption

Limit was increased to $800,000 in

2014 and will be inflated by the

Consumer Price Index going forward.

The indexed amount for 2015 is

$813,600.

The sale of a farm (or quota) may be tax-free if your farm qualifies for the lifetime$813,600 capital gains exemption.

With the 2014 Federal Budget, the

government is proposing to simplify

the rules for the taxation of quota.

This will be achieved by altering how

quota is taxed to match other

depreciable assets, such as buildings.This could increase the tax rate on the

gain on sale of quota from 13.5% to

45% and create Alternative Minimum

Taxes.

If you acquired the property after 1987,you must meet a 2-year gross revenue testto determine if farm property qualifies forthe capital gains exemption. This testrequires that your gross revenues fromfarming exceed all other sources of

income.

If you received your property from yourparents, you may be able to fall back onyour parents farming history to see if thefarm still qualifies for the capital gainsexemption. Property acquired fromsiblings does not qualify for the look back

Structure your affairs to ensure

you qualify for this deduction.

There are specific rules thatdetermine if your property qualifies

based on the use of the property andthe length of ownership. You should

always look at this option as it cansave up to $179,000 of tax per owner.

If you see yourself selling out or

transferring your quota to a

successive generation in the not too

distant future, you might consider

whether it makes sense to sell your

quota to a new company, just to sellit back again to reset the purchase

price of quota at todays values.

This will very likely create

immediate tax consequences but

may be worth it.

If you operate your farm as apartnership, you are not required tomeet this test. You should alwaysset-up your farm as a partnership toavoid this onerous test in the future.The land need not be registered in the

name of the partnership to be

considered partnership property if thefarmer has been reporting as a farm

partnership on their tax returns.

You should always look at the historyof a property when family isinvolved. You should have old taxreturns to support such a claim.Affidavits from neighbors, family

pictures and old dairy or apple co-op


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provisions through the parents.

If you owned a farm prior to 1987, butclaimed the 1994 capital gains election,you are considered to have re-purchasedthe property after 1987 and now mustmeet the gross revenue test.

You can transfer qualified farm propertyat its tax cost to children during your

lifetime or at your death.

The sale of timber from qualified farmproperty may qualify for the capital gainsexemption. Gravel sales follow the sametreatment.

If you are selling land with standing

timber, you may be subject to BCLogging Tax on the standing timber.

CRA has recently confirmed their view

that sharecropping is considered to be

a rental activity, not active farming.

As such, it may taint your ability to

meet the requirements for the Capital

Gains Exemption.

A company is not eligible for the capitalgains exemption when selling assets.Therefore, you should encourage the

buyer to purchase shares so as to utilizeyour capital gains exemption.

records all are good evidence.

You can still look to your ownershippre-1994 to determine if you meet thegross revenue test. Again, this should

be supported by tax returns.

The child acquires the farm propertyat the same tax value as the parents.

When a parents child dies, this

rollover is NOT available to thechilds spouse.

A tax court case involving the sale oftimber from qualified farm propertywas found in favor of the farmer. Ifyou are planning to sell timber, try to

structure the agreement for sale to besimilar with this case. If you have

paid tax on timber sold fromfarmland, you should file a Notice of

Objection as soon as possible.

Identify the value of standing

timber at $0 in the sales agreement

and insist that the purchaser does

not deduct the value of standing

timber on his/her tax return.

Structure your situation as a

Custom Farming Arrangement or

Farming Joint Venture Agreement,

where you are farmer and the

other individual is an employee

who gets paid with a share of thecrop.

Consider selling at a lower price toensure that the purchaser acquires theshares. The tax savings will morethan offset the reduction in direct

proceeds.


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An interest in a farm partnership alsoqualifies for the $813,600 capital gainsexemption.

Woodlots can transfer tax-free from onegeneration to the next. Woodlots, whose

marketable product can only be created atthe end of a time period beyond the lifeexpectancy of the taxpayer, may havereasonable expectations of profit

problems.

When reporting a sale using the capitalgains exemption, you will still have avery high net income despite not havingto pay much tax. This may affect yourability to claim social benefits such aschild tax, OAS, and the GIS.

Although the capital gains exemption

may reduce your taxes calculated underthe normal method to nil, the Alternative

Minimum Tax(AMT) rules may stillapply that will have you paying some tax.

If possible, always try to structureyour farm as a partnership as it

provides a significant amount offlexibility that result in tax savings.Also a new partner does not need tohold their partnership interest for 2years in order to claim the $813,600

capital gains Exemption. A familymember can transfer assets to an

existing family farm partnership andthen immediately afterwards use thecapital gains deduction on the sale ofthe partnership interest.

Ensure that the transferor or a familymember be actively involved as

required by a prescribed forestmanagement plan. This is arequirement for the tax-free inter-generational rollover.

There may be ways to spread out asale over a number of years to havethe same tax result, but allow you tocontinue to claim these social

benefits. These options are onlyavailable if drawn-up as part of thesale agreement, so you should seek

professional advice as soon as youthink you might want to sell.

AMT is essentially a prepayment of

tax for the next 7 years. If you havetaxable income in those years, youmay be able to offset the tax with theAMT that was incurred in a prioryear. AMT should always beconsidered when evaluating theoptions of a farm sale as it can likely

be reduced or eliminated.


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CRA provides for a taxpayer to sell theirhome on a tax-free basis using theprincipal residence exemption. The

principal residence exemption isgenerally limited to the home and the hectare (1.2 acres) it is situated on,although recent tax court decisions have

allowed significantly more than this.

If you sell your farm, but do not receiveall of the money immediately, you do nothave to pay the full amount of taxes. Thisreserve is claimed based on the pro-rata

portion of money received, with at least20% of the gain being reported in anyyear. This reserve is not available wherea gain is recognized on the transfer to a

controlled company.

If there are 2 parcels of farm land jointlyowned by 2 brothers, the land can be

portioned so that only 1 name will remainon each property.

If you sell farm property and replace itwith a similar farm property, the tax onthe initial sale can be deferred until thenew property is sold. In some cases

properties purchased prior to thedisposition of the farm property can be

considered replacement properties.

CRA has special rules when you areselling your farm to your children. In

particular, you may be able to transfer thefarm at a value between what you paid forit and what it is worth today, making thetransaction non-taxable

The principal residence exemptionand capital gains exemption can both

be claimed on a single property. Youshould always claim the maximumamount for the principal residenceexemption, thereby saving the capitalgains exemption for future sales.

If you sell to a related party (i.e. achild) you only have to report 10% ofthe gain in any year. You will needto determine whether it is more

advantageous to claim the income allin one year or over a number of years.

There are no tax consequencesproviding each parcel has the same

value.

Always try and have propertiesclassified as farm properties insteadof rental properties to ensure theyqualify for the replacement propertyrules.

This provides a lot of tax planningflexibility. In addition, you are still

able to claim the principal residenceexemption, the capital gainsexemption and the capital gainsreserve on such transactions. Theconsideration that is paid by thechildren may affect the elected value.Also, the children must own the farm

property for 3 years before selling;otherwise the parents will have to paythe tax on the gain.


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Once a farm has been transferred to achild, the child faces all the same rulesand tax options available to the parents.However, there are some holding periodtests to be met to ensure the variousexemptions will still apply.

If you want to transfer your farm to your

child, but do not necessarily want to givethem full control of the farm at this time,

a Family Trust may be used.

On death, most farm assets can

transfer to children at any value

between cost and fair market value.

Quota owned in a proprietorship is an

exception, which can only transfer at

cost at the date of death.

Inventory, when transferred to a child, isdone so at its fair market value and willlikely result in tax. However, if youincorporate a company, the inventory can

be transferred on a tax-free basis.

Leasing cattle to a child is an alternativeto a rollover of the cattle at their fair

market value.

When the owner of a farm property dies,he is subject to a deemed disposition ofall assets immediately prior to death.

Probate applies on death when assets areheld personally.

Do the transfer to children wellbefore (3 years) of an ultimate sale ifyou are intending to sell a farmoutside of the family group. If done

properly this can multiply the

capital gains election.

All of the above considerations

continue to be available, plus you getthe benefit of maintaining control of

the underlying assets. However, thisdoes come with the additional cost tosetup and maintain the Trust onceestablished.

Given the lack of flexibility at

death, it is generally preferable to

own quota in a family farm

partnership or a corporation.

You should consider transferring theinventory through your Will so thetax is deferred until it is actually sold.The inventory included in income the

previous year will be expensed thenext.

Make sure the lease gives your childthe option to purchase a percentage of

the herd (and you receive an annualpayment) so that CRA will not viewthe lease as a complete sale and taxyou on it.

Transfer property by bequeathing orgifting to defer any tax payable. Useas much of the deceaseds capital

gains exemption as possible. EnsureRRSPs are left to spouse for tax-freerollover.

Hold land and shares of companies injoint names with spouse to avoidprobate.



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In certain circumstances, land inside of

the ALR can be traded for propertyoutside of the ALR.

Land ownership can be separated from

the right to use the land, by use of a rentalor lease agreement.

There are a number of considerations

when transferring a farm to a

successive generation. M ost

importantly, these include: How to fund retirement cash needs

How to deal with non-farm children and

the Wills Variation Act How to protect against future legal and

matrimonial issues

How to avoid property transfer taxes

How to minimize the effect of AlternativeMinimum Tax and social benefitclawbacks

How to ensure the liquidity andcontinuance of the farm.

BC Probate taxes

At a farmers date of death, there is adeemed disposition of all his/her assets.

A developer may pay you to haveyour land designated as ALR land ifit creates the opportunity to swapfor land that could be subdivided anddeveloped.

Consider this strategy to help make

the allocation of farm amounts moreequitable amongst farm children and

non-farm children.

This is not an exhaustive list of

considerations, as each family and

situation is different. Further, your

answer to certain issues will

negatively affect other issues. As a

result, there is never a single

right answer. Instead, you

should involve your accountant,

lawyer, banker and investment

advisor from the beginning to

navigate through all theconsiderations and to determine

the course of action that best meets

your objectives.

There are tax free rollovers andcapital gains exemptions and the

ability to file a separate Rights &Things return. Be sure that your farm

properties qualify for the rollovers.



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GOVERNMENT PROGRAMS

Agriculture Canada has four programsavailable to farmers:- AgriInvest

-

AgriStability-

AgriRecovery- AgriInsurance

In order to qualify for Agri programs,

you must be registered and have paidyour annual fee.

AgriInvestis where the producer cancontribute up to 100% of theirallowable net sales once per year, and

the government will match the first1% of that amount. These types ofaccounts are used to help put moneyaside that would be used for smallincome shortfalls.

AgriStabilityis where a producerpays a fee to receive an insurancebacked by the government. The

program offers assistance once aproducers margin falls below 70% oftheir historical reference margin.

AgriRecoveryis a disaster reliefframework for governments to

provide special one-time relief notcovered by the other Agri options.

AgriInsuranceis an aggregation ofall existing production insurance for

particular industries.

Consider registering for as manygovernment programs as possible asthey are only available to

participants.



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The BC Provincial Government has a

program called Growing Forward 2

which provides funding to farmers for

the following services:

- Tier 1 - A farm assessment-

Tier 2 - Specialized business plan

The Environmental Farm Plan programprovides significant funding for farmers.

Starting in 2014, there will be a new

four-year program called the Western

Livestock Price Insurance Program

which is designed to help cattle andhog producers in Western Canada

manage price risks faced by the

industry.

The program is a 5 year program

and will be ending March 31, 2018.

To be eligible, the farm must have

a minimum of $10,000 in annual

gross farm income as reported to

CRA.

Tier 1a basic farm financial

assessment where the government

will support 100% to a maximum

of $1,900 with an upfront fee of

$100 paid by producers.

Tier 2a specialized business plan

to adopt progressive management

policies and strategies in nine

business management areas which

include succession planning,

reorganizations and tax planning.

The government will support 85%to a maximum of $3,000 with no

fees.

The government has fundingavailable to assist with the purchaseof equipment that helps to mitigaterisks for environmental issues.

For further information on this

pilot program please go online to

www.wlpip.ca
http://www.wlpip.ca/http://www.wlpip.ca/http://www.wlpip.ca/


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NOTICE TO USERS: This information is of a general nature. We try to ensure its accuracy and

timeliness. No one should act on it without appropriate professional advice after a thorough examination

of the facts of a particular situation. Information in this booklet is current to January 31, 2015. Changesafter that date are NOT INCLUDED.

Copyright 2015 Rossworn Henderson LLP

Loopholes for Farmers

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