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.