ONTARIO GRAIN FARMER BUSINESS SIDE 26 Q: HOW DO YOU DESCRIBE CAPITAL GAINS TO A FARMER CLIENT? A: Basically, if you sell an asset for more than you paid for it, the excess is a capital gain. For example, if an asset cost $100 and you sell it for $1,000, there is a $900 capital gain. For farmers, this matters because some of their most valuable assets — farmland, buildings, quota, equipment, and investments — are capital property. Assets that have appreciated significantly can create a substantial income tax bill when they are sold or transferred without proper tax planning. Q: HOW IS A CAPITAL GAIN CALCULATED? A: The basic calculation is sale proceeds, less the adjusted cost base, less the costs associated with selling the property. For example, if a farmer purchased bare farmland for $1 million and later built a $2 million barn, the adjusted cost base could be $3 million. If the farm is sold for $5 million, there is a $2 million capital gain. Costs associated with buying and selling the property can also affect the calculation. Legal fees and land transfer tax paid when the property was purchased are added to the adjusted cost base, while legal fees, real estate commissions, and auction fees paid when selling can be deducted. Q: WHAT IS THE DIFFERENCE BETWEEN A CAPITAL GAIN AND REGULAR FARM INCOME? A: The tax treatment is different. Regular net farm income, such as net income from selling commodities, is fully taxable. Currently, only 50 per cent of a capital gain is included in taxable income, and that difference is significant. Q: ARE FARMLAND AND OTHER FARM ASSETS TREATED DIFFERENTLY WHEN THEY ARE SOLD? A: Yes. Land is a non-depreciable asset, meaning farmers cannot claim tax depreciation on the land itself. Buildings and equipment, however, are depreciable property. When depreciable property is sold, there can be both recapture of past tax depreciation claimed, which is taxed as farm business income, and a capital gain if it is sold for more than its cost. Q: WHAT IS IMPORTANT FOR FARMERS TO UNDERSTAND ABOUT THE CAPITAL-GAINS INCLUSION RATE? A: There has been considerable uncertainty over the capital-gains inclusion rate. The 2024 federal budget proposed increasing it from 50 per cent to two-thirds, with individuals proposed to retain a 50 per cent inclusion rate on the first $250,000 of capital gains in a year. The federal government subsequently announced it would not proceed with the increase. The current inclusion rate remains 50 per cent. Q: WHAT ARE THE BIGGEST MISTAKES YOU SEE FARMERS MAKE WHEN PLANNING FOR A FUTURE CAPITAL GAIN? A: One of the biggest mistakes is waiting too long to address succession and estate planning. Farmers need to determine well in advance whether their property qualifies for the Lifetime Capital Gains Exemption and the intergenerational rollover rules. The Lifetime Capital Gains Exemption is currently $1.275 million per person for qualifying farm property, subject to detailed eligibility requirements. The intergenerational transfer rules allow eligible farm property to be transferred on a fully tax-deferred basis, and they also have detailed eligibility requirements. We have seen situations where farm property did not qualify for one or both, resulting in significant income tax. Ownership, farming history, and even the wording of a will can affect the outcome. Q: WHAT SHOULD A FARMER DO TODAY IF THEY THINK THEY MAY SELL LAND OR TRANSITION THE FARM WITHIN THE NEXT FIVE TO 10 YEARS? A: Start working on a succession and estate plan now, because these plans can take considerable time. As the plan develops, Capital gains: What every farmer needs to know Business side with... Kurt Oelschlagel, FCPA, FCA, TEP, tax specialist partner and the Ontario Agriculture Tax Leader with MNP LLP, MNP.ca In conversation with Jeanine Moyer Strong records and early succession planning can help farmers manage tax when land and other assets change hands
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