Tax Tip: Farms - Sales of Land and Related Rights

If the sale of a property is considered to be on “account of capital”, the tax is generally half of what it would be had it been on “account of business”. The income tax could even be completely eliminated if the disposition is:

  • considered to be on account of capital;
  • in respect of a qualified farm or fishing property; and,
  • within the lifetime capital gains exemption limit of the individual ($813,600 for 2015). (For eligible farm and fishing properties sold after April 21, 2015, the limit has been increased to $1,000,000.)

It is important to note that even if income tax is eliminated, alternative minimum tax (AMT) may be imposed. However, AMT is viewed as a deposit by some since the amount paid can often be used to reduce future income taxes payable.

In a recent Technical Interpretation, CRA noted that whether the sale of a right to operate a sandpit on a family farm gives rise to either a capital gain or business income is a question of fact. Relevant facts to consider would include the nature of the business carried on by the taxpayer, the number of transactions under review, the circumstances which determine the selling price, and the seller’s intention when original purchasing the farm. In other words, we need to determine whether or not the farm owner is in the business of selling sand (or sandpit operation rights).

If the factors as a whole indicate that the farm owner’s sale of the property or rights constitute a business, then the gains will be taxed as business income rather than under the preferential rates associated with capital sales.

Action Item: Before purchasing or acquiring certain rights, consider whether the eventual disposition may benefit from a preferential tax treatment.