Lifetime Capital Gains Exemption & Corporate Tax Planning Feat. John Schappert & Bridget Hennigar
The Farmland Exchange, the official podcast of CLHbid.com. Expert insights on buying and selling farmland in Western Canada.
Devon Davidson:Welcome back to the Farmland Exchange, the official podcast of CLHbid.com, where we provide expert insights into the process of buying and selling farmland in Western Canada. I'm Devon Davidson, your host and digital media strategist for CLHbid.com. If you haven't already, please take a minute to like, rate, and review the show on your podcast platform of choice. It helps us out and we'd really appreciate it. On today's episode, we are going to be talking about Lifetime Capital Gains Exemption and corporate tax planning with regards to selling farmland. And to help me with that conversation, our chief operating officer for CLHbid.com is Bridget Henniger. Bridget, how are you? Good. How are you, Devon? Good. Thanks for being here. And then we also have a special guest, John Schappert, all the way from Saskatoon, fellow Saskatoonian, charter professional accountant, practicing tax for about 10 years, and uh tax advisor for Chan Tax Law. So, John, thank you for being here. My pleasure. Really appreciate it. Uh, before we dive into the the exciting topic of Lifetime Capital Gains Exemption, maybe tell us a bit about yourself and uh who you are, how you how you know the people here at Sbit.com.
John Schappert:Sure, yeah. I'll try and keep it uh as brief as possible. But uh I'm uh a tax accountant. I've I've been uh CPA or CA since 2011, and I articled for a number of years with uh MMP as it then was, or Myers Norris Penny as it then was. And since that time, I I've worked as a CFO uh and uh been a tax consultant for numerous law firms, and that's that's what I'm doing currently. And right now I'm attending uh University of Saskatchewan, uh second year law student.
Devon Davidson:Nice. What's the best part about living in Saskatoon?
John Schappert:Uh probably actually how courteous the people are. Like I find compared to Edmonton, it's a much more courteous town. Like people will let you in when you're driving, et cetera. It's great. Yeah. Occasionally.
unknown:Yeah, yeah.
John Schappert:Better better odds in Edmonton.
Devon Davidson:I would say, yeah, we can't complain with the traffic in Saskatoon. Um, okay, so Bridget, when people are selling their farmland, um, what would you say is the most common question that you get regarding taxes?
Bridget Hennigar:Well, it always comes up in the conversation, the Lifetime Capital Gains Exemption.
Devon Davidson:Yes.
Bridget Hennigar:Does it apply to me? That's what they ask.
Devon Davidson:What's the impact? Yeah, well, with higher taxes, you know, um people are obviously interested to learn more about the capital gains exemption. So um, for our listeners who aren't familiar with it, can you maybe give a brief overview of what it is and and how it impacts uh farmers?
Bridget Hennigar:Well, it's for eligible individuals, and the Lifetime Capital Gains Exemption provides a deduction, um, an exemption on their gains that they have selling qualified uh property. And so that Lifetime Capital Gains Exemption is 1.25 million right now. It's a cumulative amount. And so if you have a property for uh sell it for a million dollars and the cost space is $250,000, you have a $750,000 gain. And that gain would not be taxed. And so it's a significant uh advantage and um something that people are very interested in hearing about.
Devon Davidson:Yeah.
Bridget Hennigar:Now the whole issue uh is that what is qualified property? Right.
Devon Davidson:Yeah, yeah. So, John, maybe you want to talk about how um farmland seller can determine uh if they have QFFP or how they qualify.
John Schappert:Okay, yeah, absolutely. I think uh no, I'm gonna get into the weeds a bit here. So if if I get too technical, please do stop me. Okay, but I think it's probably good to start with a few definitions that I'm gonna be using over and over again as I talk through this issue. So uh the first one is something I'm gonna call a qualifying person. That's not a technical term in the Income Tax Act, but that's just a helpful term. And that is you, your spouse, your children, and your parents. And when I'm talking about children and parents, children, it's like three generations of children down to great-grandchildren. Okay, and then parents we're talking about three generations up to great grandparents. Uh in addition, um your parent, your your spouse's parents also count as your parents, and they're like likewise their parents and their parents above them. And same thing goes with your your children. Your children's spouses also count as your children.
unknown:Okay.
John Schappert:Um a couple other nuances, of course, is that adoptive children are considered to be children as are stepchildren while the marriage persists. I guess I should clarify that for uh in-laws, in-law relationships, that only persists. Like they're only children or parents so long as that marriage persists. So if there's a death or there's divorce, that's no longer gonna continue. But that's qualifying person, just to go back through that again.
unknown:Okay.
John Schappert:You've got the individual, that's you, uh, your spouse, your children, and your parents.
unknown:Gotcha.
John Schappert:And then we've got another concept here, which is the eligible user. So that's everybody who's a qualifying person. And then you've also got something called a qualified uh farm corporation, and you've got something called a qualified farm partnership. And I don't want to get into too much of that right now because it's very complex definitions.
unknown:Okay.
John Schappert:But that's that's basically your pool of eligible users. And then the next concept here is this concept of principal use. So um it this this is kind of a part of every task for capital gains exemption. What it is is if you've got a piece of farmland, to say that it is principally used in the business of farming in Canada, that means that more than 50% of its surface area has to be cultivated and used in the farming business. So if you if you can't pass that threshold, you're never gonna meet a principal use test and you can't you don't have qualifying farm property. The next one is actively engaged on a regular and continuous basis. And that that again appears multiple times. And the kind of the root what what the government is getting at with this definition is they're trying to separate people who are really farming from people who are maybe doing it on a hobby basis or maybe just you know doing it from time to time and it's not a serious uh source of income. Right. And it's it's a question of fact, which means that you're gonna look at all the all the circumstances that apply that are uh relevant to the to the particular question. And um I guess I guess the best way to look at it, like CRA's perspective on it, is that you are not actively engaged on a regular and continuous basis unless your efforts towards the farm are kind of critical to the success of the farm business. So if you can't pass that threshold, you're not actively engaged on a regular and continuous basis. Like driving a grain truck once a year is not that, nor is driving a combine once a year. Your contributions have to be integral to the success of the business.
Bridget Hennigar:Yeah, I think that's uh something that a lot of people are unclear about. They think that um being an active farmer means paying for the fertilizer. Yeah. And that just doesn't quite cut it. And CRA does have a folio, don't they, of um what constitutes active farming and all of the operations that you would be involved in.
John Schappert:That's right. I think it's called what is farming, but I I couldn't give you the folio number or anything like that. But yeah, there's that's a really good point you bring up. So the other the other thing that is critical as part of this discussion is what is farming from CRA's perspective. And like renting your farmland to an unrelated person is not farming.
unknown:Right.
John Schappert:Crop sharing, where you're just receiving like profit from the sale of the crop at the end of the day and you've done nothing else, is not farming. It's kind of a continuum that kind of you get closer and closer to farming, the more risk you're taking in the operation, the more day-to-day involvement you have. And again, how integral your contributions of we'll say brain power and capital are to the success of the venture. So those are kind of the five definitions. We've got qualified person, we've got eligible user that's got the qualified person, and then farm corporations, farm partnerships, and all, and then we've got principal use, active engagement, and farming business. And so the next part of this is actually the tests that go into determining whether something is qualified farm property. I know you've been waiting for me patiently to get to that. But I just wanted to get through those definitions because I'm going to give you the tests, and they're embedded, like these definitions are embedded in the test. Yeah. And it's kind of weird to break out, to just you know, go through definitions over and over again. So the first test is usually the easiest one to meet. Actually, I'm gonna I'm gonna take a step back before I get into the test. The first question you want to ask yourself is when was the last time I acquired this land? So if you acquired the land before June 18th, 1987, you're into one set of tests. And you uh if you acquired it after June 17th, 1987, you're into a separate set of tests.
Devon Davidson:Okay.
John Schappert:Now the the key thing with the acquire the land, it's not necessarily where when you went on title for the land, it's like when does the income tax act treat you as having acquired the land? And there's there's a nuance there because in 1994, uh the old capital gains exemption was phased out. Okay, and so people could in 1994 elect to use the old capital gains exemption to bump things like farmland. And if you made that election, you're actually treated for income tax purposes as though you reacquired that land in 1994. So if you even if you did acquire it before June 18th, 1987 in an arm's length transaction, because you did that bump in 1994 to crystallize, you're not gonna qualify. So that's pre so pre-June 18th, 1987, and then post-June 17th, 1987. And I think I guess I'll go through the pre-June 18th rules first. They're they're a little bit easier to go through. They're the ones you're definitely more likely to qualify for under if you can pass that first threshold. Okay. And that's really uh either or. So the first prong is in the year that you sold, was the land principally used in a farming business by an eligible user.
unknown:Okay.
John Schappert:And the eligible users again is qualifying persons, which is you, your spouse, children, parents, etc. Right? Like that whole thing. And um, and then of course the principal use test, more than 50%. So that's the that's the first prong. And if you can't meet that one, the next one is in at least five years, while the property was owned by an eligible user, was it principally used in a farming business carried on in Canada by the eligible user?
unknown:Yep.
John Schappert:So that those ones are by far the easiest ones to qualify. People are always looking to get under that if they can.
unknown:Yep.
John Schappert:But because of that 1994 bump, and just, you know, it's a long time ago now, it's talking 38 years, like there's a lot of it's gonna become less relevant over time. The second set of tests is for that land acquired, last acquired after June 17th, 1987. And the first test there is before the time you're trying to sell, do you have a period of continuous ownership of at least 24 months by a qualifying person? And the continuous ownership part is kind of critical to this whole test, and we'll come back to that later. So that one's I think the easier of all the three tests to meet. And then we've got two more tests. Uh this the first one is uh what what I like to call the activity test. And that one is uh in at least two years, or I should I should say throughout at least two years during that ownership period we just discussed, like the continuous ownership period, uh was the land principally used in a farming business in Canada in which a qualified person was actively engaged on a regular and continuous basis.
unknown:Right.
John Schappert:And we'll call that the revenue period. And so the second the second prong that's kind of tied to that test is during that revenue period, so throughout that revenue period, was the gross revenue from farming of a qualified person greater than their other source of income when combined? Okay.
Bridget Hennigar:So we do um end up talking to people a lot about that, um, being able to perhaps um plan their way into that so that they can have those two years where their income from farming is more than their other income.
John Schappert:Yeah, and uh and and actually a really nice thing about those three tests is that you don't need the same person to meet each one of those tests. So we remember we've got a big pool of qualified persons here. Yeah so the that owner, that continuous ownership test that could be met by a certain set of qualified persons. Your activity test could be met by another qualified person.
unknown:Gotcha.
John Schappert:And then the revenue test actually could be met by a third qualified person. Let's say the person who's more active in the farming business, for whatever reason, maybe they have a lot of other sources of income and they actually can't meet the gross revenue test. But maybe there's somebody else who does derive farming income who is, you know, child, parent, et cetera, of the individual who can step in and meet that gross revenue test.
Devon Davidson:That's interesting. So it makes it a little easier to qualify.
John Schappert:It does make it a bit easier to qualify. Okay. So if you fail out on any of those three tests, of course, you're not qualifying unless uh there's uh kind of a fourth test here now. Throughout a period of 24 months during that ownership period we alluded to, um, did a qualified farm corporation or qualified farm partnership uh principally use that land in a farming business in Canada in which a qualified person was actively engaged on a regular continuous basis?
unknown:Right.
John Schappert:So that's your your final way of getting through. Now, I'm I probably will skip off talking about like the definition of a qualified farm corporation or qualified farm partnership for now, unless unless you guys think I should launch into that.
Devon Davidson:But this this is the format to do it. So I mean, we've got some time. If if you want to dive into it, um, I mean, I think it's probably beneficial for our listeners, but okay.
John Schappert:Well, let's let's get into it then. Let's get into the I don't know. You can tell you please. I hope I'm not too much.
Devon Davidson:No, we've got you know what I'm not flying out for a while, so let's let's get into it.
John Schappert:Okay, so qualified farm corporation at very high level, it's there's more nuances to it, so I won't uh I won't pretend that this is the complete definition, but it hinges on what type of property the corporation owns, and is there a shareholder who is a qualified person?
unknown:Okay.
John Schappert:Um and so to be a qualified form farm corporation, you basically have two tests, uh asset value tests. So the first one is kind of a point in time 90% test, 90% of your asset fair market value has to be what we're gonna call good assets, and we'll get into what those are.
unknown:Okay.
John Schappert:And then in any two years during the existence of the corporation, uh was more than 50% of the assets uh good assets again.
Devon Davidson:Okay.
John Schappert:Uh or more than 50% of the asset value was good asset value. So what good assets are is any kind of any property that's principally used in a farming business. So that could be your fertilizer, grain inventory, combines, tractors, and of course, the most important thing from our perspective is is land.
unknown:Right.
John Schappert:And in order for land to be considered to be a good asset, again, you've got more tests you gotta meet. So gonna get through it again. But basically, when you're looking at whether land is a good asset to a corporation, you have to look at the entire period of like, do you can you point to a continuous period of ownership by eligible users? And that's gonna be our ownership years, we'll say, and that's either ownership or use, actually. So it doesn't actually have to be ownership, but ownership or use by eligible users. Okay. And that's your denominator for for what we're gonna do here. And then the other question is out of those ownership years, in how many years was that land principally used in a farming business in Canada by an eligible user in which a qualified person was actively engaged on a regular and continuous basis?
unknown:Okay.
John Schappert:Uh there's a lot there. I know, I know. Um You're gonna have to draw me a flowchart after this. Yeah, yeah, there's a flowchart's probably required. I I should have brought one to the table actually. But um the for that principal use test, again, it's it's um if it's land, we're talking about how much of the area is cultivated. Remember the uh active engagement test, it's kind of are you integral to the success of the farm operation and so on and so forth. So you're gonna take all the years where you met that principal use test, sum them together, and then divide them the by the denominator of what the ownership years is. And if you're above 50% for two years, that's gonna meet your 50% test. Okay. And if you're above 90% at the kind of the determination time, we'll say the time, the particular time where you're testing the status, then you're gonna meet the 90% test.
Bridget Hennigar:So, you know, when we talk to farmers initially when they uh contact us, the first thing they're thinking about is selling the land. And they um commonly think if it's farming, then it must be eligible. And um, or there's the other group who think that they're not farming it now, so it must not be eligible. And that's when it's kind of interesting to start asking a lot of questions, you know, uh all leaning toward all of the check marks that John has mentioned.
Devon Davidson:Yeah, yeah, it's it's more complicated than I had realized. I, you know, it's it's not so straightforward, is it? There's there's gotta be a lot of misconceptions.
John Schappert:Oh, there is, and and I I think I've tried to make the rules less complex than they actually are. I didn't even talk about trusts in this whole situation, or or or you know, if you're an individual, or if you're let's say you've got a partnership that's selling land and and so on and so forth. But um really good point about the questions. Like typically when we're doing this analysis with clients, what we want to be looking at is we're gonna ask them about the full history of ownership all the way back to great grandparents. Okay. And if you know, if there hasn't been any, you know, divorces, you might even be looking at um like in-laws up the chain, uh, and so on and so forth. So, like um, so you're gonna wanna see, you know, how how long did each person in that kind of lineal chain farm if they farmed at all? And you know, you want to you're gonna look at what their source of income were over the farming period. You want you want to know if it's a it's the main source of income or just kind of an ancillary source of income. And yeah, you're gonna be questioning just the the use of the land year over year over year. Just and the good thing is like farmers love actually to like they know the history of the land, they know what how the family's been using it for generations. Yeah, and it's really easy to get that information if you ask.
Bridget Hennigar:Okay. Another common um misconception would be well, my father farmed it. Well, your father might have farmed it and then he passed away and left it to two brothers, right? And then one brother sells to the other brother. And John, um, that's an issue then.
John Schappert:That that's definitely an issue because you know, we talked about that concept of qualified persons. Yeah, well, nowhere in that list of qualified persons is your sibling. Like siblings are not qualified persons in respect to you, right? It's okay. It's only your parents up to grant great-grandparents, it's only your children down to great-grandchildren. Interesting. You can't go side from side to side in that lineal chain.
Bridget Hennigar:So unless you farm it again by the unless you farm it again.
John Schappert:So anytime we have situations where uh maybe paternal grandfather died and passed the land to your father's brother, your your paternal uncle.
Devon Davidson:Right.
John Schappert:And maybe he even farms the land, but then he passed it on to your father, your father doesn't farm, you're not going to be able to use your paternal grandfather's farming use because you had to have that continuous period of ownership with the kind of that qualified person who's your great grand or your paternal grandfather through to you or through to your father. Right. And you don't have that because you have this unqualified person, I'll say, who's your paternal uncle in the mix just ruining the whole thing? That's a selfish man. That's awesome. Yeah.
Devon Davidson:So rich shit. Um, I mean, farmland owners are probably at least aware of this, but you know, do they do they ever not realize um what they're missing out on with capital gains exemption? Can you explain that or provide a quick example of how overlooking this could impact their bottom line?
Bridget Hennigar:Uh sure. You know, marginal rates, farmers, as um you know well know they don't pay taxes generally. They keep deferring the income on to a future period. And so they actually, some of them don't even really have any idea about marginal tax rates and what are the highest marginal tax rates. You know, here um generally in the Western provinces, it's about 50% at the high marginal rates. And when you're selling farmland, you definitely will exceed those uh the highest level. So it's 50%, it's a little lower in Alberta, a little higher in BC. And um capital gains, the um you include half of that amount into income. So effectively your tax rate would be about 25%. And so if you have a capital gains deduction available of $1.25 million, 25% of that is around $300,000. So it's a substantial amount of money that we're talking about. We want to make sure that it's eligible and we want to claim it.
Devon Davidson:Yeah. All right. Uh John, how can we involve more family members to get even more savings?
John Schappert:Well, this is, I mean, there are practical considerations that come into this. So I I I I urge anybody listening not to uh not to just go and and start transferring title to various family members right after this discussion. Uh but it, you know, if if it makes sense to do so, uh, you can use the the farm rollover rules to transfer title to to your adult children. Um and then they just have to make sure that they hold it for at least three years and don't make an arrangement to sell it within those three years. And and and they'll be able to use their capital gains exemption on a future sale that, to be clear, must happen after that three-year period is over. Um I think the the consideration. Oh, go ahead.
Bridget Hennigar:I was going to say if they don't uh wait the three years, then it's attributed back to the parent.
John Schappert:That's right. So the person who transferred the land to that kid is the one who eats the capital gain on it.
Devon Davidson:And why three years?
John Schappert:Why why was that the it's a it's an anti-avoidance provision. Um I think they wanted to give parents the certainty that they could take advantage of the rollover rules and not ultimately fall afoul of this provision. But at the same time, they didn't want people to just kind of willy-nilly multiply the capital gains exemption by just transferring whatever the land they wanted to sell that they couldn't sell to their kids. Right. And and use and and and having them use capital gains exemption. And this the provision that that that applies here is one that uh applies very broadly in the income tax act, not just to this situation. But I I think it's a relatively fair provision. I hate to say that, but uh it does make sense. Okay. And then does it just apply to adult children or so this the this anti-avoidance provision uh will apply to any person that you transfer land on uh a rollover basis to.
Bridget Hennigar:Um you can't roll it over to a spouse. I think that's another misconception. You can sell it to them. Or they can buy it together.
John Schappert:That's a really good point. So again, you so if you if you want to take advantage of your spouse's ability to use capital gains exemption, you kind of have two pathways. If you've already acquired all this land and and your spouse wasn't kind of really part of that, uh you you really can't add them to title and expect to be able to claim capital gains exemption.
Devon Davidson:Interesting.
John Schappert:Uh there's something called spousal attribution that causes any capital gains from property you transfer your spouse to attribute back to you. So that's gonna completely uh deny your ability to do that. But on the other hand, if you and your spouse are, you know, are part of the farming business together, you maybe you have joint accounts, or you're buying the land together, you're both on title when the land's acquired, you're both on the mortgage. I guess you will be anyways, because it's but if you're if you're I guess part of the credit negotiation process will say, then you should be in a good position to have your spouse claim capital gains exemption as well if you if you sell in the future.
Devon Davidson:Um John, there's often confusion about personal and corporate ownership of farmland. Uh could you clarify how ownership structures differ when it comes to capital gains exemption and tax planning?
John Schappert:I think the the biggest difference is probably in terms of who is going to be interested in buying at the end of the day, like the nature of your purchaser. And I guess as as we alluded to earlier uh in our discussion about the qualified farm corporation, you have a completely different set of tests that you have to apply when you're determining, like at a point of sale, whether you're gonna qualify or not.
unknown:Right.
John Schappert:Um and just kind of to reiterate very quickly, again, you have this two-year, 50% good asset test, and then you've got, you know, a point of sale, 90% good asset test that you gotta meet with a with a farm corporation. Uh whereas with land, of course, we have a totally separate set of tests that's hinged around that kind of two-year period.
unknown:Right.
Bridget Hennigar:Now that uh allows for the qualifying uh farm corporation. Um just again, I to reiterate that um the capital gains deduction or exemption is only available to individuals. Right. So corporations, even if they have this land, they can't claim that same deduction. Although if you own the shares of that uh qualified farm corporation, you can then sell the shares and claim that capital gains deduction.
John Schappert:Okay. Thank you, Bridget. That's uh I think that's really what Devon was trying to get out about. There's always workarounds, right? Yeah, that's interesting.
Devon Davidson:Okay, yeah, thank you for clarifying that. Uh Bridget, are there any other changes in tax law that farmland sellers should be aware of?
Bridget Hennigar:You know, um probably one of the points that we maybe didn't mention earlier was AMT, alternative minimum tax. And um in last year they changed the calculation of that uh AMT, and it's much more onerous on people who are selling farmland and the uh using the capital gains exemption. So quickly the AMT, uh the government calculates out what your taxes are on the one hand, and then they add back some of the deductions, apply a flat rate, and get another number for taxes. The difference between the two is alternative minimum tax. And so you must pay that. Now it can be refundable over the next seven years, um, though, for some people, if they don't have a lot of income, and they not be they may not be able to actually get it all back. So some planning comes into effect there. You want to make sure you have income in subsequent years to uh use it up. Uh, you don't want to have a permanent tax as such.
Devon Davidson:Is there maybe just a really quick example you could provide with some numbers? Is that something you can just just to illustrate your the point? And John, how we help me.
John Schappert:Oh my gosh, alternative minimum tax is like financial wizardry. But uh if not, for sure. Like I it's how how to even get into this. So basically, the way the way the calculation works is you start with your income as it's normally calculated, and then deductions that you're entitled to, such as capital gains deduction, get kind of prorated away. Okay. Um in the case of uh qualified farm property, you have to add back, I think it's 30% of your capital gains deduction, or you know, use capital gains exemption uh in that calculation. So that gets added to your income. So now your income is bigger than it was under the normal tax calculation. And then this minimum tax gets applied to that, and you've got a provincial minimum tax on top of the federal one that's a percent of the percent of the federal. And so so if if as a result of that calculation your tax is greater than than it would be under the normal calculation, you pay the higher the higher tax.
Bridget Hennigar:So the idea is that the government wants you to pay sort of a minimum amount of tax, no matter how many deductions you have or whatever, okay? And they're saying, well, we'll give you some of that back if you have taxes to pay in the future. I I you know, for some I've done uh some calculations. Um, you know, they sort of want you to pay like uh 30% tax, you know, overall. And remember, I said a capital gain is 25% tax. So they want a chunk more, and they will refund it if you have income in future years.
Devon Davidson:Okay. Thank you for dumbing that down for me. That's perfect. Um, Bridget, for those preparing for a sale, when would you suggest they start planning for you know tax strategy and exemptions and how can CLH help or facilitate that process?
Bridget Hennigar:Uh, you know, they can't start too soon. Just as John says, they need to have an itemized list of when they acquired all the people.
John Schappert:You can't start too soon in one situation. If if you've just if you just roll. Your farmland to your kid and they're ready to sell, then you can start too soon. But otherwise, I think good point.
Bridget Hennigar:So, you know, there's so many factors to ensure that it is um um qualified uh property. And also there's a lot of planning. How about um capital losses that you might have carried forward? They can they carry forward forever, but they only are uh uh you can only apply them against capital gains. And so if you have a real dog of uh share portfolio, maybe this is the time to recognize that those losses and get on with life and apply it against that gain. So um, you know, a number of concerns there's also um just everyone is specific. Um there's capital um or sorry, old age security clawback. So when you have uh capital gain, then you're likely going to have your uh OAS clawed back. If you're just turning 65, well, why don't you just defer uh applying for your OAS? And actually, if you defer applying for your OAS until 70, you actually even get more of an OAS payment. So there's all those kind of uh things that you can look at. Um you really need to sit down with your accountant, your tax advisor. I really recommend that you take the time to talk about this whole idea of whether it qualifies or not. And uh that has a big um, you know, repercussions on what your total tax will be. They have wonderful tax software, so it's no big deal for them to run a hundred scenarios. But if you don't ask them, they don't even know that you're planning to sell it.
Devon Davidson:Right. Is this something CLH helps with, though, Bridget? Like, you know, if we're dealing, if we're working with a potential client, is it something that they can lean on you? I mean, most of them have their own accountants and stuff, right? But if they have questions, is that something we assist with?
Bridget Hennigar:You know, we always uh engage with them and talk to them about these things, but pointing them to their tax advisor, um, because again, they have all of the history, uh, all of their exact um, you know, what how much capital gain exemption do they have left? As I say, it's cumulative. So, you know, maybe they don't have a significant amount. What do they expect? You know, how much, how many um will they use it in the future? All of these things um take are come into play. Maybe they plan to transfer it to their children, so then uh the children can use their capital gain exemption, and uh maybe the parents, you know, uh it's not as crucial. So all of those factors, what we do is we really um point them in the right direction. So often we find that as you get more senior, you have less and less real tax issues. You know, you have a farm and you rent it out, there's really not much there. And um, so they tend to go to uh a person who just prepares ordinary tax returns. Maybe they're not getting the whole picture. And I often uh say, perhaps they should pay for a consult, go to a tax specialist, go to a tax lawyer, you know, lay out your whole plan and talk about it. It doesn't have to be done every year, but just so that you know.
Devon Davidson:Right. Okay. Uh for executors and beneficiaries involved in an estate sale, what unique considerations should they keep in mind with regards to the capital gains exemption?
John Schappert:Um I think the the biggest one again goes back to that first uh first discussion we had about qualified farm property, uh those three tests that we went through. And they the first thing they really need to do is get the farming history for the land and and and when they do talk to an advisor to see if they qualify. Um I think I think another consideration that often gets overlooked with farmland, even uh which can be very harmful if you don't do anything about it, is GST. Okay. Uh especially if you're not selling at arm's length, like if you're passing it down to a new generation, you still have to make sure you're taking into account GST on any transfer to land. Uh land is never, well, I shouldn't say land isn't ever GST exempt, but usually farmland transfers aren't GST exempt. Uh but otherwise, I think, yeah, for estates, the biggest consideration is capital gains exemption. And and that determination is really about who in the family farmed, what's the relationship to the beneficiaries? You know, is it is it a parent, a grandparent, a great-grandparent? And if so, you know, can they meet the two-year test that we talked about?
Bridget Hennigar:I think that's what we find a lot of uh when we talk to people is that they miss that capital gains exemption on the final return. And uh, you know, you can transfer to kids at, you know, the cost space, but then you're losing that $300,000 of tax savings when those children ultimately sell the land. And so sometimes we've um actually said, you know, go back to your uh preparers, get that amended so that you can take advantage of it. And in some cases too, we see where it's the reverse. They claimed the capital gain and did not use the deduction because they thought that um, you know, they weren't farming just before they passed away, so really they weren't eligible. So a lot of times, again, um, we spend a lot of time in conversation talking about all those situations and then um seeing if we can point them in the right direction. We want to make sure that they are paying the least amount of tax and maximizing what goes into their pocket.
Devon Davidson:Okay. Uh maybe on that note, John, if you want to talk about um farmland owners, if they're considering tax corporate tax mining, what are some common strategies that they can implement uh while keeping ownership in the family?
John Schappert:Um that's a good question. Uh like what what um are we are we looking for like tax deferral or tax minimization, or are we talking about use of capital gains exemption in the future?
Bridget Hennigar:You know, some people I think um we often say um when we want to talk about uh farmland transition, and we appreciate that um family farms uh are a legacy and that if that can be promoted and there are people who are interested in it, then uh make sure that they know all of the ways that they can uh make that happen. So, you know, that would lead into the uh rollovers or yeah, yeah.
John Schappert:I guess I guess yeah, it really I guess it depends on what the objective is. Like if you're looking at passing it down to the next generation, then then uh it's usually quite easy to to have family farm corporation shares qualify for a rollover to go to the next generation.
unknown:Okay.
John Schappert:If you're if you're looking to sell and just uh I guess you don't have anybody in the family who really wants to take on farming in the future, then you might want to look at something like what CLH bid does, which is help farmers sell their shares of farm corporations and get the best value.
unknown:Okay.
John Schappert:Um but yeah, those are those are probably the two main considerations, I'd say.
Bridget Hennigar:You know, there's uh I get I think we want to just uh have you take away that it is complex. Um you know, there are so many situations and variations, uh, and you need to just uh look at all of the facts that are out there and see if that you can apply and fit into those qualified farm property rules. Um, but you know, this another um, I guess one of the things too I'd like to say is with planning for the future, you mentioned how soon do you plan, but also it's involved in wills. Um, who gets put on to the will, how are you going to uh structure it so that the um person who is making the will claims the capital gains or has the ability to claim the capital gain exemption as well as the beneficiaries. So something again to look at.
John Schappert:That's a that's a good point. I think on on wills, it's a problem that we we see a lot is the mistake of putting multiple kids on the same title for land. Like I understand it's kind of this, you know, it's maybe a fairness concern, but in general, if if you do put multiple kids on the same parcel of land, especially if one of them is a farmer and the others aren't, you're likely to have a dispute in the future over the estate. Yeah. And you're also likely to have a situation where those kids may not be able to qualify in the in the future.
Devon Davidson:So what would your advice be? Because this is a pretty common theme, I think, right? The fairness concerns you said. So then what would your approach be?
John Schappert:Well, I think I mean it's it's gonna be different for every farmer, but something that they, you know, some farmers may want to look at is selling quarters that aren't maybe contiguous.
unknown:Okay.
John Schappert:And using that money to potentially, you know, fund something in the state for the non-farming kids.
unknown:Okay.
John Schappert:And then ideally with the farming kids, put put them and their spouses on title for uh whatever parcels are going to be used in the farm. Gotcha.
Bridget Hennigar:Yes, if you have farm corporations too, you know. Um, again, farmers are so adverse to paying any tax, but perhaps they should take advantage of the lower marginal rates, build up a shareholders' loan, pay that out again, as you say, to the non-farming children, so that the farming children can actually, you know, receive the land. So there's so there's a lot of different um strategies, and certainly it does take time. Um if you have a farm corporation every year, you should be talking about what your how is your journey and what you uh see. It's not always going to be straightforward. There may be changes that you make, so that's why it's important to talk to them each and every year.
unknown:Yeah.
Bridget Hennigar:And when you're getting your annual review done.
John Schappert:So I think another option maybe to consider for some I most farm corporations aren't exactly flush with cash, but life insurance is also a way to uh corporate held life insurance is a good way to provide for non-farming kids and ensure that the the kind of the participating shares of the farming corporation go to the farming kids. Right. And and the reason that works really well is that corporate owned life insurance, uh, you can pay that with dollars that were only taxed at 11% versus personal dollars taxed at 48%.
unknown:Okay.
John Schappert:The other thing is when life insurance is received by a company, it goes into something called capital dividend account. And then that can be paid out tax-free actually to shareholders. Interesting. So what you could do is put the non-farming kids and non-participating shares in the company, earmark the life insurance for them uh through a maybe unanimous shareholders agreement or something like that. And then for the farming kids, they own the participating shares, but they don't get any of the life insurance. And when that when the life insurance pays out, gets flowed out, then the farm, it's just the farming kids now owning a company that just has land and active farming assets.
Devon Davidson:That's really interesting, actually.
Bridget Hennigar:So, you know, I think the government has um provided lots of different uh legislation to allow for transfer of uh farmland uh in families, and I think that's recognition of the value that it brings to the economy. Um but at the same time, there may be times as we talked about that it just isn't going to work uh for that to be continued, and that's when you look at the other alternatives.
Devon Davidson:Excellent. Okay. Well, I I I think on that note, John, Bridget, thank you very much for being here. This is enlightening. Um, I'll need that flowchart later for sure. Absolutely.
John Schappert:Yeah, I think I've got it in my backpack, actually.
Devon Davidson:Okay, perfect. Thank you, Devon. Thank you, Devon. Thanks, guys. All right. Uh on that note, that's gonna do it for another edition of the Farmland Exchange. Thank you so much for tuning in. Uh, if you haven't already, as I said at the top of the show, please take a minute to like, rate, and review the podcast. We really appreciate it. Uh, if you have any questions or topics you'd like us to discuss, or if you are indeed interested in selling farmland yourself, uh, please give us a call at 866-263-7480 or send us an email, info at clhbid.com. Thanks for tuning in. I hope this was a positive exchange for you. Take care.
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