The importance of land to a farm, and a farming family, cannot be understated. There is a finite amount of land available and in many circumstances, land remains within a farming family through generations.
There are certain “tax rollover” rules designed to facilitate the transfer of land from parents to children to keep it in the family without being burdened by a tax bill. These rules apply to personally owned farmland but not to farmland owned within a corporation.
“I have transferred some of my land into my farming corporation and/or I bought land in my farming corporation. Am I out of luck?”
Having farmland in a corporation is not the end of the discussion, nor does it mean there are no planning options available. It is just a bit more complicated.
In addition to being able to transfer personally owned farmland to the next generation on a tax rollover basis, shares of a family farming corporation can be transferred to the next generation, provided various conditions are satisfied (which are beyond the scope of this article). If there is one clear successor to the farm, it becomes relatively easy to ensure that successor also receives all the land because they can receive all the shares in the farming corporation.
“But what if I have multiple children? Some do not farm, and all of my land is in my farming corporation.”
If part of your estate planning goals and legacy to the children involves passing some land to each child, further planning is necessary. If all the land is in one corporation, it is generally not a long-term solution to have various children all own shares in that one corporation, especially if some are active in the farm and others are not.
While a shareholders’ agreement can mitigate some issues in the short term, mixing the competing interests of a farming child and a non-faming child does not usually set them up for a successful farm transition. In addition, the favourable tax rules for family farms do not apply to transfers between siblings, so future transactions among the children could result in unintended tax consequences.
An alternative in this scenario is to complete a reorganization in which the farmland intended for the non-farming children would be transferred into one or more new corporations earmarked for one or more non-farming children. The shares of that corporation in many circumstances can then be left to the non-farming child (either during your lifetime, or on your death through your will) without triggering negative tax consequences.
Each non-farming child would then have a corporation of their own that owns the land you wished to give them. If they ever want to sell the land, they may be able to do so by selling the shares of their corporation. On such a sale, they may even be able to claim the lifetime capital gains exemption to shelter all or a portion of the taxes resulting from the sale. This provides a similar result to what they could do if it was personally held land.
In terms of keeping the farm running once some of the land is separated from the farming operation, you may want to put in place long-term lease arrangements granting the farming child the right to lease the land passed to the non-farming children.
If keeping the land with the family farm is critical, a first right to purchase could be granted to the farming child to buy the land from the non-farming child before it can be sold outside the family. You could register such a right against the land during your lifetime to ensure your objectives run with the land after you die.
With adequate planning and protections in place, it should be possible to separate the land from the farm while maintaining its economic viability.
What does this all mean? It is substantially easier from an estate planning perspective to deal with farmland if it is personally held, however it is often no longer economically feasible to own, and continue to acquire, farmland personally. If the farmland is in a corporation, achieving all estate planning objectives will typically require more planning than simply drafting a will. It will often require a corporate reorganization, and it’s easier to do that while you are alive and control the corporation rather than having the children complete the same reorganization once they own the corporation.
In addition to accomplishing estate planning objectives with respect to your farmland ownership, a corporate reorganization can often become necessary if the farm is profitable and has excess cash built up. This is necessary so that you don’t risk going “off-side” the tax rollover rules by having too many non-farming assets in the farming corporation.
Ideally, a comprehensive plan is put together up front so that, once implemented, it can address estate planning objectives for the farmland as well as the business objectives for the future operation and succession of the farm.
Gregory A. Kirzinger
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: gkirzinger@shtb-law.com
The information in this guide is not legal advice. We encourage you to consult with your legal advisor for specific advice.