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If you have sufficient retirement capital, you may want to consider gifting some property to your children rather than selling it to them. You may recognize for instance that your farming child will have difficulty "making ends meet" in the first few years and the removal of debt servicing costs on particular assets may make a considerable difference. Alternatively, you may feel your child has earned a "gift" as a result of the contribution he or she has made to the farm in previous years for which there has not been appropriate remuneration.
The type of gift we are discussing here does not include the sale of property at less than fair market value, which is reviewed in Chapter 5. This chapter deals only with the transfer of property or cash to your family without receiving any payment in return.
You can make a gift to a member of your family by forgiving all or a portion of a debt that is owed to you. As discussed in the questions and answers in this Chapter, this can have some bad tax consequences, so you need to receive advice from your accountant before you take this step.
If you have sold a substantial portion of your farm you may want to consider the gifting of liquid assets to your children (e.g. cash) so that the income earned thereon is taxed in their hands and not yours.
If a gift is made to only one of your children, you may want to view it as being a payment on account of the distribution the child will receive on your death. You can deal with this in your will by placing a value on the gift and stating that the other children should receive an equivalent distribution out of your estate before the residue is divided among all your children.
You may want to transfer property to your spouse so that he or she can become further involved in your farming business.
Implications of Making Gifts to
Your Spouse or Child
A gift of cash has no tax implications except that if the gift is made to your spouse, or to a child who is a minor, the "attribution rules" (see Glossary) may have the effect of causing you to be taxed on the income earned on the gift. For income tax purposes, a child is a minor until the year he or she reaches the age of 18. These rules are discussed in Chapter 10.
Property other than cash that is gifted from one person to another is generally considered to be disposed of at fair market value and the person making the gift has to account for the income tax that is payable. There are some important exceptions, however, in respect of properties transferred to a child or a spouse.
Qualifying farm properties (see Glossary) which can be sold to your child at less than fair market value (see Chapter 5) may also be gifted to your child without you having to pay tax. Where properties are gifted, they simply transfer on a "rollover" basis and your child inherits your cost for income tax purposes.
All capital assets such as land, buildings, equipment, shares in a family farm corporation and a partnership interest may be gifted on a "rollover" basis to your spouse (a spouse, for this purpose, includes a common-law spouse). You can elect to have the rollover rules not apply for any or all these types of properties. Eligible capital properties (e.g. quota) will also transfer on a rollover basis if you cease to carry on the farming business and transfer it to your spouse. This might happen, for instance, if you are injured and unable to continue working.
Property which does not transfer on a "rollover" basis between spouses during their lifetimes includes the livestock, inventories and accounts receivable of a cash basis farmer. If a cash basis farmer gifts this type of property to his spouse he or she is deemed to have received proceeds equal to its fair market value and will have to include this amount in income.
If you transfer property to your spouse, attention will have to be given to the effect of the attribution rules (see Chapter 10). In summary, any income of an investment nature that your spouse realizes from the transferred property (including taxable capital gains arising from the sale of the property) will generally be attributed back to you. Business income will generally not be attributed, however.
Some Questions and Answers
1. If I gift cash to my adult
children, are there any income tax or gift tax implications?
In short, the answer is no. There are no gift taxes in B.C.
2. I own a parcel of land which I
bought for $250,000 and now has a value of $400,000. I have used it
in my farming business, so can I gift it to my son and take
advantage of the capital gains deduction?
The answer to this question depends on whether the land is eligible for "rollover".
If we assume the land is eligible for the "rollover", it will simply "roll" to your son at your cost of $250,000 and there will be no capital gain. If you want to trigger a capital gain you would have to sell the property to your son at an amount above $250,000 and up to $400,000. If your son does not have the funds to pay the selling price, you could take back a promissory note from him. If you don't want any payments, you could alter your will to bequeath your son's promissory note back to him after your death. In this situation, you and your son would want to consider the Wills Variation Act (see Chapter 2).
If we assume the land is not eligible for the "rollover" it would be deemed for income tax purposes to have been sold at fair market value. In this situation there would be a capital gain of $150,000 and, depending on your circumstances, you may be able to take advantage of your capital gains deduction.
Don't forget to ask your advisers about the GST and the B.C. Property Transfer Tax.
3. I have sold my farm property to
my son and would now like to consider the possibility of forgiving
some of the money that he owes me. Is that a good idea?
If you forgive an amount that is owed to you then, depending on the circumstances, the debt forgiveness rules can result in some nasty tax consequences to the person who benefits from the forgiveness. In this case, because the debt is associated with the purchase of a business asset, the debt forgiveness rules will apply so as to reduce any tax losses that your son is carrying forward. To the extent the forgiveness exceeds these losses there may be a reduction in the tax values of certain assets that he owns. Conceivably, this forgiveness may even result in income on which he will have to pay tax. Because of this, you might consider bequeathing a portion of the debt to your son in your will. If you "forgive" debts in this manner, there will be no tax consequences to him.
If you decide to alter your will, you should ask your lawyer whether there might be any problem under the Wills Variation Act (see Chapter 2).
4. I own land that I bought in
1975 and farmed for only 10 years. Since 1985, when I retired from
farming, the property has been rented to a neighbour. Can I gift
this land to my children without any tax consequences?
Because your land has been farmed by you for only ten years and rented for fifteen, Canada Customs and Revenue Agency will likely consider that your land has not been used principally (eg. chiefly) in the business of farming during the period you have owned it and, in which case, it will not be eligible for "rollover" to your children. If, instead, the property had been farmed for fifteen years and rented for ten, there would not be a problem at this time.
If the property has lost its "rollover" status, and you proceed with the gift, you will be treated as having disposed of the property at fair market value. This may not necessarily result in tax because even though the land does not qualify for the rollover, it may qualify for the $500,000 capital gains deduction.
Remember if there are any buildings on the property which have been depreciated on the reducing balance basis, some or all of this depreciation may be recaptured.
Because the property is not being farmed by you, the B.C. Property Transfer Tax will apply.
Don't forget GST, the alternative minimum tax and the possible recapture of your Old Age Security payments.