I am asking this question for a friend and think I know the answer, but I’m not totally certain. Is there an inheritance tax on farmland in Alberta? I don’t believe there is one, but my friend thinks there is, and that it is about 40%. And second, would it be better to be “gifted” the land than to receive it in the will?
I was all set for a scandalous question—the kind that would befit your opening phrase: “I am asking this question for a friend…” No offense, but I’m kind of disappointed that this is an estate planning question, instead of one involving inappropriate dalliances or organized crime. Can you work a little harder on the shock value next time?
No inheritance tax in Canada
In any event, you are correct. There is no inheritance tax in Canada. Which is not to say that the farmland will not be taxed when it changes hands. Farmers, and fishermen, for that matter, have unique tax treatment under federal tax rules.
The Canada Revenue Agency looks at the transfer—whether it’s done during their lifetime or on their death like a sale, meaning capital gains taxes may be applied. That said, if the farm is transferred to Canadian resident’s children, grandchildren, stepchildren or children-in-law, who want to continue running the business, tax liability can be deferred indefinitely.
Invest in advice from a tax pro with agriculture experience
There are all sorts of rules, regulations and exceptions when it comes to farms and estate planning, so your friend would be wise to retain the services of a tax professional to determine the best way to set up their estate. I would definitely choose someone who has experience in agriculture. Start by talking to friends and family in your local community to ask for referrals. A tax professional will work with you to determine whether it is best to gift the farm or to pass it on in a will.
But there are other reasons why it makes sense to sort out succession planning issues well in advance. Elaine Froese, a farm family coach and expert in succession planning based in Boissevain, Man., has a clear view on the best way to handle this matter. “I believe land transferred with a warm hand, before death, is better for many reasons, because wills can be changed or contested.”
Taxes are just the tip of the iceberg
Your question relates to the tax issues that come with passing the farm on to the next generation. But there are many more questions to consider. Dave Cesmystruk, a chartered account with MNP, wrote about the complexity of transitioning the family farm in a recent blog post. “There are several important considerations that need to be taken into account when transitioning the family farm to the next generation. These items include (but are not limited to) determining the value of the farm, retirement planning for the transferor, strategic business planning, transition of key employees, treatment of non-farming versus farming children, and the overall tax considerations.”
These topics can be very difficult for families to discuss, but Froese says the conversation about succession planning doesn’t have to be a painful experience. She works with clients to develop a farm succession “action plan” to help relieve of stress of the situation for all parties involved.
So, pass this answer on to your friend. It sounds like it is time to get talking about the big questions involved with transferring the family farm, in the lowest stress and most tax efficient way possible.
- The Alberta government has a website for the Ministry of Agriculture and Rural Development. Check out this article written by Dean Gallimore, a partner at KPMP in Lethbridge, Alta. He uses a number of case studies to illustrate the rules.
- The Canada Revenue Agency provides more details on tax rules for transferring a farm.