estate planning for the b.c. farmer sixth edition - bcmaff · estate planning for the b.c. farmer...

Estate Planningfor the B.C.Farmer

Sixth Edition

February, 2001

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Estate Planning for the B.C. Farmer

Written ByDerek J. Fryer, FCA, Partner, KPMG (604)793-4700

Edited ByMarvin Lenz, CA, Senior Principal, KPMG (604) 793-4700Clare Scott, CA, Partner, KPMG (604) 854-2200Howard Joynt, P.Ag, Farm Management Specialist, BCMAFF (250) 260-3000

Published ByBritish Columbia Ministry of Agriculture, Food andFisheries

AcknowledgementsThis publication is funded by the Canada/British ColumbiaFarm Business Management Program, which provides B.C.farmers the opportunity to increase or improve theirbusiness management skills.

For additional information, contact:

B.C. Ministry of Agriculture, Food and FisheriesFarm Management Branch, Vernon, BC

Agriculture and Agri-Food Canada, Market and IndustryServices Branch, Victoria, BC

The responsibility for the content and all inclusions hereinare the author's alone. The publication does not necessarilyreflect the opinions of the federal and provincialgovernments which funded the project.

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Canada/B.C. Farm Business Management Advisory Committee

Projects funded under the Canada/B.C. Farm BusinessManagement Program are reviewed by the provincialadvisory committee, which is chaired by a producer andcomprised of farmers, agri-business and federal andprovincial representatives. Committee members contributetheir knowledge, interest and ability in farm businessmanagement.

Sylvia Mosterman Chair, Advisory Committee, Producer

Andrea Belsheim Agriculture Lender

Philip Bergen Agriculture and Agri-Food Canada

Bill Freding Director, Investment Agriculture, Producer

George Geldart BC Ministry of Agriculture, Food and Fisheries

Roger Keay BC Ministry of Agriculture, Food and Fis heries

Gary Kenwood Chair, Investment Agriculture

Peter Malowney Producer

John Schildroth BC Ministry of Agriculture, Food and Fisheries

Norma Senn University College of the Fraser Valley

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Cataloguing Data

Fryer, D.J. (Derek J.)

Cover Title: Estate Planning for the B.C. FarmerPublished by Ministry of Agriculture, Food and FisheriesIncludes bibliographical references.ISBM 0-77-8902-X

1. Estate planning - British Columbia - Popular works. 2.Farms - Taxation - Law and legislation - British Columbia -Popular works. I. British Columbia. Ministry ofAgriculture, Food and Fisheries. II. Title. III. Title:Estate Planning for B.C. Farmers.

KEB515.3.F79 1989 345.71105'2'024631 C90-092009-2

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PrefaceEstate planning is an extremely broad subject. It deals withthe ultimate transfer of your assets to the next generation aswell as the accumulation and management of those assetsduring your lifetime. If the planning is carried outproperly, attention will be given not only to the income taxconsiderations, which are obviously important, but also tothe legal, business and personal considerations which inmost family situations have an even greater significance.

The fact that the subject is so broad makes it difficult forfarm families to know how to tackle it. Where do youstart? What options do you have?

It is our hope that this sixth edition of Estate Planning forthe B.C. Farmer, which is much less technical than some ofits predecessors, will help you answer these questions.Some of the material is in the format of “questions andanswers” which deal with the more common issues thatarise in the estate planning process. There are also twoillustrations of family farm transfer arrangements in theAppendices.

Even though this latest edition avoids many of the technicalissues associated with the subject matter, it is not apublication that can easily be read from start to finish. Youmay wish to begin updating your knowledge by reviewingthe Estate Planning Checklist published by the Ministry in1993. This is a smaller publication, written by the sameauthor, that is designed to give you an introduction to estateplanning.

After this introduction, you might want to read Chapter 1,as well as Chapters 5, 6 and 7 dealing with the transfer ofproperty to children, and any other sections which are ofinterest to you. If you don’t read all the commentary, atleast take a look at the questions and answers which areincluded in most of the chapters. These will help youunderstand many of the principles that are discussed in thetext. After doing this, you should keep this publication in asafe place and use it for reference purposes, as yoursituation requires.

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This publication was written by Derek Fryer, and edited byClare Scott and Marvin Lenz, each of whom is a charteredaccountant. Acknowledgement is gratefully given toHoward Joynt, Farm Management Branch of the Ministry,for his project leadership, and to the following people whoprovided comments on the publication:

Dorothy and Albert Anderson, farmersHarry Bryant, retired farmerDavid Graham, farmerBarb Kunze, farm familyJohn Mathies, farmerGerrard Schmidt, farmer

Farm Management BranchMinistry of Agriculture, Food and FisheriesVernon, B.C.

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Table of ContentsINTRODUCTION ................................................................................................................... XI

1. THE BASICS OF ESTATE PLANNING ............................................................................. 1What is Estate Planning? ...................................................................................................1What are the Benefits?......................................................................................................2When Should You Begin to Plan? ......................................................................................2How Do You Pass on Your Farm? .....................................................................................3The Family Farm Transfer Process ....................................................................................5Provide for an Incapacity...................................................................................................8Gift Tax and Succession Duties .........................................................................................9Using Advisers.................................................................................................................9Keeping Track of Your Estate Planning Information .........................................................11Some Questions and Answers .........................................................................................12

2. WILL PLANNING ..........................................................................................................14Introduction....................................................................................................................14Legal Formalities............................................................................................................16Who Should Act as Executor?.........................................................................................17What Should Be in Your Will? ........................................................................................18Property Not Affected by Your Will.................................................................................20Can Your Will be Challenged? ........................................................................................20What Happens if There is No Will? ..................................................................................21Some Questions and Answers .........................................................................................22

3. SIGNIFICANCE OF OWNERSHIP AND BUSINESS ARRANGEMENTS............................26Introduction....................................................................................................................26Property Ownership ........................................................................................................26

Joint Tenancy and Tenancy in Common.....................................................................26Legal and Beneficial Interests....................................................................................29

Business Arrangements...................................................................................................29Sole Proprietorships ..................................................................................................29Partnerships..............................................................................................................30Joint Ventures ..........................................................................................................31Companies ...............................................................................................................32

Trusts ............................................................................................................................33Some Questions and Answers .........................................................................................35

4. SELLING THE FARM TO A PERSON OTHER THAN A SPOUSE OR CHILD ..................38Introduction....................................................................................................................38What are the Income Tax Rules? .....................................................................................38

Capital Property........................................................................................................38Buildings, Machinery and Equipment.........................................................................39Quota.......................................................................................................................40Livestock and Other Inventories ................................................................................40What Happens if You Are Not “Cashed Out”? ...........................................................41Planning the Sale ......................................................................................................41Purchase of a Replacement Farm...............................................................................41

What Security Do You Receive? .....................................................................................42Some Questions and Answers .........................................................................................42

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5. TRANSFERRING THE FARM TO YOUR CHILD DURING YOUR LIFETIME ....................45Introduction....................................................................................................................45How Do You Decide What Form the Transfer Will Take?.................................................46Grooming Your Successor(s) ..........................................................................................46What Are Some of the Key Issues in the Transfer Arrangements?......................................47Special Income Tax Rules Applying to a Sale to a Child (the “Rollover Rules”) .................50

Forgiving Debt After the Sale ....................................................................................54Keep the Tax Rules in Perspective .............................................................................54

Some Questions and Answers .........................................................................................55

6. GIFTS TO YOUR FAMILY DURING YOUR LIFETIME....................................................60Introduction....................................................................................................................60Implications of Making Gifts to Your Spouse or Child ......................................................61Some Questions and Answers .........................................................................................62

7. TRANSFERRING THE FARM TO YOUR FAMILY THROUGH YOUR WILL .....................65Introduction....................................................................................................................65The General Rules (Where the “Rollover” Doesn’t Apply) ................................................65Special Rules for Spouses and Trusts for Spouses.............................................................66Special Rules for Children...............................................................................................67Bequest to Children Through Spouse Trusts .....................................................................70Some Questions and Answers .........................................................................................71

8. DEALING WITH YOUR NON-FARMING CHILDREN .....................................................74Introduction....................................................................................................................74Equitable vs. Equal.........................................................................................................74What are Some of the Options for Dealing With the Non-Farming Children?......................75Use of Insurance.............................................................................................................76Some Questions and Answers .........................................................................................79

9. CAPITAL GAINS DEDUCTION.....................................................................................81Introduction....................................................................................................................81Property Eligible for the Deduction..................................................................................82What About Rental Property?..........................................................................................84The Deduction May be Multiplied....................................................................................84What Happens if You Claim a Reserve in Respect of the

Unpaid Sales Price of Your Farm..............................................................................85What Happens if Your Partnership is Not a Family Farm Partnership? ...............................85Can You Always Claim the Deduction? ...........................................................................86Don’t Forget the Refundable Minimum Tax .....................................................................86

How Can I Get the Minimum Tax Back? ...................................................................87Don’t Forget the Other Implications of Realizing Capital Gains .........................................88Some Questions and Answers .........................................................................................88

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10. RETIREMENT INCOME PLANNING ..............................................................................93Introduction....................................................................................................................93Income From Farm Assets ..............................................................................................94Registered Retirement Savings Plans (RRSPs) .................................................................95Registered Retirement Income Funds (RRIF's) .................................................................98Canada Pension Plan.......................................................................................................99Old Age Security .......................................................................................................... 100Tax Credits .................................................................................................................. 101Income Splitting ........................................................................................................... 101

11. USE OF COMPANIES IN ESTATE PLANNING ............................................................104Introduction.................................................................................................................. 104Income Tax Deferral..................................................................................................... 105The Impact of a Tax Deferral if You Have Considerable Debt ......................................... 106What about the Impact of the Capital Gains Deduction on Companies?............................ 106Dealing with Non-Farming Children.............................................................................. 110Other Matters to Consider with Companies .................................................................... 110

Principal Residence ................................................................................................ 110Potential Double Tax .............................................................................................. 112Provincial Sales Tax............................................................................................... 112B.C. Property Transfer Tax..................................................................................... 112B.C. Capital Tax..................................................................................................... 113Goods and Services Tax (GST) ............................................................................... 113

Need for Professional Advice ........................................................................................ 113

12. LIFE INSURANCE ......................................................................................................115Introduction.................................................................................................................. 115Term Insurance ............................................................................................................ 115Permanent Insurance..................................................................................................... 116Universal Life Insurance............................................................................................... 116Combinations ............................................................................................................... 117Joint and Last to Die ..................................................................................................... 117Use of Insurance........................................................................................................... 118Tax Implications ........................................................................................................... 119Conclusions.................................................................................................................. 120

13. IMPLICATIONS OF FAMILY LAW ...............................................................................121Introduction.................................................................................................................. 121Tax Implications of the Division of Family Assets.......................................................... 122Attribution Rules .......................................................................................................... 123Planning....................................................................................................................... 124

14. ADMINISTRATION OF THE ESTATE...........................................................................125Introduction.................................................................................................................. 125Role of the Personal Representative (Executor) .............................................................. 126Role of the Solicitor ...................................................................................................... 128Property That Does Not Become Part of the Estate ......................................................... 128Tax Liability of the Deceased........................................................................................ 128Filing of Returns and Payment of Tax............................................................................ 130Clearance Certificate .................................................................................................... 132Accounting Records...................................................................................................... 132

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CONCLUSIONS ................................................................................................................133

BIBLIOGRAPHY................................................................................................................134

APPENDIX 1 ....................................................................................................................135Illustrations of Family Farm Transfer Arrangements....................................................... 135

An Unincorporated Dairy Farm............................................................................... 135An Incorporated Nursery......................................................................................... 141

APPENDIX 2 ....................................................................................................................147Estate Plan Information ................................................................................................. 147

APPENDIX 3 ....................................................................................................................155Glossary of Terms Used in Estate Planning..................................................................... 155

Introduction

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IntroductionIn the first edition of this publication, written in 1984, thesubject matter was introduced by reviewing the script of animaginary play about a family planning its estate. Whilethe actors were fictitious, the sequence of events was fairlytypical of what happens in real-life situations.Since that play was written, there have been someimportant tax changes which have reduced some of thetragic consequences that our imaginary family broughtupon themselves by not following through with their estateplans. These changes have not lessened the human side ofour family’s tragedy, however, so the moral of our story isas valid now as it was sixteen years ago.

The central characters in our play are John and MaryBrown who are both aged 62. They have been successfulfarmers throughout their lives and are consideringretirement in the next two or three years.

All their assets are tied up in the farm and they have verylittle insurance. The farm is now being run by their sonBill, who is aged 35 and lives on the property with his wifeand two children. Bill doesn't have an ownership interest atthis time but “understands” he will inherit the farm oneday.

The parents also have two daughters who are married andnot involved in the farming business.

In scene one, John and Mary chat about their futureretirement while having dinner. It is not a particularlythoughtful discussion - merely a casual conversation aboutwhat might happen in the future. They have done this onseveral occasions in the past and have never involved theirchildren. They have been told by their solicitor andaccountant that they should be making an overall estateplan. Bill has also been encouraging them to do thisbecause he would like to know where he stands. John and

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Mary realize they should be doing something but alwaysfind a reason to put off a decision.

The one point that they seem to agree on is that Bill shouldacquire the farm because he has put a lot of work into it.The property was inherited from John’s parents so theywould like to see it continue in the family if possible.However, there remains the question of how they shoulddeal with their daughters. They want to treat all of theirchildren fairly.

John and Mary have prepared a straight-forward will. Itprovides that after the death of the two of them, all theirassets are to be divided equally among their children.

In scene two, John and Mary are killed in an automobileaccident and the children suddenly find themselves in theposition of co-owners of the farm. Soon there isdisagreement as to how Bill might acquire completeownership of the farm and because of the constantarguments there is a real possibility that there will bepermanent damage to the family relationship.

In scene three, the family has split into bitter factions andthe farm has been sold. Income taxes have been paid onincome that arose from the sale and Bill has been forced tomove off a farm that has been in his family for threegenerations.

This scenario is unfortunate, but in real life there can beothers which are just as bad or worse. Perhaps the parentsdon't prepare a will with the result that their property isdistributed in accordance with the government’s rulesrather than in accordance with their own wishes.Alternatively, perhaps there is a will, but it's challenged byone or more of the children on the basis that it doesn't makeadequate provision for them. There can be other problemstoo. Perhaps the parents aren't able to transfer the farm totheir children on a tax-deferred basis and their family isexposed to a substantial income tax liability.

Introduction

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The desire to avoid these and other estate planningproblems is the reason this book has been written. Wehope it will give the reader an insight as to how to approachestate planning.

The commentary is based upon the Income Tax Act as itstood on November 30, 2000 and the proposedamendments at that time.

Unfortunately, there are many “technical terms” that mustbe used when explaining the legal and income taximplications of estate planning. The meaning of theseterms is set out in the Glossary in the Appendices of thisbook.

Derek J. Fryer, FCAJanuary, 2001

The Basics of Estate Planning

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1. The Basics of Estate PlanningThere is a certain reluctance in all of us to dealwith the subject of estate planning because itrequires us to consider what is going to happenafter we die. Death is not a particularly pleasantsubject and we prefer not to think about it. Someof this reluctance may disappear if estateplanning is thought of in a broader context as

having to do with the accumulation and use of propertyduring one’s lifetime, as well as its distribution after death.In fact, this is what it is.

Estate planning is particularly important to you, as afarmer, because you are engaged in a capital-intensiveindustry. The size of your estate, and the fact thatsubstantially all of your net worth is probably tied up inyour farm, create special problems which can be dealt withonly through a well-constructed estate plan.

What is Estate Planning?Estate planning deals with all aspects of the accumulation,use and distribution of a person’s assets. It therefore entailsall of the following:

n accumulating and controlling assets;

n providing for an orderly and equitable distribution ofassets during lifetime or on death;

n providing adequate retirement income;

n minimizing tax; and

n maintaining sufficient liquidity to pay taxes and othercosts at death.

You have a number of " tools" at your disposal which youcan use to achieve all of the above. For instance, you can:

Estateplanning…doesn’t deal onlywith death

You have anumber of “tools”available to you

Chapter 1

2

n prepare a will describing how property is to bedistributed after your death (see Chapter 2);

n choose a form of business arrangement that minimizesyour tax liability and makes it easier to transfer yourproperty to your beneficiaries (see Chapters 3 and 11);

n transfer property during your lifetime or on death anduse trusts to hold property for your spouse or child (seeChapters 5, 6 and 7);

n plan your retirement income (see Chapter 10); and

n provide liquidity in your estate with the use of lifeinsurance (see Chapter 12).

What are the Benefits?The time and effort spent on your estate plan is usually wellrewarded in terms of the savings in taxes, estatemanagement costs and property transfer procedures.Equally important, however, is the peace of mind enjoyedby you and your family in the knowledge that the plan hasbeen well thought out and is fair to all.

When Should You Begin to Plan?You should give some thought to estate planning as soon asyou begin to accumulate assets. While you are single andrelatively young, your planning is likely to consist ofsafeguarding your valuable assets (such as storingimportant documents in a safety deposit box) and preparinga will setting out what should happen to your property inthe event of your death.

After you marry and start a family the scope of yourplanning will broaden. You will change the beneficiaries inyour will and, perhaps, name a person who would act asguardian to your children if you and your spouse should diesuddenly. Your business affairs will probably becomemore complex and you will want to assess whether adifferent form of business organization would be beneficial.

Estate planningis a continualprocess


3

Perhaps you will want to consider forming a partnershipwith your spouse, or carrying on business through acompany. Your debts may increase significantly and youmay want to reassess the extent of your insurance coverage.

Later on in life, your estate plan will broaden even furtherbecause you will then have to decide whether to bring yourchild or children into the business. Ultimately, you willhave to consider your retirement plans and the sale of yourfarm. Plans may have to be changed periodically inresponse to external factors such as new governmentlegislation.

It can be seen, therefore, that an estate plan is notsomething that is made and then forgotten. It's an ongoingdynamic process that evolves throughout the middle yearsof a person’s life and requires a periodic check-up inresponse to changing circumstances.

How Do You Pass on Your Farm?Your planning in the early years will probably centrearound managing your farm and earning sufficient incometo support your family. In later years, however, you willhave different concerns such as whether any of yourchildren want to take over the farm or whether there willhave to be a sale to a person outside the family.

If there is to be a sale to a person outside of the family, youwill want to receive the best possible price and reduce yourtax liability to the maximum extent possible. The best wayof doing this is to ensure that you receive advice from youraccountant well before the transaction occurs. In somesituations that advice should be obtained one or two yearsbefore the proposed sale. This is discussed in Chapter 4.

If the farm is to be transferred to one or more of yourchildren, the issues will be somewhat different. You willstill be interested in receiving a fair price and minimizingyour tax liability, but there will be a number of other issuesas well, including the following:

Chapter 1

4

n do you want to transfer all or only some of your farmproperty?

n are you looking for an arrangement under which yourchild is gradually phased-in to the business?

n how can you give your child the opportunity to takeover the farm and still treat your non-farming childrenfairly?

Planning the transfer of the farm to the next generation canbe difficult and time consuming. Because you will havespent considerable time, money and energy in acquiringyour farm, you will not want to transfer it to your childrenwithout being fairly certain that your needs will be lookedafter, and the transfer will be a success.

Don’t be surprised if the transfer process takes severalmonths, or even a year or more, before you complete it.This is a big step for parents, and it quite often takes awhile for everybody to become comfortable with theprocess as well as the outcome.

Some farm families have difficulty coming to grips withthis phase of their estate plan because they areoverwhelmed by the many issues that need to be taken intoaccount. Sometimes they put off the discussions thatshould be taking place; hoping, perhaps, that the decisionswill be easier if they are deferred to another day. Usuallythis doesn’t happen.

You will more likely avoid becoming overwhelmed if youdon’t become too involved in the details early in theprocess. The Estate Planning Checklist, published by theMinistry in 1993, will help you do this. It sets out eightbasic steps in the family farm transfer process and thendiscusses the first four of the steps in some detail. Theseeight steps are shown in the form of a diagram on the nextpage.

The issueswhen thefarming childtakes over

Use the EstatePlanningChecklist toget you started


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The Family Farm Transfer Process

STEP 7Choose Best

Option

STEP 6Identify Options andDiscuss with Family

STEP 4Become Familiarwith EstatePlanning Tools

START

STEP 1Collect Data

STEP 2Review CriticalIssues

STEP 3Set Basic Goals

STEP 5Discuss Data andGoals withAdvisers

STEP 8Complete Plan

FINISH

Chapter 1

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The data you collect in step 1 will include the approximatevalue of your farm assets and liabilities, the manner inwhich these assets are owned, particulars concerning yourfamily, details of non-farm assets, insurance policies, etc.You should try to gather this information together in amanner that will facilitate a discussion by the family aswell as a review by your professional advisers.

Step 2 of the process is perhaps the most important. Hereyou look at a number of broad financial and personal issuesthat ultimately will shape the way in which the farm istransferred to the children. There won’t be a final decisionon these issues at this stage, but there should be adiscussion of the options and an assessment of theimportance of each issue in the overall transfer process.The issues that will be considered will include thefollowing:

n The importance of an “interim” arrangement with thechild (such as bringing the child into the farm as ashareholder or partner) rather than a complete sale

n The importance of you continuing to control the farmfor a period of time

n The necessity for you to move off the farm

n Your financial needs, both now and in the future

n The ability of the farm to support the family memberswho are interested in it

n The approach you might take in dealing with your non-farming children

In step 3 of the process you will establish some broad goalsand objectives. Your plan will not have been “fleshed out”in detail at this point but hopefully you will have arrived atsome tentative conclusions in the following areas:

n whether there will be a full or partial sale or, perhaps,some sort of interim arrangement such as a partnership

Collect the data

Scan the picture

Establish your goalsand objectives


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n whether you want to retain control over the farm

n your income and capital needs in the short and mediumterm

In step 4 you should attempt to increase your knowledge ofthe estate planning "tools" which are at your disposal.These include:

n the “tax tools” (such as the capital gains deduction andfarm “rollovers”) – see Chapters 5, 6, 7 and 9

n the "security tools" (mortgages, agreements for sale,etc.) – see Chapter 3

n the different forms of business arrangements(proprietorships, partnerships, joint ventures,companies) – see Chapters 3 and 11

n methods of holding property (joint tenancy, tenancy incommon and life interests) – see Chapter 3

Your intention here is not to become an expert but to bebetter able to review the options with your advisers. Youmight begin by reviewing the brief commentary in theEstate Planning Checklist referred to earlier and thensupplement your knowledge by reading portions of thispublication.

Steps 5 to 8 in the process represent the “analysis” and“completion” phases of your plan. Here your advisers willbecome more involved. The options will be “fleshed out”for your review, and the final plan will be selected and putinto effect. Hopefully, you and/or your advisers will beable to use this publication in this phase as well.

After a plan is developed in draft form by your professionaladviser, you will want to discuss it with the remainder ofyour family. It is important that all members of yourfamily believe they have been fairly treated. Time spent atthis stage can save much anguish during your lifetime andafter your death.

Look at the“tools” available

Analysis andcompletion phases

Discuss the planwith the familybefore it’sfinalized

Chapter 1

8

If the plan you are developing is to be included in your willrather than being put into effect immediately, a discussionwith your family may avoid the possibility of your willbeing contested under the Wills Variation Act (see Chapter2).

Your accountant will naturally be concerned aboutminimizing your tax liability, but it must be recognizedthat tax is not the most important consideration. Youand your spouse must feel comfortable with the planrecommended to you and it must conform to your ideas onhow you should deal with your children.

Your estate plan should be flexible. It should, for instance,take into account that your children may change theirpersonal goals and career paths. You should not takeirrevocable steps until you are certain that your childrenhave decided what they want to do with their lives.

Provide for an IncapacityAs you become older, you will want to discuss with yourlawyer the merits of empowering another person to act onyour behalf if you were to become incapacitated. The lawin B.C. in this area changed considerably on February 28,2000 as a result of the introduction of the RepresentationAct. Essentially, this new Act enables you to sign astandard agreement covering matters such as yourpersonal care, the routine management of your financialaffairs and certain health care decisions. There is also anenhanced agreement which authorizes more significantdecisions such as the sale of assets and the refusal of life-supporting medical treatment.

If you have previously made arrangements through alawyer to give an enduring power of attorney to one ormore members of your family, the new legislation in B.C.may not be of great interest to you unless, perhaps, youwant to take advantage of the provisions dealing with

Tax is not themost importantconsideration.


9

health care. If, however, you have not done this, and youare reaching the age where somebody should be authorizedto act for you if you were to become incapacitated, youshould arrange a meeting with your lawyer to discuss thismatter.

Gift Tax and Succession DutiesFarmers in British Columbia have to consider the effect ofincome taxes on their estate plans but, fortunately, they donot also have to wrestle with gift taxes and successionduties. These taxes were abolished in British Columbia inJanuary 1977. Nowadays, therefore, you need not beconcerned about the possibility of a gift tax if you shouldtransfer property or cash to a member of your family.

Using AdvisersYou are going to need the advice of professionals indeveloping and implementing your estate plan. Thequestions that come to mind in this regard are “whichprofessionals can help you?”, “when do you consult them?”and “how do you choose the right one?”

The following is a list of some of the advisers and the areasin which they will be able to help you.

Accountants: If your accountant is very knowledgeable inthe areas of taxation and estate planning as they affectfarmers, he or she can act as the “quarterback” for youroverall plan.

Lawyers: They can advise you on the legalities of theestate planning and business succession arrangements.Agricultural experience is advisable. Ultimately a lawyerwill be required to put your estate plan into effect.

No gift tax orsuccessionduties in B.C.

Whichprofessionalscan help you?

Chapter 1

10

Bankers: They can offer advice on how to finance farmsuccession arrangements as well as retirement planning andthe investment of your capital.

Financial planners and consultants: These individualscan also advise on retirement planning and overall financialplanning. Some will have a specialized knowledge ofinsurance products and the manner in which they can beused in your overall estate plan.

Insurance agents: These individuals can advise you oninsurance matters. Some have financial planningqualifications that enable them to advise you on a broaderrange of issues.

There are two schools of thought as to when the outsideconsultants should be involved. The first is that you shouldnot bring in an outside adviser until you have done yourown research and have had some preliminary discussionswithin the family. For some people, this will be the rightapproach, particularly if they are able to locate publicationssuch as this one, and the Estate Planning Checklistpublished by the Ministry of Agriculture, Food andFisheries in B.C. Others, however, find it useful to have aninitial discussion with an advisor to help them focus thediscussions within the family. This is particularly truewhere the parents are approaching retirement and it’s timeto develop the arrangements for the transfer of the farm tothe next generation, or plan for the sale to an arm’s lengthperson.

Your advisers should have an understanding of the issuesand problems affecting farmers and, most importantly, youneed to feel comfortable talking with them. For somephases of your estate planning, your adviser will usually beyour lawyer or accountant. At other times, however, youmay need to involve several people, including youraccountant, lawyer, banker and insurance agent.

When doyou consultwith them?

How do youchoose theright one?


11

How do you know if you are dealing with the right people?Well, here are some suggestions:

n Ask around. Talk to other farmers who have usedadvisers and get their suggestions.

n Enquire at seminars and workshops.

n Contact professional associations.

n Ask the Ministry of Agriculture, Food and Fisheries.

n Set up an interview with possible advisers and find outwhat training they have and their length of experiencein dealing with estate planning for agriculturalbusinesses.

Keeping Track of Your Estate Planning InformationAs your estate planning changes over time, it is importantto keep track of the information that is essential to yourarrangements. To some extent, this information will becontained in your will but it may also be contained in otherdocuments such as the following:

n a shareholders’ agreement, if your business is carriedon through a company

n a partnership agreement if your business is carried onthrough a partnership

n lease agreements

n financial records

n insurance policies

To assist you in doing this, we have included an insert inthis publication entitled “Estate Planning Information”(there is also an extra copy in the Appendices). We suggestyou complete it and file it with your will and other valuablepapers.

Chapter 1

12

Some Questions and Answers

1. My wife and I want to bring our son into thebusiness or perhaps sell a portion of the farm tohim. How do we begin the process?

Well, as mentioned in this chapter, a good starting pointis the Estate Planning Checklist, published by theMinistry of Agriculture, Food and Fisheries in B.C.This is a fairly small publication that will give you anunderstanding of what the family farm transfer processentails as well as provide you with the information youwill need to gather together. After you have reviewedthis Checklist you may wish to talk with a professionaladviser (accountant or lawyer), a farm managementspecialist at the Ministry or, perhaps, attend an estateplanning seminar. These seminars are often providedon a periodic basis by accountants, lawyers, insuranceagents and by the Ministry itself.

2. Which professionals are likely to be able to help usdevelop an estate plan?

This depends on your advisers' experience andqualifications. There are some accountants andlawyers, who have considerable estate planning andtaxation experience with agricultural businesses and canguide you through the entire process. If youraccountant or lawyer does not have these skills, he orshe should be prepared to recommend you to somebodywho does.

Depending on your circumstances, it may beappropriate to involve your bank and insurance agent.

If you are not sure who to approach, contact your localMinistry office. They will be able to provide you withrecommendations as well as some preliminary advice.


13

3. Should we have our farming child attend the firstmeeting with our family's professional adviser?

There are no hard and fast rules but generally it'spreferable for the parents to have the first meeting withthe adviser on their own. This will usually facilitate amore complete discussion of the options available.

Chapter 2

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2. Will Planning

IntroductionOne of the most important documents you execute duringyour lifetime is your will. Ideally, it's just one of the keyelements in your overall estate plan but in some situations itrepresents the only estate planning that is done. It mayhave far-reaching effects on your family and businesspartners so it should be given a lot of thought. A solicitorshould always prepare the document in order to avoidpotential problems.

Your will is a legally enforceable document that can bealtered or revoked during your lifetime. It describes yourwishes regarding the distribution of your property and theappointment of executors. It may also deal with othermatters such as the appointment of trustees to hold propertyin trust for your surviving spouse and children and theappointment of guardians for your children.

You will lose your ability to make or amend a will if youare no longer able to understand the nature and extent ofthe property that forms part of your estate. This mighthappen for instance, if you were to have a stroke. Becausethere is always the possibility of this occurring withoutwarning it is important that will-planning be updatedregularly.

You should prepare a will to ensure that your property isdistributed in an orderly manner to your family, and otherintended beneficiaries, in accordance with your wishes. Ifyou fail to prepare one, your assets can only be dealt within accordance with the provisions of the EstateAdministration Act (see later discussion). This can resultin additional worry for your family, a possible delay in thedistribution of your estate, an increase in estatemanagement costs and the exclusion of some persons youwould have wanted to share in your estate.

What is awill?

Failure toprepare a will

Last Willand

Testament

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In planning your will, you should take into account manyfactors including the provisions of buy-sell agreementsentered into with your business partners, the income taxrules applying on death, the amount of liquid assets in yourestate, the manner in which you hold your business assetsand the provisions of any marriage agreement. Becausethese considerations are complicated and they changeperiodically, you should get into the habit of obtainingprofessional advice and reviewing your will planning everythree or four years. There should always be a review afterthe following:

n a major change in business arrangements (e.g.formation of a company or partnership);

n major changes in the form or mix of assets;

n sale of property;

n major income tax changes;

n birth or death of a child or grandchild;

n children or grandchildren becoming adults;

n emigration of a beneficiary from Canada;

n marriage or divorce; or

n death of an executor, spouse or other namedbeneficiary.

In deciding the terms of your will, you should thoroughlydiscuss your estate plans with your family. There shouldbe no surprises after your death and your family should beprepared for what is to happen at that point. Thisdiscussion can take a considerable length of time and maybe assisted by the involvement of professionals such as thefamily solicitor and accountant, an insurance agent andperhaps a farm management specialist from the BritishColumbia Ministry of Agriculture, Food and Fisheries.

Matters that shouldbe considered

Discuss yourplans with yourfamily

Update your willregularly

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After the will is completed and signed, you should leavethe original with your solicitor for safe-keeping and shouldkeep a copy for your own records. It may be appropriate toalso provide a copy to your accountant and executor.

Legal FormalitiesThe formalities governing the making of a conventionalwill are contained in the Wills Act of British Columbia. Ingeneral:

n the document must be in writing;

n it must be signed by you, or by some other person inyour presence and under your instructions;

n you should sign your will in the presence of two ormore witnesses who should be over the age of majority;

n the witnesses should not be beneficiaries named in thewill, nor the spouses of those beneficiaries.

This latter point is extremely important. If bequests aremade to the witnesses of a will, or to their spouses, theywill be forfeited and the property will simply form part ofthe residue of your estate.

If you have more than one will, the most recent one over-rides the earlier versions. For this reason, it is importantyour will be dated.

Generally, you must be nineteen years of age or olderbefore you can make a will although a married infant (aperson under age nineteen) or a member of the Canadianforces can prepare one irrespective of his age. The personmust have the mental capacity to prepare the will and mustnot be forced or coerced into it.

You can revoke a will by making a new one, by destroyingor revoking an existing one or by entering into a marriage.(A divorce will not revoke a will but it will have the effect

Be careful whowitnesses your will

Revoking a will…marriage may dothis

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of cancelling transfers of property to the ex-spouse and theappointment of him or her as executor or trustee.) Youneed not necessarily make a new will each time you wantto change it. You may be able to make the change bysimply attaching a “codicil”.

If you prepare or update your will shortly before yourmarriage, you should indicate in the document that it isbeing prepared or updated in contemplation of marriage.This indicates that you were aware of your upcomingmarriage at the time the will was prepared and the marriageitself will not have the effect of revoking it.

Who Should Act as Executor?Generally, you will want to have your spouse and/or yourchildren act as executors. The decision as to who should beinvolved will depend on the complexity of your businessarrangements and the ability of your spouse and children todeal with them.

If your will establishes a trust for your spouse under whichincome from the farm passes to the spouse during his or herlifetime, with the farm property passing to your children onthe spouse's death, it might not be a good idea for yourspouse to act as the sole executor. One or more of yourchildren might also be appointed so that there is a properbalancing of the interests of your spouse and children.

In some cases, it may be necessary to sell assets in order toprovide additional cash to the surviving spouse. In thatcase, it may be preferable to also have independentexecutors so that your children are not placed in theawkward position of trying to decide whether a sale shouldbe made.

In some situations, it may be appropriate to have a friend orbusiness associate act as an executor. You should ensure,however, that the business associate is not put in a positionof conflict. This might happen if farm assets are to be sold

Try to avoidconflict of interest

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by the estate and the business associate might be one of thebuyers.

You might consider naming your solicitor or accountant toact as one of the executors. These persons may be goodchoices if they have a detailed knowledge of your affairsand beneficiaries, and can afford to spend the appropriateamount of time on estate administration. Often their othercommitments prevent them from doing this and you arebetter off to retain these individuals in their professionalcapacities rather than as executors.

A trust company may be useful in situations where youhave extensive business interests or a trust is to be createdthat will exist for a long time. It can provide a full serviceadministration package that can rarely be equalledelsewhere. However, the trust company will not alwayshave an office in the area in which you live and this cancomplicate the administration of your estate. The trustcompany may also be more costly.

What Should Be in Your Will?You will want to state the manner in which your estate is tobe distributed. The distribution may be in the form of a“specific bequest”, a “general bequest” or a “share of theresidue” of your estate.

A “specific bequest” is made where a specific propertysuch as an interest in a particular company or a specificparcel of land is left to a beneficiary. If the particularproperty is sold before your death, the beneficiary will losehis or her inheritance unless that person also shares in theresidue of your estate.

A “general bequest” refers only to a sum of money ratherthan to a particular property.

A "share of the residue" refers to a share of the balance ofthe estate, after payment of specific bequests, general

Your bequestsmay takedifferent forms

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bequests and all of the estate's liabilities. This residuemight be entirely in the form of cash or may include assetssuch as land which have not been bequeathed to a particularbeneficiary and have not been sold in the course of theadministration of the estate.

You will want to specify what is to happen to your debts.They may be assumed by one of your beneficiaries or paidout of the residue of your estate.

Property passing to your spouse may be transferred directlyto your spouse or to a trust for his or her benefit. Use of atrust will ensure that the future entitlement of your childrencannot be affected by your spouse’s remarriage after yourdeath. You may also use a trust to hold property for infantchildren.

There is usually a provision setting out what should happenin the event that you and your spouse are killed in acommon accident. If there is no such provision, theyounger of you is treated as though he or she survived theolder and the distribution of the two estates is processedaccordingly. Sometimes the will also provides that thebequest to a spouse shall not take place unless he or shesurvives the testator by, say, 30 days. Where there is asimultaneous death, this provision should have the effect ofreducing probate fees.

You may want to consider giving your children the right toacquire certain farm property from your estate at apercentage of its fair market value (see Chapter 7). Thismakes a useful “emergency plan” that will come into effectif you are unable to transfer your farm during your lifetime.

As discussed in Chapter 7, your executors have the abilityto select the value for income tax purposes at which you aredeemed to dispose of certain farming assets to yourchildren. The values they select will have an impact on thetax payable by your estate and will determine the cost ofthe property to your children. It is important that your will

Use of a trust toprotect children’sinterests

Include anemergency plan foryour farm assets

Executors can electvalues at which yourchildren acquirecertain farm assets

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give your executors the power to choose these values forincome tax purposes. Guidance might also be given tothem as to how this choice should be made. In mostsituations, you will want them to select the highest possibletransfer values that will not result in tax being paid by yourestate.

If certain assets are to be distributed “in specie”, (eg. intheir present form - see Glossary), you should ensure thatthe will gives the executor the power to do this.

Property Not Affected by Your WillProperty held in a joint-tenancy arrangement (see Chapter3), together with the proceeds of insurance policies andregistered retirement savings plans for which there arenamed beneficiaries, do not form part of your estate and arenot affected by the terms of your will. These assets passdirectly to the surviving joint tenants or to the namedbeneficiaries, and are unlikely to be available to yourcreditors. You should check your old insurance policiesand registered retirement savings plans to ensure that the“beneficiary designation” is still appropriate.

Because of provisions in the Income Tax Act, you willgenerally want to designate your spouse as the namedbeneficiary of your registered retirement savings plan. Thisis discussed in Chapter 10.

Can Your Will be Challenged?You should be aware that even where you provide for thedisposition of your property in a properly-drawn will, theWills Variation Act in British Columbia may enable yourwishes to be varied or set aside by a court if it determinesthat you have not made adequate provision for your spouseand children. Some provision is not necessarily adequateprovision. This possibility may be of concern to you ifyour assets are not likely to be divided equally among your

Check thebeneficiarydesignations on yourRRSP and insurancepolicies

Spouse or childrennot adequatelyprovided for canchallenge your will

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children. In many situations, the desire to keep the farmintact and to treat all children equitably, not necessarilyequally, means that the inheritance of some children islarger than others.

Disputes can be avoided if you discuss your estate planswith your family and obtain their approval. Where one ofthe children appears to be treated on a more favourablebasis, perhaps because of previous contributions to the farmfor which he or she has not been paid, it is probablyadvisable to include your reasoning in your will. Then, ifthe matter is contested after your death, the court will beable to take this reasoning into account.

If one or more children are to receive more than theirsiblings, it may be advisable for you to arrange for thetransfer of the extra share during your lifetime. In thismanner, you might avoid potential problems under theWills Variation Act. You may gain other benefits as wellbecause, generally speaking, the transfer of farm propertyduring your lifetime is the preferred method of distributingyour estate. Obviously, this is a matter you should discusswith your solicitor, and perhaps your accountant, when youare preparing your estate plan.

What Happens if There is No Will?If you die without making a will, provincial laws determinewho looks after your affairs and who receives your estate.Undoubtedly there will be increased emotional andfinancial costs to your family.

If you are survived by a spouse and children, it is quitelikely the division of your estate will not be what youwould have wanted. If your children are under aged 19,their share will be managed by the Public Guardian andTrustee. If your home is sold, a portion of the sales pricemay have to be paid to your children rather than beingretained by your spouse. These and other potential

Court-appointedadministrators willdistribute yourassets according totheir rules

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problems make it extremely important for you to ensurethat you have an up-to-date will.


1. One of my sons should have an opportunity to buythe farm but I am not ready to sell it to him yet.What should I do?

Hopefully you will have an opportunity to complete thistransaction during your lifetime but to guard against thepossibility that you don’t, make sure your will instructsyour executors to offer the farm to your son. Inconsidering this possibility, keep the following points inmind:

n your farming child probably shouldn't be one ofyour executors, or shouldn't be the only one, so asto avoid a potential conflict of interest

n you should specify the sale price, or state how it isto be determined (such as a percentage of fairmarket value)

n it is probable that if your son purchases the farm, hewill be treated for income tax purposes as havingacquired some or all of your farming property atyour “adjusted cost base” (eg. tax cost – seeGlossary), or at such higher values as yourexecutors select (see Chapter 7)

n if the estate is to take back a note for the unpaidpurchase price, you should also state the following:

• the interest rate that is to apply (this could be afixed rate, or a rate that is adjusted from time totime in relation to your bank's prime rate)

• the period over which the note is to be paid off

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2. I have made gifts to some of my children that Iwould like taken into account in dividing up theresidue of my estate. How do I do that?

You can use what is called a "hotch pot" clause thatinstructs your executors to take into account previousgifts. These gifts would be specified in the will so thatthere is no misunderstanding.

As an example, let’s assume the residue of your estateis $500,000; there are two children (John and Anne),and John has received a gift during your lifetime of$100,000. By including the hotch pot provision in thewill, John would receive $200,000 from the residue andAnne would receive the remaining $300,000. Thiswould be calculated as follows:

Residue $ 500,000Add gift subject to hotch pot 100,000Adjusted residue 600,000

Entitlement of each child 300,000Less gift already made to John (100,000)John’s share of the residue $ 200,000

Anne’s share of the residue $ 300,000

3. If at the time of my death I still own the farm, Iwould like my executors to sell the property to myson and to arrange the transfer so that my wifecontinues to be able to live in our home until shedies. How can I do this?

This can be achieved by arranging for your executors totransfer a "life interest" in the home to your wife, if shesurvives you.

4. One of our children has received a loan from uswhich we would like to have settled on our death.

You can provide in your will that on the death of thesurvivor of you, the loan owing by your child is

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bequeathed to him or her. This would be a "specificbequest" that would have the effect of cancelling thedebt. If you want this specific bequest taken intoaccount in the distribution of the residue of your estate,you can do this through the "hotch pot" clause referredto in the answer to question 2 above.

5. My husband and I own a parcel of land which is notused in our farming business. We plan to bequeaththis property to one of our non-farming children.Any problems here?

There may be. As discussed in Chapter 7, capitalproperty such as land that is transferred to a child onyour death is treated for income tax purposes as havingbeen sold to that child at fair market value (exceptwhere the farm "rollover" rules apply). Tax that iscreated on this deemed sale at fair market value isnormally payable out of the residue of your estate.

Look at your will and see who receives the residue ofyour estate. If all of your children share in the residue,and there is no provision in your will dealing with thetax liability on this land, it means that the tax associatedwith this specific bequest will be shared by all yourchildren. If you decide this is inappropriate, you mightwant to state in your will that the child who is to receivethis non-farming property should be responsible for anyincome tax relating thereto.

6. My wife and I want to provide in our wills thatshould we die while our children are minors, ourproperty is to be held in trust until they becomeadults. Moreover, if they should die beforebecoming adults, their share is to be inherited bytheir brothers and sisters. Is that a problem?

It can be. The potential problem here is that there is a“rollover” for income tax purposes on certain farmingproperty passing to children (see Chapter 7) but,generally, it applies only where the property vestsindefeasibly (see Glossary) in the children within 36

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months of death. If one of your children was say, aged10 at the date of death of the survivor of you and yourwife, and your will stated that this child isn’t to inheritanything unless he or she becomes an adult, this child’sshare of the estate would not vest for approximatelyeight years. Because this time period exceeds 36months, there may not be a “rollover” for propertypassing to that child.

There is no problem in stating in your will that if any ofyour children are minors, their share of the estate mustbe held in trust until they become adults. But, if thechildren are very young, and you want to ensure thatthere is a “rollover” for income tax purposes, you needto go on to state that if the child dies before becomingan adult, the inheritance falls into the deceased child’sestate and does not pass to the brothers and sisters.

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3. Significance of Ownership andBusiness Arrangements

IntroductionThe manner in which you hold your property can have asignificant impact on your estate plan. Your land, forinstance, might be:

n owned outright, or

n co-owned –• as a joint tenant, or• as a tenant in common

These alternate forms of ownership can affect your abilityto deal with your land through your will.

Your business might be carried on by a proprietorship,partnership or company. These different arrangements canhave a substantial impact on the manner in which youoperate your business, the income taxes that you will payduring your lifetime and the form in which your childrenwill receive their inheritance after your death. Beforechanging any of these business arrangements you shouldobtain advice from your accountant and solicitor in order toavoid potential tax and legal problems.

Property Ownership

Joint Tenancy and Tenancy in Common

A joint tenancy is an arrangement under which two or morepersons own a percentage interest in property. Thecharacteristic that distinguishes it from other forms of co-ownership is the inability of the joint tenant to dispose ofhis or her interest in the property through their will unless

Joint tenants holdundivided interests

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the joint tenancy is severed before death. On death, thejoint tenant’s interest automatically passes to the otherjoint tenants.

During the co-owner’s lifetime, the joint tenancyarrangement can always be severed and the property can betransferred to strangers, family or to the other joint tenants,in the same manner as other interests in property. It is onlyon death that the special survivorship characteristic comesinto effect.

A husband and wife will often hold property as jointtenants because they intend that their respective interestsshall pass to the survivor of them on their deaths.However, business partners will generally not hold theirproperty interests in this manner because they will want tocontrol the distribution of their property after their death.

A tenancy in common is also an arrangement under whichtwo or more persons hold an undivided interest in property.As with a joint tenancy, each co-owner has an equal right topossession of the property because the property has notbeen divided in a specific way. Unlike a joint tenancy,however, the ownership interest of a co-owner under atenancy in common need not be equal to that of his co-owners. For instance, a tenant in common could hold a90% interest in a particular property and his co-ownerscould hold the remaining 10%.

An individual owning an interest in a property as a tenantin common is able to dispose of that interest just like anyother property. When the individual dies, the interest in theproperty does not pass to the co-owners on the death of thetenant. Instead, it falls into the tenant’s estate and isdisposed of in accordance with his or her will.

Land owned by a partnership will usually be registeredjointly in the names of the partners. In most cases, it willbe held in the form of a tenancy in common and not a jointtenancy.

Tenants in commonalso hold undividedinterests but thereare differences

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If you own a property outright and transfer an interest toanother person so that you then hold the property as a co-owner, or if you transfer part or all of your co-ownershipinterest to another person, you may be treated as havingdisposed of the property. If so, the property will generallybe deemed to have been sold at fair market value unlessone of the rollover rules apply (see Chapter 5). There mayalso be GST consequences; and a liability for propertytransfer tax, if the property is land.

Keep in mind that even though property held in a jointtenancy passes automatically to the surviving joint tenantson your death, there is still a deemed disposition for incometax purposes, which could result in a tax liability (seeChapter 7).

Transferring property into a joint tenancy arrangement witha child is sometimes recommended as a way of avoidingprobate fees. This can be an expensive solution, however.Not only do you have a potential income tax liability (seeabove), but there can be other problems as well:

n the property will become subject to your child’screditors

n if your child is married and later becomes divorced, theproperty may have to be split between you, your childand his or her spouse

n if the property is your principal residence, one half ofthe principal residence exemption for years after thetransfer will be lost if you continue to live in theproperty

n your child’s consent will be required if you want tomortgage or sell the property

n the B.C. Property Transfer Tax may apply if theproperty is land which does not qualify as farm land.GST may be an issue as well.

Get some tax advicebefore changing theregistration of yourproperty

Joint tenancyarrangements can bean expensive way ofavoiding probate fees


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Legal and Beneficial Interests

In some circumstances, the legal owner of a property willnot also be the beneficial owner. The legal owner is theperson in whose name the property is registered whereasthe beneficial owner is the person who is entitled to theincome arising from the property as well as the proceedsfrom its ultimate sale. In a partnership situation, forinstance, the individual partners will likely be the legalowners of the land but the beneficial owner (for income taxpurposes, at least) will usually be the partnership itself.

Keep in mind that income tax must be considered wheneverthere is a change in the beneficial owner. Where theproperty is land, the B.C. property transfer tax must beconsidered whenever there is a change in the legal owner.

Business Arrangements

Sole Proprietorships

If you are a sole proprietor you will usually own all of yourfarming assets directly, or jointly with your spouse, andwill be able to transfer them during your lifetime or throughyour will. In some situations, the farm is co-owned in ajoint tenancy arrangement and will pass automatically toyour spouse on your death.

Generally, all of a proprietor’s assets will be at risk if aliability is incurred in the course of carrying on the farmingbusiness. This should be contrasted with the limitedliability that can be obtained through a company.

The transfer of a sole proprietorship to the next generationcan be time-consuming and cumbersome because eachasset will have to be identified and dealt with. However,for many farmers, the simplicity and flexibility the soleproprietorship offers during their lifetime more thancompensates for this problem. Moreover, direct ownership

The legal andbeneficial ownerscan be different

A simple andflexiblearrangement

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of the farm is more in keeping with their emotionalattachment to the land.

A sole proprietorship allows you to operate your businessin a reasonably tax-effective manner. This is important,because the minimization of tax is an integral part of anyestate plan. Admittedly, as a sole proprietor in BritishColumbia, you are subject to tax on your farm profits atmarginal rates which vary from nil to approximately 50%;however, there are a number of offsetting advantages. Ifyou have a capital gain when you sell your farm, you maybe able to claim the capital gains deduction. You can claimthe principal residence exemption on the sale of your homeand you may be able to offset your farming losses againstyour off-farm income. You can also offset business orproperty losses against farming income.

The sole proprietorship gives you considerable flexibility intransferring your farming assets to your children in a tax-effective manner. There are also extensive “rollovers” forfarm property transferred to your spouse or to a trust foryour spouse, and for property transferred from that trust toyour children. These are discussed in Chapters 5 and 7.

Partnerships

If you are a partner in a farming partnership, you are in adifferent position than a sole proprietor. Even thoughcertain assets used in the business, such as land, may beregistered jointly in the name of you and your partners, andit will be necessary to remove your name when you die ordispose of your interest in the partnership, the Income TaxAct may not consider you to be the owner of theseindividual assets. Rather, depending on the circumstances,the partnership itself may be considered to own them.What you are looked upon as owning is an interest in thepartnership itself which, in some respects, is not unlikeshares that you might own in a company. When you die,you are treated as having disposed of this partnershipinterest but not your interest in the individual assets.


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So, for income tax purposes, at least, the partnership istreated as being an entity that is separate from you as apartner. The partnership itself doesn't pay any incometaxes because all of its income is allocated to its partners.

If you enter into a partnership you should remember thatyou become jointly and severally liable for all of thepartnership’s debts. Accordingly, you should choose yourbusiness partners carefully.

Again, there is generally no limitation on your exposure toliabilities that are incurred in carrying on your business.This limitation may exist if you carry on business through acompany.

In terms of your ongoing exposure to income tax, thepartner in a farm partnership is in much the same positionas the sole proprietor.

Because a partnership is treated for tax purposes as beingan entity that is separate from its partners, care must betaken in transferring assets to a partnership or receivingassets from it. Generally, these transfers are deemed totake place at fair market value unless special elections arefiled with Canada Customs and Revenue Agency (formerlyRevenue Canada) within a prescribed time limit.

If you are a partner in a farming partnership, you haveconsiderable flexibility in transferring your interest to yourchildren and your spouse in a tax-effective manner. This isdiscussed in Chapters 5 and 7. You have an even greaterability than the sole proprietor to take advantage of thecapital gains deduction. This is discussed in Chapter 9.

Joint Ventures

Occasionally farmers will participate in a business withother individuals or companies and will describe thearrangement as being a joint venture rather than apartnership because there is a sharing of particular revenuesand expenses rather than the final net profit or loss. In

A partnership isconsidered to be aseparate entity forincome taxpurposes…but thepartners still paythe tax.

Be careful aboutputting assets intoor taking assetsout of partnerships

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some situations this can be advantageous in that certainrestrictive income tax rules applying only to partnershipsare avoided.

The question of whether a joint venture is a form ofpartnership has not been answered with certainty although,generally speaking, if taxpayers say they are carrying onbusiness as a joint venture and not as a partnership, CanadaCustoms and Revenue Agency will not usually challengetheir tax returns. Because there is this uncertainty withjoint ventures, and arrangements between persons whocarry on a farming business together are normally based ona sharing of net profits, joint ventures are not used veryoften in B.C.

You could participate in a joint venture as an individual orthrough a limited company. If you were to participatedirectly, and wanted to transfer your interest to your spouseor children, you would be considered as having transferredyour interest in the joint venture’s individual assets.

Companies

Companies (or corporations, as they are sometimes referredto) are treated under corporate and income tax law as beingentities which are separate and distinct from theirshareholders. If you transfer your shares in a company toyour spouse or child, you need only amend the company’sshare records. Therefore, the transfer is extremely easy.The company can provide continuity for the farmingoperation. The company might be passed from onegeneration to the next but the operation of the farm willcontinue unaffected.

A company can limit your exposure to liabilities that arisein the course of carrying on the farming business.Depending on the circumstances, a creditor may only haveaccess to the assets inside the company and not to assetsthat you own personally.


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If you incorporate your farm you will have to pay moreattention to the proper segregation of your personal andbusiness funds. Because the company is a separate entityfor tax purposes and there are rules in the Income Tax Actthat restrict it from making loans or advances to itsshareholders, there will have to be a careful accounting ofyour draws and personal expenses, and these amounts willhave to be repaid or covered off by the payment of a salaryor dividend.

Effective January 1, 2001, most farm companies in B.C.will be taxed at approximately 18% on the first $200,000 oftaxable farm income each year. This rate can be muchlower than the rate applying to an unincorporated farm. Ofcourse, there is a second level of tax when the companydistributes its after-tax profits to its shareholders, but thistax isn’t paid until a distribution is actually made.

You need to remember that a company is not able to claimthe capital gains deduction with respect to the gains arisingfrom the sale of its assets. However, you, as shareholder,are sometimes able to take advantage of the deduction byselling shares of your company. A sale of shares isrelatively easy to arrange if the farm is being transferred toyour child but is sometimes more difficult if you are sellingto a third party.

As a shareholder of a farm company, you have considerableflexibility in distributing your share interest to yourchildren or spouse on a tax-deferred basis. This isdiscussed in Chapters 5 and 7.

TrustsFarmers do not often use a trust arrangement because theyprefer to keep their affairs uncomplicated and passabsolute ownership of their farm to their spouse orchildren. There will be situations, however, where a farmerdecides to transfer the farm to his or her children (eitherduring his or her lifetime or upon death), but wants to

A company is aseparate entity forincome tax andother purposes

The companyitself cannot claimthe capital gainsdeduction

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ensure that the income from the farm is paid to the spouseduring the remainder of his or her life. This can beachieved by establishing a spouse trust. The effect of thetrust will be that the children will not acquire ownership ofthe farm until after the death of the surviving spouse. Atthe same time, the spouse will not be able to dispose of thefarm in his or her lifetime or in his or her will, and thechildren cannot be cut out of the farmer’s estate if thespouse should remarry after the farmer's death.

You may want to consider the use of a trust in the eventthat you should die unexpectedly and property should passfrom your estate to a beneficiary who is not yet an adult.

Property passing to a trust becomes the property of thetrustee(s). The terms of the trust agreement will determinethe manner in which the trustees are able to deal with it.The person you might appoint as a trustee will depend onyour personal circumstances. Quite often individuals willappoint one or two of their children and, perhaps, thesurviving spouse as well.

Certain types of trusts are deemed to dispose of their capitalassets every twenty-one years. This rule does not apply toa qualifying spouse trust (see Glossary).

A trust created through a will (called a testamentary trust)will generally pay tax on its income at the marginal ratesapplying to individuals. A trust created by an individualduring his or her lifetime (called an inter-vivos trust) willgenerally pay tax at a flat rate of approximately 50%.

Traditionally, individuals use a will to distribute assetswhich they own at death. If they do this, they have toaccept that the Province of B.C. will levy a probate fee(currently 1.4% for estates in excess of $50,000), and thereis the possibility that a spouse or child could apply to theCourt to have the will varied under the Wills Variation Act(see Chapter 2).

Consider a spousetrust to protect theinterests of yourchildren

Trusts have to filetax returns

Trusts aresometimes usedas substitutes forwills


35

As a result of these problems, some individuals havetransferred assets to a trust during their lifetime (an inter-vivos trust) so that on their death the property passesdirectly to the persons named in the trust document anddoes not fall into the individuals’ estates. The problemwith this type of planning has always been that, for incometax purposes, a transfer of property to a non-spousal trustusually results in a deemed sale of that property at fairmarket value. This can result in a significant tax liability.

As a result of proposed changes to the Income Tax Act, thistype of planning will be easier to carry out for individualsaged 65 or over. It will be possible, for example, totransfer property to a trust for the benefit of your children,while retaining the income from the property during thelifetime of you and your spouse, without incurring a tax atthe time the arrangement is set up.

While these new trust arrangements (sometimes referred toas alter-ego and joint partner trusts) will be useful in somecircumstances, it appears from the draft legislation theymay not incorporate the special “rollover” that is availablefor income tax purposes when farming assets aretransferred to a spouse trust and then to the children (seeChapter 7 – Bequests to Children Through Spouse Trusts).Because of this, these new arrangements may not beappropriate for most farm families.


1. Some of my assets are owned jointly with my wife.Do we have a partnership?

Not necessarily. In order for there to be a partnershipbetween you and your wife there has to be more thanthe co-ownership of property. There has to be anintention to create a business relationship. You andyour wife do not have to be involved to the samedegree, but her contribution should stem from her

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desire to carry on business with you rather than fromyour marital relationship. The best evidence of ahusband/wife partnership is a partnership agreement.

2. My wife and I file our income tax returns on thebasis we carry on business as a partnership but notall of our assets are owned jointly. Do we have aproblem?

This will depend on the circumstances; however, itcertainly is a matter that you should discuss with youraccountant. It is important to determine whether apartnership exists, whether your assets are owned bythe partnership, or by both of you as partners or by onlyone of you. It can have a significant impact on theincome tax that might be payable when you sell them.

3. Will a company help me transfer our farm to ourchild?

That depends on a number of factors including thevalue of your farm, the amount of your accrued gainand the number of children. Companies can be usefulwhere:

n the accrued gain on your farm is considerably inexcess of your available capital gains deduction (seeChapter 9); or

n your farm is very profitable; or

n you have several non-farming children

The use of companies is discussed in Chapter 11.

4. When my wife and I die, there will be an unequaldivision of our estate. How can we minimize thepossibility of one of our children challenging ourwill?

Clearly this is a matter you should discuss with yourlawyer. One possibility you may want to discuss withthat person is to hold some of the property in a joint


37

tenancy arrangement with the intended beneficiary.When you die, this property would pass directly to thesurviving joint tenant, without passing through yourestate and, therefore, the transfer could not bechallenged by any other beneficiary. You would needto receive advice on the tax or other implications ofarranging for your beneficiary to acquire a joint tenancyinterest in your assets.

5. My wife and I would like to bring our son into ourpartnership but we want to do this so that, for thetime being, he doesn't share in any of the existingvalue. In other words, we want him to share only inthe future profits and future increases in value. Canwe do this?

Yes you can, by making sure that your partnershipagreement sets out clearly each partner's entitlement.

Remember that when you bring a child into apartnership, particularly one where the rights of thepartners are not equal, you will almost certainly have tochange to a "double-entry" bookkeeping system. Undera "double entry" system you will keep track not only ofyour income and expenses but also your assets,liabilities and partner equity accounts. This system willenable you to determine at any point in time the equitythat your child has accumulated in the farm, comparedto your own. This may not involve much additionalwork on your part but it will increase your accountingcosts.

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4. Selling the Farm to a Person OtherThan a Spouse or Child

IntroductionThe sale of your farm during your lifetime will be one ofthe key issues in your estate plan. If your circumstancesare such that you must sell to a person other than a spouseor child, your main objectives will be to:

n maximize the sale price

n pay the least amount of tax

There are many issues to take into account in an arm’slength sale that cannot be dealt with in a publication of thisnature. The critical issue is to ensure that you obtain advicebefore you enter into the transaction. Depending on yourcircumstances, this advice should, perhaps, be obtained oneor two years before the transaction occurs. Certainly, itshould be obtained before you sign any agreements.

The existence of the capital gains deduction will be asignificant benefit in most arm’s length sales. Thisimportant tax concession is discussed in Chapter 9.

What are the Income Tax Rules?

Capital Property

The tax arising on the sale of farm property will depend onthe nature of the asset. If the property is a capital assetsuch as land, buildings, equipment, shares in a farmcompany or an interest in a farm partnership, there will be acapital gain to the extent that the sale proceeds exceed thetotal of the “adjusted cost base” of the property (seeGlossary) and the costs of disposition. A portion of this

At some point, thefarm will changehands – these willbe key elements ofyour overall plan

Get expert advicebefore the sale

Two-thirds of gainson capital propertyare subject to tax

Selling the Farm to a Person Other Than a Spouse or Child

39

gain (called the taxable capital gain) is included in yourincome. For sales prior to February 28, 2000, the taxableportion was three-quarters. For sales in the period February28, 2000 to October 17, 2000, the taxable percentage is tobe reduced to 66 2/3% and for sales subsequent to October17, 2000 it is to be reduced to 50%. There are additionalrules applying to the 2000 taxation year if a taxpayer hasgains or losses in 2000 that have different taxable portions.

A portion of your quota gains will also be treated as ataxable capital gain (see below). This taxable gain,together with the taxable portion of gains from the otherproperties referred to above, are usually eligible for thelifetime capital gains deduction (see Chapter 9).

Buildings, Machinery and Equipment

As discussed under the heading "Capital Property" (seeabove), the buildings, machinery and equipment that youuse in your business are called capital properties.Generally, if you sell these assets for an amount thatexceeds their adjusted cost base (eg. tax cost – seeGlossary), the excess is treated as a capital gain.

This type of asset is also referred to as depreciable propertybecause it can be depreciated or written off for income taxpurposes. This tax depreciation is referred to as capital costallowance.

The depreciable properties that you acquired after 1971 aredepreciated on a reducing balance basis. The rate that isused depends on the tax class that applies to the particularasset.

The depreciable properties acquired before 1972 aregenerally depreciated on the straight line basis.

If you sell buildings, machinery or equipment depreciatedon the reducing balance basis, the depreciation claimed inprevious years can be included in your income in the yearof sale (i.e. “recaptured”) if the sale proceeds exceeds your

Some of your previousclaims for capital costallowances can berecaptured

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undepreciated capital cost (eg. depreciated value – seeGlossary). If the asset was acquired before 1972 anddepreciated for income tax purposes on the straight-linebasis there is no recapture of prior years’ depreciation.

Where the sale proceeds of property depreciated on thereducing balance basis in a particular tax class are less thanthe undepreciated capital cost of the property, and you haveno other property of that class, the excess will sometimesbe deductible from your income as a “terminal loss”.

Quota

As mentioned above, a portion of the gain on the sale ofyour quota is treated as a taxable capital gain that is usuallyeligible for the capital gains deduction. Unfortunately, thequota rules are complicated, particularly since thegovernment proposed in its 2000 federal budget that thecapital gains inclusion rate be reduced from three-quartersto two-thirds, and in the October 18, 2000 mini-budget itproposed a further reduction from two-thirds to one-half. Ifyou are proposing to sell quota you should obtain advicefrom your accountant beforehand as to the taxconsequences. In general terms, the result will be asfollows:

a) you will have to include as ordinary income an amountequal to your previous quota write-offs. This will notbe eligible for the capital gains deduction;

b) there will be a capital gain (three-quarters, two-thirds orone-half of which will be taxed) to the extent yourproceeds exceed the total of the cost of quota acquiredsubsequent to 1971 and the value of quota owned at theend of 1971. The taxable portion of this gain willusually be eligible for the capital gains deduction.

Livestock and Other Inventories

If the property is livestock or feed and you use the accrualbasis of accounting for tax purposes, the sale proceeds willbe included in your income in the year of sale whether or

Quota gains can beeligible for thelifetime capital gainsdeduction


41

not you receive the full sale proceeds in that year. If youuse the cash basis of accounting for tax purposes, you haveto report as income in the year of sale only the actualproceeds you receive during the year, even though theentire inventory may be sold. Proceeds not reported in theyear of sale are reported in the year they are actuallyreceived.

What Happens if You Are Not “Cashed Out”?

If you sell your farm but are not “cashed” out at the time ofsale, you may claim a reserve in respect of the unpaid saleprice in computing the capital gain on assets such as land,buildings, shares of farm companies, and partnershipinterests, but not quota. The effect of this reserve will be tospread your gain over two or more years and, perhaps,reduce your overall tax liability. Unfortunately, the reservecannot be claimed for a period of greater than five years(ten years, in some circumstances, if the transferredproperty is sold to a child).

Planning the Sale

You may want to consider selling your farm before the yearin which you reach the age of 65 so as to avoid (or reduceto the extent possible) the clawback of your Old AgeSecurity payments (OAS - see Chapter 10). You shouldn’tfocus on this item alone, however. You need to rememberthat if you accelerate the reporting of your farm gains so asto avoid a recapture of your OAS you may become subjectto the alternative minimum tax (see Chapter 9).

The most important point to remember is to seekprofessional advice well in advance of the proposed saledate.

Purchase of a Replacement Farm

Upon retirement, you may want to sell the family farm andbuy a scaled-down operation to keep you busy during yourretirement years.

The taxation oflivestock proceedsdepends onwhether you followthe accrual or cashbasis of accounting

You can reduceyour gain if you arenot “cashed out”

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Depending on your circumstances, it may be possible todefer some of the tax arising on the sale of the original farmby taking advantage of the replacement property rules inthe Income Tax Act.

What Security Do You Receive?If you sell your farm and take back debt on the transaction,you can structure the arrangement as an agreement for saleor secure the amount owing to you by having the purchasergrant a mortgage. If the contract is structured as anagreement for sale, title to the property remains with youuntil the debt is repaid. If a mortgage is used, title passes tothe purchaser and you take back the mortgage as evidenceof the debt. If there is a default under the agreement forsale or mortgage, you have the right to commence courtaction for the cancellation of the agreement for sale or forforeclosure under the mortgage.


1. I am a sole proprietor and I am thinking aboutselling my farm to my neighbour. What factors canaffect the income tax I will pay?

The income tax issues that you need to consider are toodetailed for a publication of this nature but they willinclude the following:

n allocating the sale price between your assets so thatyou:

(a) maximize your principal residence exemption;

(b) reduce your recaptured depreciation; and

(c) maximize the capital gains deduction you andyour spouse can claim (see Chapter 9).

You may be able toreduce your tax ifyou buy areplacement farm

Mortgage oragreement for sale


43

n allocating the cash that you receive between theassets that are sold so that you maximize yourability to defer income tax

n choosing an appropriate sale date to defer themaximum amount of tax

n considering what other steps can be taken to spreadthe income from the sale over two or more years soas to reduce income tax

n considering the payment of retiring allowances toyour spouse and other members of the family whohave been employed on the farm

n considering the merits of acquiring a replacementfarm

2. My farm is carried on by a company. What issuesdo I need to consider before selling to myneighbour?

Again, a detailed review of this matter is beyond thescope of this publication, but the issues that should beconsidered would include the following:

n assessing the merits of selling shares rather thanassets

n determining a range of values at which your sharesmight be sold so that on an after-tax basis, youwould be in an equal or better position than sellingassets

n considering the availability of the capital gainsdeduction on a share sale and how your claim mightbe maximized (see Chapter 9)

n if there is, or should be, a share sale, consideringhow to remove assets that you want to retain

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n considering the payment of a retiring allowance tomembers of the family who have been employed inthe business

Transferring the Farm to Your Child During Your Lifetime

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5. Transferring the Farm to YourChild During Your Lifetime

IntroductionAt some point in your lifetime, you will want to give upbeing a full-time farmer. When that time arrives, you willneed to have created a pool of retirement capital that willenable you to live comfortably for the rest of your life andprovide an inheritance for your children. You are not goingto be able to do this unless you sell some or all of your farmproperty.

If you sell your farm to an unrelated person, the issues youneed to think about are summarized in Chapter 4. If,however, you sell to a child, the issues are usually quitedifferent. Here, you don’t necessarily want to receive the“full price”, although you do want to receive a “fair one”.You have to think about your child’s ability to pay the priceyou are looking for and, most important, you have to besatisfied that the overall arrangement enables you to dealfairly with all of your children.

Fortunately, there are some special rules in the Income TaxAct that enable you to transfer most of your farm propertyto a child at less than fair market value. If these specialrules didn’t exist, you would be taxed as though youreceived fair market value for any assets you transfer to achild. If this happened, the costs of transferring a farm tothe next generation would increase dramatically.

If you are going to transfer your farm to your child, thereare a great many issues to think about. Review thecommentary in this Chapter (and, perhaps, Chapter 8dealing with non-farming children) and then review theexamples discussed in Appendix 1.

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How Do You Decide What Form the Transfer Will Take?As mentioned in Chapter 1, there are some basic issues thathave to be decided early in the process. These include thefollowing:

n Is there only one child who is interested in the farm?

n If there is more than one child, will the farm support theextra families?

n Do you want to transfer only a portion of the farm atthis time?

n Do you want an interim arrangement such as forming apartnership with your child?

n Will you need to move off the farm?

n What are your financial needs in terms of up-frontcapital payments, and payments to meet your ongoingliving needs?

These issues can be difficult enough. But if you combinethem with the tax issues, and the troublesome question ofhow to be fair to all of your children, the process oftenseems overwhelming.

Because of this, it is important to take the process one stepat a time and not to become too involved in the details earlyin the planning. As recommended in Chapter 1, make useof the Estate Planning Checklist. It sets out eight steps inthe family farm transfer process and discusses the first fourin some detail.

Grooming Your Successor(s)In transferring the farm to your children, you need to domore than address the “mechanics” of the transfer. Youalso need to take the time to prepare your child to take overthe business. If you don’t do this, its quite possible yourfarm will be poorly managed. This will obviously impact


47

the financial well-being of your successor(s) but it canaffect you as well because it is very likely, to some extentat least, that your financial security will be dependent onthe success of the farm.

There is a discussion of this subject in a publication issuedby the Canadian Farm Business Management Councilentitled “Managing the Multi-Generational Family Farm”.Essentially, the authors talk about the value of thefollowing strategy:

n providing for off-farm education and on-farmmentoring

n developing a step by step process that will enable yoursuccessor(s) to learn and, ultimately, manage all aspectsof the business. This includes providing opportunitiesto manage labour, solve personnel problems,understand financial information and make purchasingdecisions

What Are Some of the Key Issues in the TransferArrangements?

If there will be bank financing (which is sometimes thecase so that you can receive a down payment), the overallarrangement has to be bankable.

A “bankable” arrangement is one which your child can taketo his or her bank and get the financing that is necessary.The arrangement with you has to be such that (a) the bankwill have adequate security, and (b) your child will be ableto make payments to the bank and still have enough moneyleft over to meet personal needs and look after thecontinuing improvements to the farm.

What is “bankable” depends to some extent on the assetsyou are selling. If, initially, you decide to sell only youroperating assets, the bank will not be able to secure theirloan with a mortgage. This may mean the bank’s lending

If there will be bankfinancing, thearrangement has tobe “bankable”

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limit will be lower (which means you will receive a lowerdown payment) and your child will have to pay off the loanat a faster rate. Of course, if you retained ownership of theland, you could guarantee your child’s bank debt andprovide the bank with a collateral mortgage as security foryour guarantee. This should allow your child to obtain thefinancing on more favourable terms but, because your farmwould then be at risk, you would want to consider thiscarefully.

The down payment that you receive will have to besufficient to enable you to make the transition to retirement.This transition may include moving from the main farmand building a new home. Make sure that you have thecapital to do this sort of thing.

Where you are not cashed out (which is usually the case),you will usually take back an agreement for sale or amortgage that will set out the repayment terms and theinterest that will apply. You will have to take into accountthe ability of the farm to generate the payments that areprovided for in the agreement. If your child will havedifficulty in making the debt repayments, you may decideto accept a low interest rate or may even agree to charge nointerest in the first few years of the agreement. Quite often,there will be an acceleration clause that will require theagreement for sale or mortgage to be repaid if your childsells the property. This is particularly important if thereis a low interest rate, or the outstanding balance is notsecured very well.

If you sell only the operating assets, or the arrangement issubstantially funded by your child’s banker, it is unlikelyyou will be able to structure the deal as an agreement forsale or obtain a mortgage. Any debt owed to you willlikely be evidenced by a promissory note. However, evenin these circumstances, you can obtain security byarranging for a General Security Agreement to be preparedand for notification of this security interest to be registered

Pay-out should beaccelerated if yourchild sells the farm

Make sure thedown-paymentis sufficient


49

in the provincial registry. You should ask your lawyer toadvise you on these matters.

If you sell property to a child at less than fair market value,you are likely to do so on the understanding that he or shewill farm the property for a reasonable period of time. Ifthere is any concern this might not happen, you may wantto discuss with your lawyer the provisions that might beincluded in your overall plan to deal with the matter.

One of the concerns that always arises in a sale to a child is“What happens if his or her marriage fails?” Will yourson- or daughter-in-law end up taking a substantial portionof your farm – perhaps even more than your own non-farming children? There is no ready answer to thisconcern. Perhaps you should defer the sale of your farmuntil you have had an opportunity to see how your child’smarriage will work. If you are going to sell the farm instages (operating assets first, real property later), perhapsyou should make the initial sale at a high value so that yourchild’s equity is relatively small. You have to recognize,however, that this may result in a significant tax liability.

If you sell to your farming child at substantially less thanfair market value, it might be possible for you to includewording in the legal documents making it clear that this is agift you want to confer on him or her alone. This mayinfluence a court in deciding how the property should besplit between your child and his or her spouse if theirmarriage should fail. However, since this is not likely toimprove your relationship with your son- or daughter-in-law you may be very reluctant to consider this possibility.

This is another of the key concerns when a farm istransferred to the next generation. If you have non-farmingchildren, their inheritance may not be equal to that of yourfarming child but, hopefully, the overall arrangement willbe equitable. The steps you can take to achieve anequitable arrangement are described in Chapter 8.

Will there be aproblem withyour in-laws?

Will thearrangement allowyou to deal fairlywith your otherchildren?

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Special Income Tax Rules Applying to a Sale to a Child(the “Rollover Rules”)

Every farm in Canada has an accrued income tax liability.This liability represents the tax that will be paid at somepoint in the future on the difference between the cost of theassets for income tax purposes and their fair market value.For farms that have been transferred within a family fortwo or more generations, this liability can be huge. In mostsituations, this accrued income tax liability has to be dealtwith when the business is sold. This is particularly truewhere the sale is to a stranger.

To make sure the government collects all the tax on theaccrued gains, there is a rule in the Income Tax Act that, inmost cases, deems a parent to receive fair market valuewhenever property is sold to a related person such as achild. This means that if a parent were to sell a property toa child at less than fair market value, he or she wouldgenerally be treated as having received fair market valueand would be taxed accordingly.

Fortunately, as a farmer, this fair market value rule doesn’tapply to the majority of your assets. As discussed below,you have the ability to sell certain of your assets to a childat less than fair market value, and only be taxed based onwhat you receive.

The rules that deal with this special tax concession areoften referred to as the “rollover rules”. The reason theyhave been given this name is that they provide you theopportunity of “rolling over” an asset to your child withoutpaying tax on all of the accrued gain.

You can arrange for a “complete rollover” to a child byselling the property at your cost or by gifting it (seeChapter 6 for a commentary on gifts). In this situation, allof your accrued income tax liability would be deferred tothe next generation.

The accruedincome tax liabilitycan be huge

The fair marketvalue rule thatapplies to mosttaxpayers

The “rolloverrules” that apply tocertain farmproperty


51

As an alternative, you can arrange for a “partial rollover” ofyour property to a child by selling it at a value betweenyour cost and fair market value. In this situation, only aportion of your accrued income tax liability would bedeferred to the next generation.

Very often it makes sense for you to sell certain property toa child at a value between cost and fair market value so thatyou can use your capital gains deduction (see Chapter 9 fordetails). Let’s assume, for example, that you own land thathas an adjusted cost base (eg. cost for tax purposes – seeGlossary) of $200,000 and a current fair market value of$500,000. Let’s assume also that you have already used$400,000 of your capital gains deduction and have only$100,000 available to you for this transaction.

If the “rollover rules” weren’t available, then irrespectiveof whether you gifted the land to your child, or sold at lessthan fair market value, you would be treated as havingreceived $500,000. On that basis, you would realize acapital gain of $300,000 and could only shelter $100,000with your capital gains deduction.

If, however, the land was eligible for the “rollover rules”,you could sell it for $300,000 and only realize a capitalgain of $100,000 which would be fully offset by the capitalgains deduction. If you took this approach, the remaining$200,000 capital gain would be deferred to the nextgeneration.

Clearly, the fact that you have the ability to use your capitalgains deduction when you sell your farm to your childdoesn’t mean that the “rollover rules” are no longerimportant. The reasons for this are as follows:

1. The “rollover rules” enable you to avoid recaptureddepreciation on buildings and equipment by allowingyou to transfer this type of property at its undepreciatedcapital cost (see Glossary). You should remember thatthe capital gains deduction does not apply to recaptureddepreciation.

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2. The “rollover rules” enable you to avoid the recaptureof write-offs previously claimed on your quotaexpenditures.

3. As discussed above, the capital gains deductionavailable to you may not be sufficient to fully offset thetaxable portion of the accrued capital gains on yourassets.

In looking at the “rollover rules” you should keep in mindthe following:

n Only certain properties are eligible for “rollover” to achild (see below). The qualifying properties do notinclude livestock.

n The child must be resident in Canada immediatelybefore the transfer.

n The term “child” includes a grandchild, great-grandchild, daughter-in-law, son-in-law and certainother persons.

The properties which are eligible for the “rollover” are asfollows:

n Land1

n Buildings, equipment etc. depreciated on the reducingbalance basis1

n Eligible capital properties (e.g. quota) 1

n Shares in a family farm corporation (See Glossary fordefinition)2

n Interest in a family farm partnership (See Glossary fordefinition) 2

Notes

1. The property must be owned by you directly and,before the transfer, it must have been used principally

Not all farm assetsare eligible for therollover


53

in the business of farming in which you, your spouse orany of your children were actively engaged on aregular and continuous basis. For this purpose,property that is leased to a family farm corporation or afamily farm partnership (see Glossary) is treated ashaving been used in farming.

2. Shares in a family farm corporation (as defined) andinterests in a family farm partnership (as defined) areeligible for rollover to a child. Note, however, thatterms similar to “family farm partnership” and “familyfarm corporation” are also used in connection with thecapital gains deduction rules (see Chapter 9), but thedefinitions are different. Conceivably, this could meanthat shares of a farm company will be eligible for thecapital gains deduction but not the rollover. The samecould be true for an interest in a family farmpartnership. This makes it important for youraccountant to continually monitor the status of yourbusiness.

Note that in determining whether land, buildings orequipment are eligible for "rollover", you don’t look tothe use of the property immediately before its sale.What you need to do is to determine whether during thetime you have owned the property, it has been usedprincipally (eg. mainly) in the business of farming in whichmembers of the family (see above) were actively engagedon a regular and continuous basis.

As an example, let's assume you have owned a parcel ofland for 15 years. You farmed the property for only fiveyears and have rented it to a person outside the family forten years. In this situation, the property may not be eligiblefor the "rollover", but, as mentioned in Chapter 9, it may beeligible for the capital gains deduction.

Canada Customs and Revenue Agency takes the view thatthe rollover rules do not apply to your principal residencelocated on the farm. However, the gain on the sale of theresidence will often be exempt from tax under the general

The rules arecomplicated andmust be examinedclosely

Rollover andyour principalresidence

The status of yourland depends onhow it has beenused in the past

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principal residence rules or will be taxed at a nominalamount because of the special rules applying to farmers’residences.

As mentioned previously, the "rollover rules" do not applyto livestock. They also do not apply to your feedinventories, supplies and depreciable property written offon the straight-line method.

Forgiving Debt After the Sale

If you sell property to your child and decide at a later timeto forgive a portion of the debt arising on the transaction,you need to obtain some advice on the application of theforgiveness of the debt rules in the Income Tax Act. Theserules can result in your child having to include a portion ofthe forgiveness in his or her income.

There will not be a problem if you, in effect, “forgive” adebt by bequeathing it to the child in your will. In thatsituation, the forgiveness of debt rules do not apply.

Keep the Tax Rules in Perspective

While the "rollover rules" described in this chapter can bevery useful there are situations where they can cause a lotof grief. Consider, for instance, the situation where yousell your farm to your son or daughter at considerablyless than fair market value and your child’s marriagegoes on the rocks. In effect, you would have made a giftto your son or daughter which may end up in the hands ofyour son-in-law or daughter-in-law. Consider also whatwould happen if your child runs into financialdifficulties - there is a possibility that some or all of yourgift would end up in the hands of one of your child’screditors. Finally, consider what would happen if yourchild were to decide to give up farming shortly after youtransfer the farm. You would likely want your gift backagain - but could you get it?

Certain assetscannot be sold atless than fair market

Always get advice if youare thinking aboutforgiving debts owed toyou by your children

Consider “forgiving”debts through your will

Don’t let your desireto avoid tax causeyou to do somethingyou might regret later.


55

Unfortunately, you may not be able to fully protect yourselffrom all of these potential problems. You should, however,be aware these problems may arise and you should judgenot only the timing of the transfer but also the conditionson which it is made.


1. I own land and buildings which are now beingfarmed by my son. The land cost me $100,000 andnow has a value of $250,000. The buildings havebeen depreciated to $30,000 and now have a fairmarket value of $150,000. I want to sell theproperty to my son without paying tax. What aremy options?

n Assuming your land qualifies for the $500,000capital gains deduction (see Chapter 9), you can sellit to your son at its fair market value of $250,000.The capital gain of $150,000 can be offset byclaiming the capital gains deduction. You wouldneed to check whether (a) the alternative minimumtax might apply (see Chapter 9); (b) whether therewould be any recapture of your social benefits (eg.Old Age Security); and (c) whether you can use thededuction without having to pay tax - see Chapter 9.

n Assuming your farm buildings qualify for thespecial "rollover rules" applying to children, youcould sell them to your son at their depreciatedvalue of $30,000. If you sell them for a value that ishigher than $30,000 some or all of the depreciationyou claimed in previous years would be“recaptured”. This recaptured depreciation wouldbe included in your income and would not beeligible for the capital gains deduction.

n In total therefore, depending on the circumstances,you could receive $280,000 for the land andbuildings without being subject to tax.

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n If you sold your property for $280,000 so as toavoid tax on recaptured depreciation, you would, ineffect, be making a considerable gift to your sonbecause you would be transferring property to himthat has a value of $400,000. The value of the giftwouldn’t be as high as $120,000 because your sonwould be inheriting the depreciated value of yourbuildings (only $30,000). Nevertheless, therewould be a gift and you would need to decide if oneshould be made at this time.

n You will need advice with respect to GST and thepossible application of the B.C. Property TransferTax.

2. Included in the assets I want to transfer to my son ismy livestock which has an estimated value of$150,000. What can I do?

Livestock cannot be “rolled” from a parent to a child.In other words, for tax purposes, it has to be sold at fairmarket value. However, if you are a cash basis farmer,you can defer tax on the sale by ensuring that the salesprice for the livestock is not paid at the time of sale.You would accept a note as evidence of the unpaidsales price and would include amounts in income onlyas the note is paid off.

If the note is unpaid at the time of your death, youcould bequeath it to your child. If that happens, you oryour estate will not pay tax on the livestock and yourchild will not get a deduction for it.

It's important in these arrangements to ensure you donot accept the note in satisfaction of the amount that isowed to you. The note must be issued only to evidencethe unpaid sales price.

If you do accept the note in satisfaction of the amountthat's owed to you, you will be treated for income taxpurposes as having received payment. You will then be


57

subject to tax on your livestock sale even though youwouldn't have put any cash in your pocket.

Another possibility that you might want to discuss withyour accountant is the “rollover” of your livestock to apartnership of you and your child.

3. My wife and I carry on business in partnership.Can we use the "rollover rules" to transfer ourindividual farm assets to our child?

Not immediately. Remember that a partnership istreated as an entity that is separate from the partners,much like a company is separate from its shareholders.You, as individuals, can use the "rollover rules" whenyou transfer qualifying assets to your children but yourpartnership can’t.

In this situation you have two options which you shoulddiscuss with your accountant. The first is to transferyour partnership interests to your son (in much thesame way as you would transfer the shares of acompany) and the second is to unwind your partnershipand then transfer individual assets.

Again, you will need advice on GST, the B.C. PropertyTransfer Tax, the income tax election that has to befiled on the unwinding of a partnership, the refundableminimum tax and the potential recapture of socialbenefits.

4. My wife and I carry on business in partnership andwant to transfer all of our assets to our son with theexception of one parcel of land which we would liketo retain. Our accountant tells us that all our farmassets are considered to be owned by the partnershipand not by us as individuals. What do we do?

One possibility would be to withdraw the land from thepartnership and to sell your remaining partnershipinterests to your son. The withdrawal of the land wouldbe treated as a sale by the partnership to you at fair

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market value. The capital gain arising from thistransaction may be eligible for the capital gainsdeduction.

Again, you would need advice on GST and the othernon-income tax matters referred to above.

5. I farmed my land and buildings for approximatelythirteen years but for the past ten years I haverented them to my neighbour. Does this propertyqualify for rollover to my son? Does it qualify forthe $500,000 capital gains deduction?

The answer at this time is probably yes to bothquestions although you should discuss the situationwith your accountant to confirm that conclusion.

While the property appears to qualify for the “rollover”rules now, it may not qualify in three or more years ifyou continue to rent it. At some point, its “principaluse” (measured over time) will change from farming torental and the requirements of the “rollover” rules willno longer be met.

6. My farming business is carried on by a company.Can I transfer my shares in that company to my sonon a "rollover" basis?

Provided the shares qualify for the "rollover" rules andyour son is resident in Canada, the answer is probablyyes. A key question will be whether or not at least 90%of the company’s assets consist of assets which havebeen used principally in the business of farming. Thatbusiness can be carried on by the company itself or bycertain members of your family. Note that it is notsimply the current use of the company’s assets that hasto be examined, but the principal use that has beenmade of them over all of the years they have beenowned by the company (or by certain members of thefamily).


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7. My farming business is carried on by a company,but the land and buildings are owned by mepersonally. Are the land and buildings eligible for"rollover" to my child?

Your land and buildings will be looked upon as havingbeen farmed by you during the period they are rented toyour farming company, so the answer to this question isprobably yes. It is important, however, that yourfarming company qualify as a family farm corporation(see Glossary). If, for any period of time, yourcompany doesn't qualify as a family farm corporation,you will be treated as not having farmed the propertyduring that period.

One situation where this issue needs to be examinedcarefully is a nursery operation. If land is madeavailable to a company that carries on a nurserybusiness, you will have to look at the operations of thecompany to see whether its assets are related to thefarming activities, or to the purchase of nursery stockfor resale. If more than 10% of the fair market value ofthe company’s assets represents property usedprimarily in the purchasing and retail activities, thecompany may not be a family farm corporation. If thatis the case, the growing operation should probably becarried on outside of the nursery company (by theindividual shareholders or by a separate company) sothat the status of the land is not tainted.

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6. Gifts to Your Family During YourLifetime

IntroductionIf you have sufficient retirement capital, you may want toconsider gifting some property to your children rather thanselling it to them. You may recognize for instance thatyour farming child will have difficulty “making ends meet”in the first few years and the removal of debt servicingcosts on particular assets may make a considerabledifference. Alternatively, you may feel your child hasearned a “gift” as a result of the contribution he or she hasmade to the farm in previous years for which there has notbeen appropriate remuneration.

The type of gift we are discussing here does not include thesale of property at less than fair market value, which isreviewed in Chapter 5. This chapter deals only with thetransfer of property or cash to your family withoutreceiving any payment in return.

You can make a gift to a member of your family byforgiving all or a portion of a debt that is owed to you. Asdiscussed in the questions and answers in this Chapter, thiscan have some bad tax consequences, so you need toreceive advice from your accountant before you take thisstep.

If you have sold a substantial portion of your farm you maywant to consider the gifting of liquid assets to your children(e.g. cash) so that the income earned thereon is taxed intheir hands and not yours.

If a gift is made to only one of your children, you may wantto view it as being a payment on account of the distributionthe child will receive on your death. You can deal with thisin your will by placing a value on the gift and stating that

Gifts – the transfer ofproperty or cashwithout any paymentin return

You can have yourgifts taken intoaccount in your will

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the other children should receive an equivalent distributionout of your estate before the residue is divided among allyour children.

You may want to transfer property to your spouse so thathe or she can become further involved in your farmingbusiness.

Implications of Making Gifts to Your Spouse or ChildA gift of cash has no tax implications except that if the giftis made to your spouse, or to a child who is a minor, the“attribution rules” (see Glossary) may have the effect ofcausing you to be taxed on the income earned on the gift.For income tax purposes, a child is a minor until the yearhe or she reaches the age of 18. These rules are discussedin Chapter 10.

Property other than cash that is gifted from one person toanother is generally considered to be disposed of at fairmarket value and the person making the gift has to accountfor the income tax that is payable. There are someimportant exceptions, however, in respect of propertiestransferred to a child or a spouse.

Qualifying farm properties (see Glossary) which can besold to your child at less than fair market value (seeChapter 5) may also be gifted to your child without youhaving to pay tax. Where properties are gifted, they simplytransfer on a “rollover” basis and your child inherits yourcost for income tax purposes.

All capital assets such as land, buildings, equipment, sharesin a family farm corporation and a partnership interest maybe gifted on a “rollover” basis to your spouse (a spouse, forthis purpose, includes a common-law spouse). You canelect to have the rollover rules not apply for any or all thesetypes of properties. Eligible capital properties (e.g. quota)will also transfer on a rollover basis if you cease to carry onthe farming business and transfer it to your spouse. This

Income attribution rulesneed to be considered

Certain farming assetscan be gifted tochildren without tax

All capitalproperties can be“rolled” to a spouse

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might happen, for instance, if you are injured and unable tocontinue working.

Property which does not transfer on a “rollover” basisbetween spouses during their lifetimes includes thelivestock, inventories and accounts receivable of a cashbasis farmer. If a cash basis farmer gifts this type ofproperty to his spouse he or she is deemed to have receivedproceeds equal to its fair market value and will have toinclude this amount in income.

If you transfer property to your spouse, attention will haveto be given to the effect of the attribution rules (see Chapter10). In summary, any income of an investment nature thatyour spouse realizes from the transferred property(including taxable capital gains arising from the sale of theproperty) will generally be attributed back to you. Businessincome will generally not be attributed, however.


1. If I gift cash to my adult children, are there anyincome tax or gift tax implications?

In short, the answer is no. There are no gift taxes inB.C.

2. I own a parcel of land which I bought for $250,000and now has a value of $400,000. I have used it inmy farming business, so can I gift it to my son andtake advantage of the capital gains deduction?

The answer to this question depends on whether theland is eligible for "rollover".

If we assume the land is eligible for the “rollover”, itwill simply “roll” to your son at your cost of $250,000and there will be no capital gain. If you want to triggera capital gain you would have to sell the property toyour son at an amount above $250,000 and up to

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$400,000. If your son does not have the funds to paythe selling price, you could take back a promissory notefrom him. If you don’t want any payments, you couldalter your will to bequeath your son’s promissory noteback to him after your death. In this situation, you andyour son would want to consider the Wills VariationAct (see Chapter 2).

If we assume the land is not eligible for the “rollover”it would be deemed for income tax purposes to havebeen sold at fair market value. In this situation therewould be a capital gain of $150,000 and, depending onyour circumstances, you may be able to take advantageof your capital gains deduction.

Don’t forget to ask your advisers about the GST and theB.C. Property Transfer Tax.

3. I have sold my farm property to my son and wouldnow like to consider the possibility of forgiving someof 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 forgivenessrules can result in some nasty tax consequences to theperson who benefits from the forgiveness. In this case,because the debt is associated with the purchase of abusiness asset, the debt forgiveness rules will apply soas to reduce any tax losses that your son is carryingforward. To the extent the forgiveness exceeds theselosses there may be a reduction in the tax values ofcertain assets that he owns. Conceivably, thisforgiveness may even result in income on which he willhave to pay tax. Because of this, you might considerbequeathing a portion of the debt to your son in yourwill. If you “forgive” debts in this manner, there willbe no tax consequences to him.

If you decide to alter your will, you should ask yourlawyer whether there might be any problem under theWills Variation Act (see Chapter 2).

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4. I own land that I bought in 1975 and farmed foronly 10 years. Since 1985, when I retired fromfarming, the property has been rented to aneighbour. Can I gift this land to my childrenwithout any tax consequences?

Because your land has been farmed by you for only tenyears and rented for fifteen, Canada Customs andRevenue Agency will likely consider that your land hasnot been used principally (eg. chiefly) in the businessof farming during the period you have owned it and, inwhich case, it will not be eligible for "rollover" to yourchildren. If, instead, the property had been farmed forfifteen years and rented for ten, there would not be aproblem at this time.

If the property has lost its “rollover” status, and youproceed with the gift, you will be treated as havingdisposed of the property at fair market value. This maynot necessarily result in tax because even though theland does not qualify for the rollover, it may qualify forthe $500,000 capital gains deduction.

Remember if there are any buildings on the propertywhich have been depreciated on the reducing balancebasis, some or all of this depreciation may berecaptured.

Because the property is not being farmed by you, theB.C. Property Transfer Tax will apply.

Don't forget GST, the alternative minimum tax and thepossible recapture of your Old Age Security payments.

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7. Transferring the Farm to YourFamily Through Your Will

IntroductionTransferring assets through your will is known asbequeathing. Assets transferred in this manner are treatedfor income tax purposes as having been disposed ofimmediately before your death. Because of (a) the capitalgains deduction (see Chapter 9) and (b) the extensive"rollover" rules applying to properties transferred tospouses and children this “deemed disposition” will notusually result in a substantial tax liability for your estate.

Before dealing with the special rules that can apply tobequests of farm property to members of your family, let’sreview the general rules that apply when a person dies.These rules apply where the deceased person has nospouse or children. They can also apply where thereare children but the farm property does not qualify forthe special rollover (see Special Rules for Children).

The General Rules (Where the “Rollover” Doesn’t Apply)

1. If there is no “rollover”, capital property such as land,shares in a company and stocks and bonds, etc. will bedeemed to be disposed of at fair market value and thetaxable capital gains or allowable capital losses realizedon this disposition will have to be included in your finalincome tax return.

Depending on your circumstances, your executors willprobably be able to claim the capital gains deduction tooffset some or all of these taxable gains (see discussionin Chapter 9).

Generally, propertypassing to a personother than a spouse ora child, and propertypassing to a child thatis not eligible for the“rollover”, is deemed tobe disposed of at fairmarket value

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2. If there is no “rollover”, depreciable property (eg.buildings and machinery) written off on the reducingbalance basis is also deemed to be disposed of at fairmarket value. Taxable capital gains, recaptureddepreciation or terminal losses arising on thisdisposition will be included in your final income taxreturn.

3. If you are a cash-basis farmer, your livestock,inventories and accounts receivable (called “rights andthings” in the Income Tax Act) are given specialtreatment. Your executors will have three options.

a) All or a part of the value of the rights and things canbe included in your final income tax return togetherwith your other income; or

b) Your executors can elect within certain time limitsto include the rights or things in a separate taxreturn for the year of death and a second set ofpersonal exemptions can be claimed; or

c) If the rights and things are transferred to abeneficiary within certain time limits, the value isincluded in the beneficiary's income when the rightsand things are disposed of.

4. Your eligible capital property (e.g. quota) is deemed tobe disposed of on a rollover basis.

These are the general rules; now, let's take a look at thespecial rules that apply where (a) property is bequeathed toyour spouse (or to a trust for your spouse), and (b)qualifying farm property is bequeathed to your children.

Special Rules for Spouses and Trusts for SpousesGenerally, property bequeathed to your spouse or to aqualifying trust for your spouse (called a spouse trust) isdeemed to transfer on a “rollover” basis. If your executors

If you are not survived bya spouse, or the propertyis not eligible for“rollover” to a child, therecan be recaptureddepreciation

Special rules mayapply to livestock andaccounts receivable


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chose not to have these “rollover rules” apply, they can filean election with your final income tax return. The effect ofthis election will be that your property is deemed to be soldat fair market value. Each property can be treatedseparately. Some properties can be “rolled over” whileothers can be elected upon and will be disposed of at fairmarket value. This gives your executors considerableflexibility in putting your estate and your beneficiaries inthe best possible tax position.

To qualify for the “rollover”, the property passing to yourspouse, must “vest indefeasibly” in him or her not laterthan thirty-six months after the date of death. A longerperiod may be allowed by Canada Customs and RevenueAgency if it is reasonable in the circumstances. The term“vested indefeasibly” means that your spouse must obtain aright to absolute ownership which cannot be defeated by afuture event.

If you want to use a spouse trust and have propertytransferred to it on a "rollover" basis, the terms of the trustmust be such that all income of the trust arising before yourspouse’s death is received only by the spouse. No personother than your spouse should be able to obtain the use ofany income or capital of the trust during his or her lifetime.

This requirement is sometimes not met because of technicalproblems in the drafting of the will. Remember, thatCanada Customs and Revenue Agency may discover theseproblems because a copy of the will is normally requestedto be filed with your final tax return.

Special Rules for Children“Qualifying farm properties” which can be transferred toyour children on a "rollover" basis during your lifetime (seeChapter 5) can also be transferred to them on a "rollover"basis on your death. As mentioned previously, theseproperties are land, depreciable property written off on areducing-balance basis, eligible capital properties (e.g.

In most cases, there is a“rollover” for propertypassing to your spouse,or to a trust for his orher benefit

Property must vestindefeasibly

If you are planning touse a spouse trust,you need expert legaladvice

Certain farm assetscan be “rolled” toyour children

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quota), shares in a family farm corporation and an interestin a family farm partnership. The land and depreciableproperty must have been used before your death principallyin the business of farming in which you, your spouse or anyof your children was actively engaged on a regular orcontinuous basis. Property will be considered to be used ina farming business if it is rented to a family farmcorporation or a family farm partnership (see Glossary).

As mentioned previously, the terms “family farmcorporation” and “family farm partnership” referred toabove are not to be confused with the terms “share of thecapital stock of a family farm corporation” and “interest ina family farm partnership”. The latter two terms are usedonly in connection with the capital gains deduction rules.Conceivably, a company could be treated as a family farmcorporation for purposes of the capital gains deductionrules but not for purposes of the "rollover" rules. The sametype of problem could also apply to a partnership. Youraccountant should be asked to monitor the status of yourpartnership or company for income tax purposes, and tomake recommendations if your business no longer qualifiesfor either the “rollover” or the capital gains deduction.

Your executors can choose to have your "qualifying farmproperties" disposed of to your children at any amountbetween their cost amount (see Glossary) and their fairmarket value. This decision can be made on a property byproperty basis. One or more properties can be “rolled” to achild; others can be transferred at a higher value. In thisrespect, your executors have almost the same flexibility asyou would if you disposed of these assets during yourlifetime.

It is important to note that the assets for which yourexecutors can choose the transfer values include all the“qualifying farm properties” listed in Chapter 5 excepteligible capital property (eg. quota). This latter assetalways transfers on a “rollover basis” when it is transferredto a child through a will.

Your executor canelect to have certainassets transferred toyour child at an amountthat is higher than the“rollover” value


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Because your executors can select the transfer values ofmost assets passing to the next generation and can claim thecapital gains deduction to offset any taxable capital gainincluded in your income, the strategy will generally be toselect the highest possible transfer value that doesn't resultin tax being paid by your estate. Fortunately, it's no longernecessary for your executors to worry about the minimumtax because this tax no longer applies in the year of death.

Land, depreciable property (eg. buildings and machinery)written off on a reducing-balance basis, shares in a familyfarm corporation and an interest in a family farmpartnership will not be eligible for the “rollover” and willbe deemed to be transferred at fair market value if it doesnot vest indefeasibly in your child within thirty-sixmonths of the date of death. Again, Canada Customs andRevenue Agency may permit a longer vesting period if it isreasonable in the circumstances. Where there is a will, thisvesting provision will not be a problem because theproperty is treated as having vested immediately after yourdeath.

If you are a sole proprietor and will not have sufficientliquid assets to satisfy the cash bequests to your children orother members of your family, you could instruct yourexecutor to place a mortgage on your farm land beforedistributing the land to your farm child. The proceeds ofthe mortgage could then be paid into your estate and usedto fund your cash bequests. One of the problems with thisarrangement is that, assuming the land "rolls" to your farmchild, the “tax cost” of the land will not be increased byany portion of the mortgage placed against it by yourexecutors. Furthermore, Canada Customs and RevenueAgency has stated that your farming child will not be ableto deduct interest paid on the mortgage. This is because themortgage cannot be related directly to the acquisition of theland by the farming child.

No minimum tax inthe year of death

Farm assets “rolled” tochildren must vestindefeasibly within 36months

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A better method of generating liquid funds in your estate isto arrange for your farming child to have the option ofpurchasing certain farm assets from your estate. If yourfarming child is required to pay interest to the estate or to abank, it should be deductible for income tax purposes.Provided the assets consist of land, depreciable propertywritten off on a reducing balance basis, shares in a familyfarm corporation or an interest in a family farm partnership(see Glossary), this purchase need not be made at fairmarket value.

Irrespective of the actual sales price, your executors havethe ability to elect for the sales price for tax purposes tobe any amount between the property’s cost and its fairmarket value. The amount chosen will be the proceeds inyour final return and the cost to your farming child.Generally, your executors will choose the highest amountthat will not result in tax.

An illustration of this election mechanism is contained inquestion 3 at the end of this chapter.

Bequest to Children Through Spouse TrustsIf you were to die before transferring the farm to yourchildren, you might want your spouse to enjoy the incomefrom the farm during his or her lifetime and to have theproperty pass to your children on your spouse's death. Youcan achieve this by using a spouse trust. On your death,your farm (if it qualifies – see below) will pass into thetrust on a “rollover” basis. When your spouse dies, theproperty will pass out of the trust to your children at anyvalue selected by the trustee that is between its cost amount(see glossary) and its fair market value. The property thatis eligible for this treatment is land, depreciable propertywritten off on a reducing-balance basis, shares in a familyfarm corporation and an interest in a family farmpartnership.

Consider giving yourfarming child the optionof purchasing farmassets from your estate


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1. I own 90 shares in our family farm company onwhich there is an accrued capital gain of $750,000.If I were to bequeath these shares to my children,how could my executors use my $500,000 capitalgains deduction without triggering tax on the extragain?

Assuming your shares are eligible for the “rollover”,your executors could elect to have them disposed of byyou at a value that results in a capital gain exactly equalto your unused capital gains deduction.

You should make sure that your will empowers them tomake this election.

2. Can my executors make use of my capital gainsdeduction by electing to transfer my quota to my sonat a value that results in a taxable capital gain?

No. Quota always transfers on a "rollover" basis.

3. What happens if instead of bequeathing my farmland to my son, I authorize my executors to sell it tohim?

In this situation, provided your son acquires theproperty within 36 months of your death, and theproperty qualifies for “rollover”, the result will be asfollows:

n if your personal representatives do not make anelection with respect to the property, it will “roll” toyour son

n if your representatives do make an election, it willtransfer to your son at the value specified in theelection (which cannot be in excess of fair marketvalue)

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To illustrate this further, let’s assume the following:

n your land has no buildings on it

n it is eligible for “rollover”

n the adjusted cost base (tax cost – see Glossary) is$200,000

n its fair market value is $500,000

n your son has an option to acquire it for $300,000which he exercises shortly after your death

In these circumstances, the situation would be asfollows:

a) if no election is filed, you would be deemed to havedisposed of the land at $200,000 and your son willbe deemed to have acquired it at the same price.This tax result is not altered by the fact that yourson would have paid $300,000

b) your personal representatives can elect for the landto be disposed of at anywhere between $200,000and $500,000. The elected proceeds to you willbecome the cost to your son. Again, the electedproceeds of disposition will not be altered oraffected by the fact that your son pays $300,000.

If the elected proceeds results in a tax liability to yourestate, your personal representative would have toreceive advice from your lawyer or accountant as towhich of your beneficiaries would bear the tax. Thiswould be determined by the wording in your will.Generally, your executors would want to avoid thissituation.

If you have not used your $500,000 capital gainsdeduction and your land qualifies for this deduction,your representatives would probably elect a transferprice of $500,000. This will not result in a taxliability to the estate and will give your son a tax cost


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of $500,000 rather than the $300,000 which he paidfor the property.

Your son would not have to pay the purchase price incash. You could provide in your will that your soncould issue a promissory note to your representatives insatisfaction of the price. This note could provide forinterest and, in which case, the interest expense shouldbe deductible to your son provided he uses the land in abusiness. If appropriate, the promissory note could besecured by a mortgage.

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8. Dealing With Your Non-FarmingChildren

IntroductionIf you have one or more non-farming children and youwant to give your farming child the opportunity to takeover your farm, it is sometimes difficult to make anarrangement that treats all of your children equitably. Thereasons, of course, are as follows:

n like most farmers, you may have substantially all ofyour capital tied up in the farm

n the child or children who would like to take over thefarm may not have a great deal of capital

n ultimately, a substantial portion of the inheritances ofthe non-farming children may have to be financed fromthe farm’s cash flow

Equitable vs. EqualIn considering this matter, a distinction has to be madebetween equitable and equal arrangements. An equitablearrangement will not necessarily be an equal one. It will,however, be one that is reasonably fair, taking into accountall the circumstances.

A conclusion as to what is equitable will differ from onefamily to the next and will be based on a number of factorsincluding the following:

n the importance of the farming child receiving the farmintact

n the contribution the farm child has made to the businessrelative to the remuneration and other benefits he or shehas enjoyed

Being fair to thenon-farming childrenis not always easy

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n the standard of living and prospects of the non-farmingchildren

n the benefits all children have received to date (eg.loans, university tuition, etc.)

n the resale value of the parents’ assets (farm and non-farm)

n the future cash flow from the farm

Sometimes parents resolve this issue by determining adollar value for the inheritance of the non-farming childrenand structuring their will so that this inheritance is received.Some parents have taken a slightly different approach bysaying that the non-farming children’s inheritance shouldbe capped by determining the level of additional debt thatthe farm could amortize over, say, a ten or fifteen yearperiod, after the parents retire or die. The amount of thisdebt is then inherited by the non-farming children.

What are Some of the Options for Dealing With the Non-Farming Children?

The most obvious technique for dealing with this issue is tosegregate your non-farming assets and to ensure they areinherited solely by your non-farming children. Usually,however, this will result in a less than equitablearrangement and, in which case, it will be necessary tocreate other assets which your non-farming children caninherit.

In an unincorporated farm, the additional possibilitieswould include the following:

n selling farm assets that are not essential to yourbusiness

n leasing assets (such as farm land) to your farm childand bequeathing the ownership to your non-farmingchildren (perhaps including in the lease arrangement a

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purchase option which your farm child could exercise atsome future time, based on conditions stipulated by youin the option agreement)

n arranging for your farm child to purchase the farm fromyou during your lifetime, with the intention ofbequeathing a portion of the sales price to your otherchildren

Clearly, the leasing and purchasing arrangements wouldhave to be based upon the cash flow from the farm.Remember that cash flow is not the same as profits. Theannual profit from your farm might be substantial but if youalready have significant bank debt, a considerable portionof this cash flow will already be tied up.

In a corporate farm, there is the possibility of giving yournon-farming children a non-voting share interest in thecompany that could be repurchased over a period of time.This possibility is discussed in Chapter 11.

In a nursery operation, and in some other larger businesses,it may be possible to segment the operation so that thefarming child inherits the farm activities and one or more ofthe other children are involved in the wholesaling orretailing activities. Depending on the circumstances, thissegmentation may be very desirable in any event so that thefarming portion of the business is treated as such forincome tax purposes.

Use of InsuranceMost of the options discussed above involve the creation ofa non-farming asset after you retire or die. There is,however, an alternative which is to pre-fund your non-farming children’s inheritance by purchasing life insuranceon the life of you and/or your spouse. There is a briefdiscussion on insurance policies in Chapter 12, but in orderto illustrate how insurance might be used to deal with your

The leasing andpurchase arrangementsmust cash flow

An additional possibilityif there is a company


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non-farming children it is worthwhile looking at anexample.

Assume the following:

1. You and your wife carry on business in partnership.

2. The total adjusted cost base (eg. tax cost – seeGlossary) and fair market value of your interests in thepartnership are $300,000 and $1,200,000 respectively.

3. You have an insurance policy for $400,000.

4. You have two sons who will carry on the farm, and twodaughters who are not involved in the farm.

5. You need $600,000 of retirement capital.

6. The farm is eligible for “rollover” (see Chapter 5).

In this situation, you might proceed as follows:

1. You might sell your partnership interests to your sonsduring your lifetime for $600,000. Under the proposedrules, this would precipitate a taxable capital gain of$150,000 (50% x $300,000); however, on theassumption that you and your spouse have notpreviously used your capital gains deduction (and thatthe minimum tax rules do not present a problem), thereshould be no taxes payable. Your sons will receive agift by acquiring their partnership interests at less thanfair market value but this would not result in a tax.

2. You might provide in your wills that after the death ofthe survivor of you, the residue of your estates shouldbe divided among all of your children in a manner thatwould recognize the earlier gift to your sons. As yoursons would have inherited a portion of your future taxliabilities and may have contributed value to the farm,you may look upon the gift as being something lessthan $600,000 - perhaps $400,000. On this basis, thefirst $400,000 of the residue of your estate (the

Solving the problemwith insurance

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insurance proceeds) would be distributed to yourdaughters and the balance would be distributed equallyto all of your children.

To evaluate this option, it's necessary for you to take intoaccount the cost of insurance. Unfortunately this isdifficult to do because there are a great many insuranceproducts available and the premiums are affected by theinsured’s personal circumstances. However, in order toprovide you with a very general idea of what the cost mightbe on a $400,000 policy, we have summarized belowcertain information provided by an insurance broker in1996 from a review of the term insurance products thenoffered by the major insurers. The figures quoted are basedon the assumption that the insured person is a male, is ingood health and is a non-smoker. His wife is four yearsyounger, in good health and is also a non-smoker.

Estimated Annual Premiums * Level Term Insurance

Age at Regular Term To Age 100 Which Policy is Insurance Insured Only 2nd to DieTaken Out (Note 1) (Note 2) (Note 3)

40 $ 561 $ 2,035 $ 93550 1,150 4,200 1,69760 2,750 8,525 3,135

* information supplied by Glenn Devereaux, Mat HassenFinancial Services, Armstrong, B.C.

Notes

1. The regular term insurance is available only up to theage of 75 and is convertible to permanent insurance ifthe conversion option is made by age 65. Thepremiums noted are those applying in the initial tenyear period only. Premiums in subsequent renewalperiods are higher.

2. The level term insurance provides a level guaranteedpremium to age 100. It does not have any cash valuesbut at age 100 it provides a choice of either (a) a cash


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payment of the face amount or (b) the continuation ofthe paid-up coverage past age 100 to the date of death.

3. The premium for the 2nd to die policy (joint and last todie) is much lower because the insured's family will notreceive the insurance proceeds until the death of thefarmer and his or her spouse.

If the insurance solution sounds attractive, you shouldreview Chapter 12 and contact your insurance agent.Remember that you need to look for a permanent policyrather than a term product that expires at say aged 65 to 75.


1. Is it better to pre-fund my non-farming children’sinheritance with insurance or let my farming childtake care of this after I’m gone by buying the farmfrom my estate?

These aren’t the only options but, if they were, youwould need more information before being able toreach a decision.

If your farming child is going to be obliged to go to thebank to fund the purchase from your estate, the totalcost (principal and interest) could be very substantial.In these circumstances, depending on your age andhealth and the cash flow from your business, it may bemore attractive to fund at least a part of the non-farmingchildren’s inheritance with insurance.

Before making any decision, you will need to find outwhether you and your spouse are insurable. After youpass that hurdle and you are given some quotations onthe products that are available, you, your accountantand your insurance agent should be able to arrive at adecision.

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2. If I knew my son was going to continue farmingafter my death, I would be less concerned about thedistribution of my estate being “skewed” in hisfavour. But if he sells shortly after I die, then Iwould consider my other children to have been“short-changed”. What can I do?

This is a tough one. Obviously, you cannot controlwhat happens after you die.

If you want to have some sort of adjustment mechanismthat comes into effect if your son liquidates the farm, itmay be possible to arrange for a portion of hisinheritance to be held within your estate for a period oftime. If he liquidates within this period, the inheritancewould be re-directed to your other children. If, forinstance, your farm was incorporated, you couldarrange for some of the shares to be held in the estate inthis manner.

One of the difficulties with this type of solution is that,generally, for the farm property to transfer to your sonon a “rollover” basis for income tax purposes, it has to“vest” in him within 36 months of your death (seeChapter 7). Perhaps this 36 month period is longenough for your purposes? If it isn’t, the problem couldperhaps be avoided by ensuring that the propertyretained in the estate does not have an accrued gain. Ina corporate situation, examples would be:

a) a shareholder loan account

b) shares that will not appreciate in value (eg. fixedvalue shares) that have an adjusted cost base (eg.tax cost – see Glossary) that is equal to their fairmarket value

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9. Capital Gains Deduction

IntroductionOne of the most important tax benefits available to you isthe ability to avoid tax on up to $500,000 of capital gainsarising on the sale of certain farm properties. This is acumulative exemption that applies over your lifetime inrespect of sales after 1984.

Because this is a generous tax exemption, there arecomplicated rules in the Income Tax Act which areintended to ensure the benefit is available only to personswho meet all the requirements. As a result of thiscomplexity, you need to ensure that you receive appropriateadvice well before entering into any transaction that isdesigned to take advantage of the exemption.

It is important to note the exemption is available only inrespect of capital gains. Therefore, income arising fromthe sale of your livestock is not eligible; nor is recaptureddepreciation on your buildings and quota.

The $500,000 limit refers to the gross gain and not thetaxable portion. As a result of the 2000 federal budget inFebruary 2000 and the mini-budget in October 2000, thegovernment is proposing that the taxable portion of capitalgains realized after October 17, 2000 be reduced to one-half. If this change is enacted, the effect of the deduction(where there is a one-half income inclusion) will be toexempt from tax up to $250,000 of taxable capital gains.

Remember the deduction is not available to a company. Ifyou have incorporated your farm the only method by whichyou can benefit from the deduction is to sell the shares ofyour company.

The capital gainsdeduction is a generoustax exemption requiringcareful attention to thedetailed rules

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Also remember the deduction applies to each individual. Ifyou and your spouse own the farm jointly, each of you maybe entitled to the $500,000 deduction.

Property Eligible for the DeductionThe farming assets eligible for the $500,000 deduction are,generally speaking, restricted to those owned by anindividual and a partnership, an interest in which qualifiesas an interest in a family farm partnership (see Glossary).

The types of property that are eligible are generallyrestricted to the following:

1. Land and buildings used in a farming business by

n the individual, his spouse, his parent or any of hischildren;

n a company, a share of the capital stock of which is a“share of the capital stock of a family farmcorporation” (see Glossary) of the individual, hisspouse or any of his children; or by

n a partnership, an interest in which is an “interest ina family farm partnership” (see Glossary) of theindividual, his spouse or any of his children.

2. A “share of the capital stock of a family farmcorporation” (see Glossary);

3. An “interest in a family farm partnership” (seeGlossary); and

4. Quotas used in a farming business.

Note this listing excludes machinery and livestock.

Land and buildings, acquired before June 18, 1987 willbe treated as farming property provided it was usedprincipally (ie. chiefly) in farming by an individual,

Qualifying propertyincludes land,buildings and quotas

Investments inpartnerships andcompanies canqualify too


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partnership, or corporation mentioned in paragraphs 1 - 3above:

n in the year the property was sold, or

n in at least five years during which the property wasowned by the farmer, his spouse, his parent or his child.

Where the land, buildings or quota was acquired (or isdeemed to be acquired) after June 17, 1987, the rulesare tougher to meet. First, there is a two-year holdingrequirement; second, there is a two year “use” test; andfinally there is a requirement that during that period, theindividual, his spouse, child or parent, as the case may be,are actively engaged in the business of farming on aregular and continuous basis. These additionalrequirements will not usually be a problem for the full-timefarmer. However, the fact they exist makes it even moreimportant to check on the status of your farm propertybefore you sell it.

When the government eliminated the basic ($100,000)capital gains deduction, it gave individuals an opportunityto file an election with their 1994 income tax return inorder to take advantage of the deduction they had not used.Essentially, the election had the effect of deemingindividuals to dispose of, and then re-acquire, properties(such as land) that were specified in the election.

The reason for mentioning this is that if you specified yourfarm land in a capital gains election filed with your 1994return, your property will now be looked upon as havingbeen sold and then re-acquired in 1994. As a result, thepost-June 17, 1987 capital gains deduction rules will applywhen you sell the property even though you may havepurchased it before June 18, 1987.

It appears that in some circumstances, the sale of timber byan individual from land that has been used in the businessof farming may qualify for the deduction, even though theland itself is not sold. Accordingly, if you are proposing to

Tougher rules forland, buildings andquota acquired afterJune 17, 1987

Sale of timber maybe eligible for thededuction

An election filed inyour 1994 tax returnmay affect the way inwhich the deductionapplies

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remove trees from land that has been farmed, you shouldobtain advice before the transaction occurs.

It is important to note there are differences between thenature of the shares of a company which are eligible forthe $500,000 capital gains deduction and those which areeligible for the "rollover" from parent to child. The same istrue for an interest in a farm partnership. The differencesare not likely to affect too many real-life situations butconceivably, shares of a farm company (or an interest in apartnership) could be eligible for the deduction but not the"rollover".

The capital gains deduction is not affected by the claimingof an exemption in respect of the gain on the sale of yourprincipal residence.

What About Rental Property?Depending on the circumstances, land and buildings whichare rented to your child or spouse for use in a farmingbusiness may qualify for the exemption. This can also betrue for land rented to a company or partnership.

Even where your land is currently rented to a personoutside of the family, the previous use of the property byyou, your spouse or a child may enable you to make use ofthe exemption.

The Deduction May be MultipliedIn certain circumstances, it may be possible to make greateruse of the family’s capital gains deduction by gifting aninterest in certain farm property to an adult child (orchildren) resident in Canada and for the whole family tosell their respective interests at a later time. Clearly, thistype of planning should be considered well before a salestransaction is entered into. Moreover, there are a numberof issues that would have to be considered before taking


85

this step, not the least of which is the general anti-avoidance rule in the Income Tax Act.

Where property is registered in the name of only onespouse, it is possible on occasion to use the principles ofconstructive or resulting trusts to support the view that bothspouses have an interest in the property. If this can besupported, both spouses might be entitled to the capitalgains deduction, instead of one. If your farm is registeredin your name alone but both you and your spouse havecontributed substantially to the purchase of the property, oryou have always considered the farm to be jointly owned,you may wish to discuss this matter with your lawyer.

What Happens if You Claim a Reserve in Respect of theUnpaid Sales Price of Your Farm

If you sell capital property in exchange for debt, you maybe entitled to claim a reserve for income tax purposes inrespect of the unpaid proceeds. If you are able to claim areserve, it would have the effect of spreading your capitalgain over a number of years. The length of the period overwhich the reserve is available depends on the nature of theproperty, the terms of the sale and whether or not thepurchaser is your child.

If the property being sold is one for which the $500,000deduction is available (eg. land, buildings, shares of afamily farm company or an interest in a family farmpartnership) the capital gains deduction can be claimed ineach year in which a portion of the capital gain is includedin income.

What Happens if Your Partnership is Not a Family FarmPartnership?

As noted previously, the $500,000 deduction is available inrespect of qualifying land and buildings owned by apartnership, an interest in which qualifies as a family farm

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partnership (see Glossary). If the partnership does notqualify as a family farm partnership (perhaps becausesubstantially all of its property is not used in the businessof farming in Canada), then the taxable capital gain on thesale of any land, buildings or quota owned by thepartnership, or the sale of the partnership interest itself, isnot eligible for the $500,000 deduction. This could makea tremendous difference in the tax that would bepayable, so you need to have your accountant review thestatus of your partnership before you sell. If yourpartnership doesn’t qualify, your accountant should beasked to identify the steps necessary to remedy thesituation.

Can You Always Claim the Deduction?You need to be aware there is a rule in the Income Tax Actthat restricts your ability to claim the deduction if you havededucted “investment expenses” (see Glossary) from yourincome in 1988 and subsequent taxation years or if youhave deducted capital losses from your other income. Thisrule will not likely affect too many farmers but could affectyou, for example, if you have borrowed to acquire shares ina family company. The interest on your borrowings will betreated as an “investment expense” and unless on acumulative basis, this expense is offset by “investmentincome” (see Glossary) a portion of your future taxablecapital gains will be subject to tax.

Your accountant will know whether this will be a problemfor you and, if it is, whether it can be dealt with prior to thesale. This is another matter to be checked before youcommit yourself to a deal.

Don’t Forget the Refundable Minimum TaxIn response to political pressure from people who wereupset about certain individuals receiving substantial income

A non-qualifyingpartnership createsproblems

Be careful if you haveany investmentexpenses such asinterest


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without paying “a fair tax”, the government introduced a“refundable alternative minimum tax”. This tax obligesmany taxpayers to make two tax calculations each year.The additional one was intended to apply primarily toindividuals who avoid paying tax by investing in taxshelters of one kind or another. However, the rules aresuch that the calculation is also required if you realize asignificant capital gain on the sale of your farm.

In most situations involving the transfer of a farm from aparent to a child, it should be possible to alleviate the effectof the minimum tax, if the proper planning is done beforethe transaction is carried out. Where the farm is being soldto a person outside the family, the scope for planning maynot be as significant.

Fortunately, the refundable minimum tax rules will notapply to a taxable capital gain on the sale of quota, nor willthey apply to any gains arising from the deemed dispositionon death.

How Can I Get the Minimum Tax Back?

As indicated by its name, the minimum tax is intended toensure that all Canadian individuals pay at least a minimumamount of tax. Individuals with substantial incomes mustcalculate their taxes under the regular method and under thealternative method and pay whichever is the higher. If thealternative tax is higher, the amount of the excess can becarried forward and deducted from the regular tax liabilityin the next seven years. The carry-over of these additionaltaxes cannot reduce a taxpayer’s liability to an amount thatis below his minimum tax for the year.

Because of this seven-year carry-forward, any minimumtax that is paid on the sale of the farm will often berecovered in full in the years following the sale. Anyminimum tax that is not recovered before death is no longerrecoverable.

A special refundableminimum tax canapply if you realize alarge capital gain

The minimum taxcan be recoveredagainst your futuretax liability

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Don’t Forget the Other Implications of Realizing CapitalGains

If you realize a capital gain on the sale of your farm, therecan be other implications as well. These include thefollowing:

n there may be a “clawback” of your old age securitypension

n there may be an impact on your income supplements orchild tax credits


1. We are considering the transfer of our farm to ourson in the next two to four years and we will want totake advantage of the capital gains deduction. Weare concerned, however, that the deduction might betaken away before we can use it. Do you have anyadvice?

This is a concern to many farmers, as they nearretirement. The capital gains deduction is an extremelyvaluable tax concession; one wonders whether it willremain in the Income Tax Act over the long termparticularly when:

a) the deduction contributes significantly to the ever-increasing complexity of the Income Tax Act;

b) the deduction has probably not contributedsignificantly to new investment in Canada (whichwas the primary objective) but has, on the otherhand, enabled persons who have alreadyaccumulated substantial gains to realize themwithout paying tax; and

c) a committee, commissioned by the federalgovernment to review our income tax system, hasrecently recommended that the deduction beeliminated.


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Clearly, we can only guess as to whether these andother reasons might cause our government to removethe deduction and, if it does, whether it will be done sothat it applies only to gains that accrue in the future orto all gains that are realized after the change is made.

Now that the taxable portion of capital gains is to bereduced to 50%, the refundable alternative minimumtax is more of an issue. If you take steps to lock in yourfull $500,000 deduction, the refundable tax might be$40,000 or more. Given that the benefit of the capitalgains deduction is now reduced to approximately$125,000 (because of the reduced taxable portion), it ismore difficult to justify the triggering of a capital gainthat would expose you to this tax (unless, of course, yousell your property and have the cash to pay the tax).

Nevertheless, if the availability of the deduction is vitalto your estate plan, or you are concerned that yourproperty may cease to be eligible for the deduction, youmay wish to look at whether you can reorganize yourfarm so that:

a) you crystalize at least some of your accrued capitalgains now and take advantage of your capital gainsdeduction and

b) you facilitate the ultimate transfer of your farm toyour child.

The way in which you might use some or all of yourdeduction will depend on the manner in which yourfarm is organized. The possibilities include thefollowing:

Sale to Partnership

If, for instance, you operate as a sole proprietor, youmight consider transferring your assets to a partnershipin which you and your spouse are the partners. Youcould arrange for your son to become a partner (without

If you need thecapital gainsdeduction, considerusing it now

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necessarily acquiring any of the existing value), ordefer this to a later time.

Sale to Spouse

Another option might be to transfer certain property toyour spouse and elect out of the “rollover” rule thatnormally applies.

Use a Company

You could also consider the transfer of some or all ofyour assets to a company. If you already have acompany, you might discuss with your accountant thepossibility of reorganizing the capital so that youcrystalize some of the accrued gain on your shares andtake advantage of your deduction.

2. I inherited our farm from my husband and, sincethat time, I have rented it to my son. Would thecapital gains deduction apply if I were to sell it?

The answer to this question depends to some extent onwhether you inherited the farm after June 17, 1987. Ifyou did, then it is likely you will be eligible for thededuction provided:

a) you and/or your husband have owned the propertyfor more than two years; and

b) for a period of at least two years, prior to yourhusband’s death, his gross farming incomeexceeded his net income from all other sources and,during this period, he was actively engaged in thebusiness on a regular and continuous basis; or

c) for a period of at least two years, while your sonrented the farm, his gross farming income exceededhis net income from all other sources and, duringthis period, he was actively engaged in the businesson a regular and continuous basis.


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If you inherited the farm before June 18, 1987, you willlikely be eligible for the deduction if:

a) the property is farmed by your son in the year ofsale, or

b) the property has been farmed for at least five yearsin the past by your son or your husband.

Because this is a very complex matter you shouldalways have an experienced adviser review all the factsand give you a written opinion. If you inherited thefarm before June 18, 1987, the adviser may want toexamine your 1994 personal income tax return todetermine whether you filed a capital gains deductionelection in that year. If you did, the status of your landmay be affected.

3. My wife and I own the farm land jointly but I havealways reported the farm activity on my return.Can we both claim the capital gains deduction if wewere to sell the farm?

On the surface at least, the answer to this question isprobably yes. If the land has been used in farming tothe extent required by the Income Tax Act (and thisdepends on the date it was acquired), the fact that yourwife owns a half interest and has not been involved inthe business (except perhaps as an employee) does notprevent her from claiming the deduction.

An issue in this situation will be whether you have, ineffect, “transferred” or gifted a half-interest in the landto your wife after 1971. If you have, it is possible yourwife’s share of the capital gain would be “attributed” toyou and you would not be able to take advantage of herdeduction. Much will depend on when the propertywas purchased, whether the purchase was made fromfunds that both of you had accumulated and the extentto which you have repaid the purchase debt from fundsgenerated by the farm.

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Because this is a complicated area you should makesure you discuss it with your accountant.

4. Does the $500,000 capital gains deduction apply tomy machinery and equipment?

Unfortunately no. Remember also that the deductioncannot be used to offset recaptured depreciation.

5. Our farm land has always been registered in myhusband's name alone, and he has always reportedall of the farm income. However, we have alwaysconsidered this to be a family business. I have beenheavily involved in many aspects of it and a portionof the farm assets was acquired with my money.Can both of us benefit from the capital gainsdeduction?

This is not entirely out of the question - much dependson all of the background circumstances. At the presenttime, your husband is the legal owner of the land but it'spossible that both you and your husband are thebeneficial owners (see Chapter 2 for a brief discussionon this matter). Keep in mind that it is the beneficialowners of property who must account for the capitalgains on the sale of the property and, depending on thecircumstances, have the opportunity of using the capitalgains deduction. If you are planning to sell the farmand the taxable capital gain will exceed your husband'scapital gains deduction, it might be worthwhile meetingwith a lawyer who is experienced in these matters. Inpreparing for this meeting, write out a very detailedhistory of your farm, including the dates on which themajor assets were acquired, and the extent to whichfunds have been invested in the farm by each of you.

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10.Retirement Income Planning

IntroductionYour financial security during your retirement years will bean important factor in your overall estate plan. It willinfluence the manner in which you transfer your farmingproperty to your children because the capital realized fromthis transaction will provide you with a substantial portionof your retirement income. The possible ways oftransferring the farm to your children are discussed inChapters 5 and 7.

In planning your retirement, you will have to considerwhether you will need to purchase a new home off thefarm. You will also have to think about your activitiesduring retirement and, if your children take over the farm,whether you can help them by staying on or near theproperty. Ideally, you will continue to be involved in thefamily business on a part-time basis so there is a gradualtransition to retirement.

In assessing your need for retirement capital you shouldtake into account the effect of inflation. As we saw a fewyears ago, a prolonged period of inflation at rates in therange of 6% - 10% can significantly erode an individual’spurchasing power. A retired farmer who is debt-free willprobably be shielded from the effects of inflation to someextent, particularly if he or she continues to live off of theland. However, even in this situation, inflation must beconsidered.

In developing your estate plan, you should estimate yourannual retirement income from sources such as governmentpensions, your RRSP and income from the sale or leasingof farm assets. You should compare this income to yourestimated level of expenditures during retirement, ensuringthat a “cushion” exists for inflation and emergencies of onesort or another. Keep in mind that your living costs might

Ensure you haveadequate retirementincome beforefinalizing your plan

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increase during retirement as a result of your increasedability to travel.

The estimates should not be left until the last minute. Theywill have to be reworked at the time you are planning toretire but they should be done on a preliminary basis muchbefore that time so that you are able to give an appropriateamount of thought to your options. Avoid placing yourselfin the position of having agreed to an overall estate planwith your family and then discovering that it doesn’tprovide you with adequate financial security.

Income From Farm AssetsThe manner in which you receive income from yourfarming assets during retirement will depend to asignificant extent on whether your business is carried onthrough a company. It will also be influenced by whetheryou continue to be involved with the business (as might bethe case if a child takes over) and the manner in which yousell your farming property.

If, for instance, your farm is carried on through a companyand the business is taken over by a child, your cash flowcould come from the following sources:

n wages or directors’ fees from the company itself, if youcontinue to be involved in its business

n dividends on shares that you continue to hold

n payments on debt owed by your child in respect of thepurchase of your shares

n payments from the company in respect of the purchaseof your shares

If you have an unincorporated business that is partially orcompletely taken over by a child, there can again be avariety of income sources. The possibilities in this scenarioinclude the following:


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n a share of the profits, if you continue as a partner afterretirement

n a wage, if your role is that of a part-time employee

n payments on debt owed by your child in respect of thepurchase of your interest in the business

Where you transfer your business to a child, you will havethe ability to decide the extent to which the ongoingpayments will be income in nature (such as interest, wages,directors’ fees, dividends) or will be capital (payments onaccount of the sale price). Clearly, the tax consequences toyou will vary significantly depending on whether they areincome or capital. This will be particularly true if the saleis structured so that you can use your capital gainsdeduction and receive tax-free payments from your child(see Chapter 9).

Equally important is the extent to which you need theseongoing payments to meet your basic living needs. Ideally,your living needs should be financed by your incomepayments so that the capital payments can be retained forreinvestment.

Registered Retirement Savings Plans (RRSPs)This type of private pension plan is well known to mostindividuals. In enables farmers and other individuals whohave “earned income” (see Glossary) to set aside money fortheir retirement in a tax-sheltered plan and to deduct theircontribution in calculating their income for tax purposes.The amount that can be set aside each year is known as theRRSP “contribution limit”.

In general terms, an individual is able to contribute to anRRSP up to 18% of his or her “earned income” of theprevious year. The maximum contribution for any year is

Avoid living offcapital, if you can

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currently fixed at $13,500, which is reached when your“earned income” is $75,000 or higher.

To the extent you do not contribute the maximum in anyyear, the excess can be carried forward and deducted in asubsequent year. You can contribute the maximum butdefer the deduction of the contribution to a subsequentyear, if that would result in a larger tax saving for you.

Contributions for a particular calendar year can be made atany time in the year or within 60 days after the end of theyear.

RRSP’s must now mature by the end of the calendar year inwhich you reach the age of 69. At that point, you mustdecide how you intend to draw down your retirementcapital. Essentially, the options are as follows:

n lump sum withdrawal (not usually desirable)

n life annuity

n term annuity to age 90 or

n transfer to a registered retirement income fund (RRIF)

The RRIF is by far the most popular choice these days;largely because of the flexibility you have as to the mannerin which you receive payments and the fact that you cancontinue to enjoy a tax deferral on monies inside the RRIF(see later discussion).

You can contribute to your spouse’s plan instead of yourown, or you can allocate your contribution between themContributing to a spousal plan is a useful method of“splitting income” between you and your spouse that canresult in the saving of income taxes during retirement.Your ability to contribute to a spouse plan is not affectedby whether you are over aged 69. All that is required isthat your contribution is made before the end of the yearyour spouse reaches age 69. It should be remembered that


97

if your spouse withdraws funds from a spousal RRSP, thiswithdrawal will, in some cases, be included in your income,to the extent you have contributed to that or any otherspousal plan in the same year, or the preceding two years.

Your executors will be able to make a final contribution toyour spouse’s RRSP within 60 days of the end of the yearin which you die (assuming, of course, you had notpreviously made a contribution for that year and thecontribution is made before the end of the year in whichyour spouse reaches the age of 69).

If you have a farm company, you might arrange for thecompany to pay you a retiring allowance when you retire.A considerable portion of this allowance may be transferreddirectly to your RRSP. The rules dealing with this issue arefairly complicated so you should make sure you receiveadvice before you proceed.

You are able to designate a beneficiary in your RRSP and,if you do so, that person will receive the proceeds of theplan after you die, rather than your estate.

It is important for you to remember that if the beneficiaryof your RRSP is a person other than your spouse, or afinancially dependent child or grandchild, the amount in theplan at the date of your death (including the commutedvalue of any annuity you might have been receiving fromthe plan) will be included in your final income tax return.

If, on the other hand, your RRSP funds do pass to yourspouse, or a financially dependent child or grandchild, therewill be no adverse tax consequences. If your plan had notmatured, there will be a refund of the amount in the planwhich your spouse, or the dependent child, can thencontribute to his or her own RRSP. If your plan hadmatured and you had started receiving annuity payments,these payments will simply pass to your spouse, or thedependent child, (assuming the plan provided for this) andwill be taxable in his or her hands as received.

Be careful if yourspouse withdrawsfunds from a plan youhave contributed to

Take a retiringallowance from yourcompany and put itin your RRSP

There will be tax on yourdeath if your spouse, ora financially dependentchild or grandchild, is notthe beneficiary of yourplan

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Where there will be a tax liability in your estate because theRRSP will be inherited by someone other than a spouse orfinancially dependent child or grandchild, you shoulddiscuss with your lawyer or accountant the person(s) whowill be responsible for this tax. This will depend on thewording of your will. This issue can be important wherethe person inheriting your RRSP does not share in theresidue of your estate.

All of the financial institutions offer several different typesof RRSP’s. Their performance may vary considerably aswill the rules dealing with administration fees, the ability towithdraw capital, etc. Some of the plans will invest incommon stocks, others will invest in fixed incomesecurities, mortgages or bank deposits. Because there areso many different plans and their relative performance canhave a significant impact on the amount of funds you willhave on retirement, you should be prepared to shop aroundfor a plan that suits you and, perhaps, consult with afinancial adviser. There are a number of booklets on themarket that will assist you in doing this.

Registered Retirement Income Funds (RRIF's)As mentioned earlier, the most popular retirement optionwith RRSP’s is to transfer the accumulated funds to anRRIF. In some respects, an RRIF is similar to an RRSP.The RRSP is a tax-sheltered fund that accumulates moniesthat you set aside for your retirement whereas an RRIF is atax-sheltered fund that holds your retirement capital as yougradually draw it down. Both types of funds can be self-administered.

Under the current rules applying to RRIF’s:

n you can have more than one plan at a time;

n they can be established at any time;

There are a myriadof plans – choosethe right one for you

If there is going to betax on your RRSP,check who is goingto have to pay it


99

n there will be a minimum withdrawal computed on aformula basis, but you will be able to withdraw agreater amount if you wish;

n the withdrawal period no longer has to end at age 90;and

n funds are transferable from one plan to another.

As with RRSP’s, an RRIF can be established throughseveral different financial institutions, including banks,credit unions, trust companies and life insurancecompanies.

Canada Pension PlanThe Canada Pension Plan is an earnings-relatedcontributory plan that provides for a retirement pension andcertain supplementary benefits. Contributions based onincome are required from the age of 18 to the age of 65 (or70 if you continue to work and do not apply for yourretirement pension). If you are aged 65 and over you can,if you wish, draw your retirement pension whether or notyou continue to work and receive income. You may alsoarrange for a portion of your pension to be received by yourspouse. Any amount transferred to your spouse will nothave to be included in your income for tax purposes.Finally, under certain circumstances, you can arrange toreceive your pension when you reach the age of 60. Yourpension is discounted by 1/2% per month for each monthbefore your 65th birthday.

The retirement pension is 25% of your “average monthlypensionable earnings”, adjusted to reflect the final three-year maximum pensionable earnings. The “averagemonthly pensionable earnings” represents your totalpensionable earnings from the start of the Plan, or from age18, whichever is later, averaged over the period you havecontributed to the Plan and expressed on a monthly basis.The maximum retirement pension is earned by making

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contributions at the maximum level throughout yourworking life.

If you are self-employed, your contribution for 2000 was7.8% of the difference between your net earnings for theyear (not exceeding the maximum pensionable earnings of$37,600) and your annual exemption of $3,500. Thiscontribution rate is scheduled to increase each year until, in2003, it reaches 9.9%. If you are employed by a farmcompany, one-half of the contribution is made by you andthe other is made by your company.

The present maximum pension under the Canada PensionPlan is approximately $750 per month.

Old Age SecurityThe Old Age Security Pension, known as the Old AgePension (OAS), is a flat rate pension that is payable to anyperson who meets the age and residency requirements. Theamount paid is adjusted each quarter to reflect the increasein the Consumer Price Index.

The pension becomes payable when you reach the age of65. Individuals who were aged 25 or more on July 1, 1977and arrived in Canada prior to that date will be eligible forthe full pension if they reside in Canada withoutinterruption for the ten years preceding the date they applyfor the pension. Individuals who did not reside in Canadaprior to July 1, 1977 or were not aged 25 on that date willreceive a reduced pension unless they reside in Canada forat least forty years after age 18.

The maximum monthly old age security pension payable onOctober 1, 2000 was $428.79 per month.

Some or all of your OAS payments will be "clawed back"by the government in the form of an additional tax, if yourincome exceeds a threshold amount ($53,960 in 2000).

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Keep in mind that if you realize a large capital gain, thetaxable portion will be included in your income and couldresult in a “clawback” of some or all of your OAS incomefor that year even though the gain might be fully offset byyour capital gains deduction.

Tax CreditsThe credits that will be of interest to you during yourretirement include the following:

Age credit: Available to each person who is aged 65 orolder. This credit is income-tested with the result that itbegins to reduce where the individual's income exceedsapproximately $26,000 and is eliminated when incomereaches approximately $49,000.

Pension credit: Available to a person aged 65 or over inrespect of the first $1,000 of qualifying pension income.Qualifying income includes an annuity from an RRSP andpayments from an RRIF but does not include CanadaPension and OAS payments. The credit is available to aperson under age 65 in respect of a more limited range ofpension income.

If you or your spouse are not able to use certain of thepersonal credits, they may be deducted by the other person.

Income SplittingThe reduction of income taxes is always one of theobjectives in estate planning, and can sometimes beachieved by splitting income within the family. When wetalk about “income splitting” we are referring totransactions that have the effect of directing income toother members of your family that might otherwise havebeen received by you. To the extent this income is subjectto a lower tax than would have applied had you received it,there is an overall tax saving.

Age credit isincome-tested

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Unfortunately, the government is aware of the potentialbenefits from income splitting and has introduced a numberof anti-avoidance rules into the Income Tax Act to blockthis type of planning.

The anti-avoidance rules that are most often encounteredare called the attribution rules (see Glossary). These rulesprovide that if you transfer or loan property to your spouse,or to a person who subsequently becomes your spouse, anyincome or taxable capital gains realized from thetransferred or loaned property, or from property received inexchange for the transferred property, will be attributed toyou for purposes of the Income Tax Act. The income ortaxable capital gains may legally belong to your spouse butwill be taxed in your hands. This rule applies only whileboth of you are alive, remain married and are residents ofCanada.

A similar rule applies to transfers made to minors. If youtransfer or loan property to a minor, the income earned on itin years before the year in which the minor reaches the ageof 18 will be taxed in your return. Any taxable capitalgains realized from the disposition of the transferredproperty will generally not be attributed back to you.

These rules also catch an interest-free or low-interest loanto an adult child if one of the main purposes of the loan isto reduce or avoid tax.

Finally, the attribution rules apply not only to direct loansor transfers to your spouse or children but also to certainindirect transfers through a trust or a company.

The news is not all bad, however, because it is still possibleto split income within the family without being caught bythese rules. The acceptable transactions include thefollowing:

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n the purchase of property by one spouse from the other,at fair market value, so that future income accrues tothe purchasing spouse

n a loan to a spouse that bears interest at a rate equal tothe lesser of the commercial rate and the rate prescribedin the Income Tax Act

n one which has the effect of transferring businessincome to a spouse

n the payment of a reasonable salary or directors’ fee forservices rendered to the family business

n splitting CPP payments with a spouse

n contributing to a spousal RRSP

n gifts of cash to adult children (see Chapter 6)

n gifts of qualifying farm property to adult children (seeChapter 6)

n contributions to registered educational savings plans fora child

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11. Use of Companies in EstatePlanning

IntroductionA company is sometimes looked upon as an expensive andmore cumbersome vehicle in which to carry on a farmingbusiness. In some respects this may be true yet a companycan be extremely useful in estate planning.

In illustrating this to you, let’s take a quick look at one ofthe estate planning scenarios that is discussed in Appendix1. Assume, for the moment, that you have a dairy farmwith the following assets that you want to pass to yourchild:

Fair Market Tax Value Value1

Land $ 650,000 $ 150,000Buildings 200,000 100,000Equipment 150,000 50,000Livestock 225,000 NilQuota 2,000,000 120,000

$ 3,225,000 $ 420,000

(1) This is the value above which there will be an incomeinclusion (eg. taxable capital gain, recaptured depreciation,etc.), if the property is sold.

Based on the above information, you can see the following:

a) If you sell all of your assets to your child at fair marketvalue, you will have a large capital gain. There willalso be other amounts on which you will have to paytax including recaptured depreciation and income fromthe sale of livestock. You may not have used all of

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your capital gains deduction but there is still going to bea large income tax liability.

b) If you reduce the selling price of your land, buildings,equipment and quota (the “rollover” properties) so thatyou eliminate most or all of your tax liability, you willlikely have to give your child a significant gift. Do youwant to do that? What happens if your child’s marriagefails? Does this gift make it difficult for you to dealequitably with all of your children?

One of the possible solutions here is to use a company.Your child could set up a company to acquire your assetsand, provided the transaction is carried out properly, thereneed not be any immediate gift to your child and thereneedn’t be any immediate tax liability either. This isdiscussed more fully in Appendix 1.

Avoiding a gift or a substantial tax liability on a transfer toa child isn’t the only reason you might want to consider acompany. A company can enable you to defer incometaxes and pay down debts at a faster rate. Finally, it can beuseful if you have several non-farming children andrelatively few non-farming assets and you are trying todevelop an equitable estate plan.

As discussed below, the transfer of your farm to a companymay mean you are less able to use the capital gainsdeduction in the future. The relative importance of thisconsideration will depend primarily on the extent to whichthe fair market value of your land, buildings and quotasexceed your cost for income tax purposes at the time ofincorporation, and the length of time before the farm mightbe sold.

Income Tax DeferralAs explained in Chapter 3, most Canadian-controlledprivate companies carrying on a farming business in B.C.will pay tax at an approximate rate of 18% on the first

A company mayprovide flexibilityin your estate plan

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$200,000 of taxable farm profits each year, commencingJanuary 1, 2001. If the farm company is associated (asdefined in the Income Tax Act) with other companies, this$200,000 limit is shared among them.

Because most family farm companies in B.C. are, or willbe, taxed at only 18% on the first $200,000 of farm profits,there is a significant opportunity for tax deferral if farmprofits exceed the shareholders' living requirements. In thissituation, the extra profits can be retained in the companyto pay down debt or purchase new assets. If the farm is notincorporated and the income is earned by the farmerdirectly, the extra profits will be taxed at personal rateswhich can reach as high as 49%. Accordingly, at the toppersonal rate there can be a deferral of approximately 31%of tax.

The Impact of a Tax Deferral if You Have ConsiderableDebt

The ability to defer tax can be useful to you if you haverecently incurred substantial debt to acquire farm property.Whether you operate your farm as a proprietorship, apartnership or through a company, the principal paymentson your debt must be made out of after-tax income. In aproprietorship or partnership situation, the tax rate will varyfrom approximately 24% to 49%, which means there willbe between 51% to 76% for debt payments.

If your farm is incorporated, the debt repayments will likelybe made out of income that has been taxed at only 18%.Accordingly, there will be approximately 82% of yourincome for debt payments.

What about the Impact of the Capital Gains Deductionon Companies?

As discussed elsewhere in this publication, it’s sometimesdifficult to sell shares of a farm company to a person

If your farm’s profitsexceed your living costs,there is the opportunityfor a tax deferral

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outside your family. A purchaser usually wants to purchasethe individual farm assets so he or she can write off as anexpense the amount paid for livestock, and depreciate theamount paid for quota, buildings and equipment. If thepurchaser buys your shares he or she can only write off asan expense the balances in your company.

You may be able to arrange a share sale if you sell yourshares at a discount that compensates the purchaser for thelost tax write-offs. Provided your shares qualify as theshares of the capital stock of a family farm corporation (seeGlossary) you will be entitled to the $500,000 capital gainsdeduction.

Even after selling your shares at a discount, you may havemore cash in your pocket than you would have done hadyou caused your company to sell its assets and distribute itscash to you. The fact remains, however, that in most cases,you will have to take a discount on your shares in order tostructure a share deal. In other words your before-tax saleprice will be lower than it would have been had you notincorporated and had you, instead, sold assets while youwere still an individual. If this is the case, it seems that youmay be better off not to incorporate because as a soleproprietor or a partner in a partnership, you would receivethe full value of your assets and may still benefit from thecapital gains deduction. What therefore, are the possiblecompensating factors that would make you want toconsider a company? Well, there are several, and theyinclude the following:

n The accrued capital gains on your land, buildings andquota may be less than $500,000 and, in which case,you would not use all of your capital gains deduction ifyou did not incorporate. On the other hand, if you didincorporate and sell shares, you may use more of yourdeduction. This is because you would be able toconvert what would have been a taxable sale oflivestock or taxable recapture of depreciation on yourequipment and buildings into a capital gain on the sale

Sale of your companyto a third party may bedifficult

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of your shares, some or all of which might be offset bythe capital gains deduction.

n As mentioned above, by incorporating your farm andselling shares, you convert what would have beenordinary income (livestock proceeds, recapture, etc.)into a capital gain. Because only a portion of capitalgains are subject to tax, there is a potential tax benefiteven where the capital gain on your shares exceedsyour capital gains deduction.

n You can crystallize your accrued capital gain on yourland by transferring it to your company at fair marketvalue (you would need to consider the implications ofthe alternative minimum tax, see Chapter 9). Thiswould enable you to take advantage of your capitalgains deduction now and prevent the government fromtaking it away by future tax changes.

n You could also crystalize the accrued gain on yourquota in the same way and take advantage of yourcapital gains deduction. Here, however, you need toremember that:

a) there will be a recapture of your previous quotawrite-offs, and

b) the “step-up” in the quota value to the companycannot be depreciated for income tax purposes tothe extent that it's represented by a gain that'scovered by your capital gains deduction.

So what are the conclusions with respect to the use ofcompanies and the capital gains deduction? Clearly yourdecision is much more complicated than it was previously,but there are some general principles that you should keepin mind:

1. The capital gains deduction, while still extremelyvaluable, has less value than it used to when a higherportion of your capital gain was subject to tax. If youhave an accrued capital gain of at least $500,000, which

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ordinarily would be taxed at the top rate, the deductionis worth approximately $125,000 in tax savings (basedon the proposed 50% inclusion rate for capital gains).If each of you and your spouse have accrued capitalgains of $500,000, the potential savings double.

2. It is not necessary to use a company to take advantageof your capital gains deduction. A transfer of yourassets to a partnership will sometimes be the betteroption because you can go from there to a company, orsimply unwind the partnership, without incurring tax,provided you follow all the rules. Therefore, look atthis option first.

3. Look at other non-company options such as transferringsome of your capital property to your spouse andelecting out of the "rollover" rule. Make sure you don'ttrigger recaptured depreciation and ask for advice onthe impact of the attribution rules (see Chapter 10).

4. If the bulk of your accrued capital gain is on land, by allmeans look at the merits of incorporation because youcan “lock in” your accrued deduction when you transferyour farm to the company. Bear in mind, however, thatany future increases in your land value will not beprotected by the capital gains deduction unless you cansell shares of your company.

5. If (a) your overall accrued capital gain (or quota gain) issignificant, or (b) it is likely that a sale of the farm willoccur within the short to medium term but not in thenext few months, look at the benefits of incorporation.Bear in mind that to utilize the deduction on your quotayou will have to suffer the recapture of your previousquota write-offs. If this recapture is significant theincorporation will be less attractive, particularly if thefuture sale may not occur for several years.

As a final comment, it may be possible in somecircumstances for you to incorporate but retain certainproperties outside the company (such as land) which you

Perhaps keep some ofyour assets outsidethe company

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could sell at a future time and claim the capital gainsdeduction. Generally speaking your land would continue tobe treated as a property that qualifies for the capital gainsdeduction provided your company is such that its sharesqualify as the shares of the capital stock of a family farmcorporation (see Glossary).

Dealing with Non-Farming ChildrenAs discussed in Chapter 8, one of your most difficult estateplanning problems is to develop a plan that treats your non-farming children equitably (not necessarily equally) andallows your farming children to continue operating yourbusiness. Sometimes, these objectives cannot be reconciledand you, your executors or your children are obliged to sella substantial portion of the farm to persons outside thefamily. In some situations, however, the use of a companyprovides the answer to your problem. This is illustrated inthe examples discussed in Appendix 1.

Other Matters to Consider with Companies

Principal Residence

If you are going to incorporate, you will want to considerwhether you should keep your principal residence outsidethe company. If you continue to own it personally you willretain the ability to claim the principal residence exemptionon the home and up to 1/2 hectare of land, and willcontinue to be eligible for the home-owner’s grant.

In the past, the decision as to whether to retain the principalresidence outside the company was sometimes influencedby whether the home was on a small acreage with aseparate legal title. If it was situated on a large acreagetogether with the farm buildings, the entire property wasoften transferred to the company because there was aconcern that perhaps the principal residence portion couldnot, by itself, be left outside the company and, if the whole

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property was left outside, it would not qualify for“rollover” to the farmer’s children. This latter concern isno longer a problem because the Income Tax Act providesthat property leased by an individual to a company thatqualifies as a family farm corporation of the individual, hisspouse or his child (see Glossary) qualifies for the“rollover”.

Some farmers who have built their homes on the main farmhave attempted to keep their principal residences outsidetheir company by transferring to the company only a partialinterest in the property. The undivided interest they retainis equal to the proportion of (a) the value of the home plus1/2 hectare of land to (b) the value of the whole property.Canada Customs and Revenue Agency has indicated that itdoesn’t consider this arrangement to be valid in a strictlylegal sense. However, if the farmer’s solicitor is preparedto use it and the farmer recognizes that it may complicatehis or her financing arrangements at some point in thefuture, there may not be much to lose by trying it.

Another complicating factor as far as residences areconcerned is that some farmers have been able to convinceour Tax Courts that they should be able to treat much morethan a half hectare of land as being part of their principalresidence. While the law in this area is still unclear insome situations, it appears that significant acreages may, intheir entirety, be included as part of a residence if (a) theparcel is equal to the minimum lot size or (b) it exceeds theminimum lot size but the excess cannot be subdivided. It isdifficult to determine at this time how our Courts willultimately deal with this matter and how the governmentmight respond if it concludes the decisions are toofavourable to taxpayers. In the meantime, however, if yourresidence is on a title that is separate from the main farm, itmay make sense to leave it outside of the company so thatyou have the maximum flexibility with respect to yourprincipal residence claim when the property is sold.

Is the principalresidence restrictedto a half-hectare?

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Potential Double Tax

If you transfer property to a company which has increasedin value since you bought it, and an income tax election isfiled so that the transaction is completed on a “rolloverbasis”, there is a possibility that your accrued profit will besubject to a double tax. It will be taxed in the companywhen the company disposes of the property and it will betaxed a second time when you or your heirs dispose of theshares that were issued by the company in exchange for theproperty.

As a practical matter, this is not usually viewed as asignificant problem for a farmer because the shares of afamily farm corporation (as defined in the Income Tax Act)can be transferred from one generation to the next on arollover basis. If the farm is to be sold in the near future ora significant portion of the shares issued by the companyfor the transferred property are to be redeemed in thatperiod, your adviser should give more attention to thismatter.

Provincial Sales Tax

Provincial sales tax should not be a significant concern ifyou incorporate your farm because the majority of yourassets will be exempt from tax. However, the tax couldstill apply to automotive equipment and certain other assetsif the incorporation is not structured properly. This is amatter that you should discuss with your accountant.

B.C. Property Transfer Tax

Ordinarily, this tax will not be a problem on theincorporation of your farm; however, it could apply incertain situations. There is an exemption for a “familyfarm” if it is transferred to a “related individual” or to a“family farm corporation” but because these terms aredefined very strictly, it is always necessary to check if yoursituation fits the exemptions.

There are manyexemptions but it stillapplies to someassets

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Because this is a tax that applies to the purchaser, it will notusually be of concern if you sell to an arm’s length person.It will, however, be an issue that your accountant or lawyershould look at if you are selling to a member of your familyor to a family company.

Where the tax does apply, it is calculated at the rate of 1%on the first $200,000 of value and 2% of the remainder.This is calculated on a property by property basis.

B.C. Capital Tax

Effective for years ending after March 31, 1994, thegovernment introduced an exemption from the B.C. CapitalTax for family farm corporations, as defined. Theexemption is worded fairly broadly and should extend tomost family farms.

If you are considering the use of a company, youraccountant should make sure the exemption from capitaltax will apply.

Goods and Services Tax (GST)

The GST must always be considered when you transfersome or all of your assets to a company. However,provided the company is registered before the transaction iscarried out, this tax will not usually be a significantproblem.

Need for Professional AdviceIt is extremely important for you to receive advice from alawyer and a qualified accountant before incorporatingyour farm and setting up your estate plan. One or both ofthese individuals should be thoroughly experienced in taxmatters. This advice should be obtained well in advance ofthe transaction.

The transaction will have to be structured carefully so thatit fits within the rules in the Income Tax Act dealing with

GST won’t be asignificant problemprovided the companyis registered

Make sure youradvisers have thenecessary taxexpertise

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“rollovers” to companies. A special income tax electionwill have to be filed with Canada Customs and RevenueAgency within prescribed time limits.

The need for care cannot be over-emphasized. If thetransaction is structured incorrectly, you could beexposed to a tax penalty.

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12.Life Insurance

IntroductionLife insurance can play a useful role in your estate planprovided your insurance needs are correctly identified andthe product you buy meets those needs. Unfortunately, thisis easier said than done because there are many differentproducts available. In assessing your needs, you shouldrely on the advice you receive from your professionaladvisers such as your accountant, lawyer, governmentagricultural representatives and, most important, your lifeinsurance agent.

Basically, there are two types of insurance available -temporary insurance, also called term insurance, andpermanent insurance.

Term InsuranceTerm insurance is available in a variety of terms. The mostcommon are one year term, five year term, ten year termand twenty year term. The policy is renewable at the endof the term in accordance with a schedule that is knownwhen the policy is entered into. As you get older, thepremiums increase. In the latter years of your life, terminsurance becomes very expensive, because of yourincreased risk of death.

If the policy has a guaranteed renewal clause, it may berenewed without a medical examination. If it has aconversion clause, it may be converted into permanentinsurance even though you may become uninsurable. Mostterm policies sold today have guaranteed renewal andconversion clauses; however these clauses are not alwaysthe same. You should check, for example, whether therenewal rates are guaranteed or are subject to market

There are two basickinds of insurance

Temporary insurancebecomes much moreexpensive as you getolder

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conditions and whether there is any guarantee as to the typeof permanent product that you are allowed to convert to.

The important aspect of most term insurance is that it is notpermanent. It has to be renewed and it will only be ofbenefit if the policy is in force when you die. If your healthdeteriorates and you become uninsurable without having aguaranteed renewal and convertible clause, your policy willterminate. Many years ago, term insurance policies werenot normally available beyond the age of 65. Now thereare a number of products on the market that are availableup to age 75 and, in the case of Term to 100, up to age 100.

It is possible to buy certain types of term insurance througha group plan. The most common example is mortgageinsurance which is often available through banks, creditunions or other financial institutions. Group insurance mayalso be available through certain farm producer groups andChambers of Commerce.

Permanent InsurancePermanent life insurance, also known as "whole life" or"ordinary life", covers you for as long as you live. You paythe same premium (a level premium) throughout the life ofthe policy. The premiums are higher than term insurancepremiums in the beginning and lower later on. In effect,you pay a higher amount than needed to meet the insurancerisk in the early years and a lower amount than neededlater. The excess accumulates as cash values, which areinvested by the life insurance company. The cash values,together with the interest they earn, are needed along withfuture premium payments to carry the policy in later years.

Universal Life InsuranceUniversal life can cover you for as long as you live, but it'syour choice. These flexible policies allow you to increase,decrease or stop your premiums altogether. Usually you

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also have the option of increasing or decreasing the amountof coverage. Premiums are paid into a fund that earnsinterest at current rates, but these rates may not beguaranteed. A charge is deducted from the fund to cover(a) the cost of the insurance risk the company has assumedand (b) the expenses. The insurance continues for as longas there is enough money in the fund to pay the charges asthey come due.

CombinationsYou can combine different kinds of insurance. Forexample, you can buy whole life insurance for lifetimecoverage and add term insurance for the period of yourgreatest needs. Usually the term insurance is on your life,but it can also be bought for your spouse or children.

The important aspect of most term insurance is that it is notpermanent. It has to be renewed and it will only result in adeath benefit if the policy is in force at the time the deathoccurs.

Joint and Last to DieInsurance companies have developed policies that pay outonly on the death of the survivor of a husband and wife.These are called "Joint and Last to Die policies". They areuseful products because very often a family will not needliquid funds to pay income taxes or to finance bequests tochildren until both parents are dead. Depending on thecircumstances, this type of policy can be considerablycheaper than a conventional one that is payable on thedeath of one of the parents.

Joint and Last toDie policies canbe much cheaper

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Use of InsuranceLife insurance has several possible uses in your estate plan.It may be purchased for one or more of the followingreasons:

1. To provide coverage on farm bank loans.

2. To fund a buy-sell agreement between you and yourpartners or, if there is a company, the othershareholders. Many agreements between partners andshareholders have a buy-sell clause requiring each ofthe parties to hold insurance on the other party to ensurethat cash is available to the surviving party to enablethat party to fulfill the requirements of the agreement.

3. To provide funds for your estate’s liquidity. Dependingon the circumstances, your death may generate the needfor funds to meet outstanding tax liabilities created bythe deemed disposition of capital property on death orto pay gifts under your will. Liquidity may also berequired to cover probate costs, legal fees and finalexpenses.

4. If you have non-farming children, life insurance can bevery effective in equalizing your estate. Naming yournon-farming children as the beneficiaries of a lifeinsurance policy may enable you to achieve a moreequitable distribution of your estate and reduce thelikelihood of challenges to the estate distribution underthe Wills Variation Act of British Columbia. (Anexample of how insurance might be used for thispurpose is discussed in Chapter 8.)

5. Depending on the size of your farm, there may be asituation where the operation's success is largelydependant on the contribution of one individual. Thesudden death of this key person can be as disastrous tothe operation as his or her sudden resignation. Keyperson insurance can help protect the farm operationfrom this financial risk.

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6. To provide a tax-sheltered investment. Universal Lifepolicies have become a popular tax planning tool toshelter assets during an individual’s lifetime. Whenyou retire, it is possible to use this policy as collateralfor a series of loans, thus establishing a tax-free incomestream. Most institutions will lend against this type ofpolicy at a preferred rate. When you die, the bank loanwould be paid off using the tax-free death benefit fromthe policy, with the remainder of the insurance proceedsgoing to your beneficiaries.

7. To facilitate charitable giving. You might considerpurchasing a policy and assigning ownership to aregistered charity. You will then be able to treat theinsurance premiums as charitable donations.

Tax ImplicationsThe federal Income Tax Act contains many complex rulesconcerning the taxation of life insurance policies whichcannot be discussed in a publication of this nature. Froman estate planning standpoint, the tax-free mortality gain isthe most attractive feature of life insurance. It means that,properly arranged, a large pool of tax-free dollars can bemade available upon the death of a life insured person tocope with the expenses and other financial obligationsarising as a consequence of his or her death.

If you dispose of a policy during your lifetime, the policygain (i.e. the excess of the proceeds of the disposition overthe adjusted cost basis as determined under the Income TaxAct) will generally be subject to income tax. There is anability in some situations, however, to transfer a policy to achild or to a spouse on a “rollover” basis.

Policy loans are treated for income tax purposes as beingproceeds of disposition of the insurance policy with theresult that an amount will be included in income to theextent that the loan exceeds the adjusted cost basis of thepolicy. Because of this, it is usually better to use the

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insurance policy as collateral and obtain a loan from aninstitution other than the insurer.

Generally, premiums paid on life insurance policies are notdeductible for income tax purposes, although a deductionwill be permitted for some or all of your premium wherethe policy is required by your financial institution ascollateral for a business loan. The amount of the deductiblepremium in any year will be determined based on therelationship between the face value of the policy and thebalance owing on your loan from time to time during thatyear.

If a farm company is to be the beneficiary of an insurancepolicy that is payable on the lives of one of its shareholders,it is always important to confirm with your accountant thatthe existence of the policy will not prevent the company’sshares from being eligible for the capital gains deduction orthe tax-deferred rollover to your children. This will notusually be a problem unless the policy has a large cashsurrender value.

Where a company is the beneficiary of an insurance policyon the life of a shareholder and the insurance proceeds areused to redeem the shares of the deceased person, specialincome tax rules come into play. Because of thecomplexity of these rules, you should always receive expertadvice before arranging for your company to purchaseinsurance on your life or the lives of individuals in yourfamily.

ConclusionsDue to the multitude of products on the market, you willneed the advice of an insurance professional to helpdetermine your needs and clarify which products meet yourobjectives. You will be well advised to select an insuranceprofessional with the appropriate professionalqualifications and training who can offer ongoing periodicreviews of your situation.

The cost of some orall of your premiumscan be tax deductibleif the policy is requiredby your lender

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13.Implications of Family Law

IntroductionApproximately four out of every ten marriages end up inthe divorce courts these days so it is important you havesome understanding of the provisions of the FamilyRelations Act in B.C. This Act sets out the manner inwhich a family’s assets are divided between a husband andwife in the event of a marriage breakdown. Because it canhave a significant effect on an estate plan you should askyour solicitor for advice when he prepares or updates yourwill.

The basic premise of the Act is that marriage is aneconomic partnership through which each spouse is entitledto share in the financial rewards of the other’s efforts. TheAct establishes a category of assets called “family assets”that must be divided between the spouses in the event of amarriage breakdown. There is a presumption that familyassets will be divided on an equal basis unless it would beunfair having regard to criteria set out in the Act itself.

The classes of assets that are defined as being “familyassets” are as follows:

a) any property owned by a spouse and ordinarily used forfamily purposes; and

b) assets owned by a spouse and used for businesspurposes, if the spouse who does not have an interest inthe property has made a contribution in money ormoney’s-worth to the acquisition of the asset.

Category (b) above is extremely broad because acontribution towards the acquisition of the property isdeemed to include any savings realized by the familythrough a spouse’s effective household management orchild - rearing responsibilities. In many cases, it will be

“Family assets”must be divided ifthere is a marriagebreakdown

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difficult to argue that a spouse has not made at least somecontribution in this sense to all the assets acquired duringmarriage. This will be particularly true on a family farmwhere the spouse not only maintains the home but usuallyhelps with farm chores and business management as well.As a result, virtually any type of asset can constitute afamily asset for purposes of the Family Relations Act.

It appears that a spouse can acquire the right to share in aparticular property even though it might have been ownedby the other spouse before the marriage or might have beenobtained by that spouse from his or her parents. This isparticularly true where the marriage is of reasonably longduration - say ten years.

Issues that complicate and lengthen divorce proceedingsare disputes over valuations and maintenance, andarguments as to whether family assets should beapportioned other than on a 50:50 basis.

Tax Implications of the Division of Family AssetsAs mentioned in Chapters 6 and 7, the Income Tax Actcontains provisions that enable certain property to betransferred between spouses on a "rollover" basis unless thetransferor spouse elects to not have the "rollover" rulesapply. These provisions also apply where there is adivision of property pursuant to a provincial statute such asthe Family Relations Act. Despite the existence of theserules, however, the division of family assets can result inincome tax problems. The problems arise because eitherthe particular asset is not covered by the spousal "rollover"rules or the court directs that the asset be transferred to aperson other than a spouse.

Looking at the position of a farmer, income tax problemscan arise in the following situations:

1. Where quota is transferred to the farmer’s spouse it willusually be treated as having been sold at fair market

On farms, virtuallyany type of asset canbe a family asset

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value. Fortunately, a portion (perhaps all) of the quotagain is likely to be treated as a taxable capital gain thatis eligible for the capital gains deduction. If, as part ofthe settlement, the farmer ceases to carry on farmingand his spouse commences to carry on the business,there will be a “rollover” (see Glossary) for income taxpurposes.

2. Livestock and other inventories transferred to thefarmer’s spouse (or his children) will also generally betreated as having been sold at fair market value.

3. Land and buildings transferred to a trust for the benefitof the farmer's spouse will not transfer on a rolloverbasis unless the provisions of the trust meet therequirements of the Income Tax Act.

Attribution RulesGenerally, if property is transferred to a spouse, and theacquiring spouse does not pay fair market value, incomeand capital gains on the property are taxed in the hands ofthe original owner. Similar rules apply where property istransferred to a child under age 18 except that generally,they do not apply to capital gains realized on thedisposition of the transferred property. These provisionsare discussed in more detail in Chapter 10.

Where property is transferred to a former spouse theattribution rules do not apply. Where the transfer is madeto a spouse who commences to live apart by reason of abreakdown in the marriage, the rules are as follows:

a) Income from the transferred property: Incomeceases to be attributable after the spouse commences tolive separate and apart.

b) Taxable capital gains : Taxable capital gains cease tobe attributed after the spouse commences to liveseparate and apart, provided the individual whotransferred the property files an election, completed by

Special rules applywhere property istransferred to a spouseon the breakdown of amarriage

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both spouses, to the effect that the attribution rules shallnot apply. This election must be filed with the returnfor the year in which the separation occurs.

PlanningIn some cases, a straight-forward division of the familyassets of a farmer will result in a significant tax liabilityand it will be in the interests of both parties to see if theycan restructure the distribution so that the tax is deferred.

A person who is contemplating marriage, perhaps for thesecond time, may want to review with his or her solicitorthe extent to which the provisions of the Family RelationsAct can be avoided, or limited, by entering into a marriageagreement. Discussing this sort of agreement with a “brideor bridegroom-to-be” may not be easy because it istantamount to saying "I love you but ...". However, theseagreements are being used more often these days.

Where property is being transferred by parents to their sonor daughter and there is some concern over the FamilyRelations Act, the parties may want to consider making itclear in the documents that the transfer is being made totheir child and not to his or her spouse. This may have theeffect of reducing the spouse’s claim on the property ifthere is a marriage breakdown at some future time.

Administration of the Estate

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14.Administration of the Estate

IntroductionThe administration of an estate involves the collection,management, and realization of the property of a deceasedperson and the distribution of that property to thebeneficiaries of the estate. It will be carried out by thedeceased’s executor (or administrator if there is anintestacy) with the help of a solicitor.

As discussed in Chapter 2, your executors will normallyinclude your spouse and one or more of your children. Ifthey are not able to fully understand your business affairsthe family’s accountant or solicitor might be involved aswell.

The administration of your estate may take up to sixmonths, or even longer, because there will be a substantialnumber of assets to locate, value and transfer to theintended beneficiaries. The job will be somewhat easier ifthe farm is incorporated because the distribution of thefarm property will be accomplished by simply recordingthe transfer of your shares in the company’s share records.

You should look upon the administration of your estate asthe final test of your estate plan. You will not be around tosee if your plan passes this test but your family and friendswill. If your planning is effective, your executors’ job willbe made much easier.

The steps you can take to help your executor are as follows:

1. Ensure that all members of your immediate family areaware of, and in agreement with, the provisions in yourwill and know where the will is kept.

2. Ensure that your will takes into account all changes inyour business and family situation; it is expressed

Proper planningmakes yourexecutor’s job easier

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clearly, and it provides for the disposition of your assetsin an orderly and reasonable manner.

3. Ensure your executor is aware that he or she has beennamed and that there are alternates in the event he orshe is unable or unwilling to act.

4. Maintain a listing of major assets and liabilities andensure your spouse and children know where it is kept.This listing should include the street address or legaldescription of real property owned, a description of themajor farm equipment and its location, bank accountnumbers and details on insurance policies, etc.

5. Keep valuable papers such as land title documents,mortgages, agreements for sale, share certificates,bonds, savings account pass books and insurancepolicies in a safe place and ensure that your spouse andchildren know where they are.

Role of the Personal Representative (Executor)Your executor (or the administrator if there is no will) hassignificant responsibilities. He or she will usually delegatemuch of the work to a solicitor or accountant, but ultimateresponsibility remains with that person.

The executor's initial responsibility will be to makeappropriate funeral arrangements and to request a solicitorto apply to the court for Letters Probate. This documentconfirms the validity of your will and the executor’sappointment. If there is no will, an administrator wouldapply for Letters of Administration. If the executorappointed in your will is unwilling to act and there are noalternates, an administrator would again apply for Lettersof Administration with Will Annexed.

An administrator may be required to post a bond with thecourt. This requirement can be dispensed with in specialcircumstances.


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In dealing with your estate your personal representativewill do the following:

n determine the nature and value of your assets andliabilities

n advertise for information on debts that he or she is notaware of

n calculate and pay the income tax liability relating toyour final return and your estate

n obtain a clearance certificate from Canada Customs andRevenue Agency evidencing that all income taxes havebeen accounted for

n obtain the consent of your beneficiaries or pass theaccounts through court

n convert your assets to cash and distribute the proceedsor, if empowered to do so, distribute them “in specie”(see Glossary)

n set aside the assets or funds which are to be retained

n pay all legal fees and other costs of settling your estateand

n account to your beneficiaries, and to the court ifrequired to do so, for all actions in connection with theadministration of your estate.

Your personal representative is allowed to receive apercentage of the gross value of the assets of your estate ascompensation for the services he or she performs. Thisgross value would not include property which passes toyour beneficiaries outside of your estate (see latercomments).

Your executor hasmuch to do

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Role of the SolicitorThe solicitor’s function is to act on behalf of your executoror administrator. This person will normally advise yourpersonal representative on legal matters affecting theadministration of your estate, prepare the application forLetters Probate or Letters of Administration, prepare thedocuments required in connection with the conversion ofassets to cash or the distribution of property tobeneficiaries, and assist in the preparation of the financialaccounts of your personal representative.

Property That Does Not Become Part of the EstateCertain property passes directly to your beneficiaries, ratherthan through your will, and does not, therefore, becomepart of your estate. The distinction is significant becauseproperty treated in this manner is not usually available tocreditors.

Assets that do not become part of your estate include thefollowing:

n property held in a joint tenancy arrangement (seeChapter 3);

n proceeds from life insurance policies which havenamed beneficiaries; and

n proceeds from a registered retirement savings plan or aregistered retirement income fund which has a namedbeneficiary.

Tax Liability of the DeceasedAs discussed in Chapter 7, you are deemed to havedisposed of most of your assets immediately before yourdeath and the resulting taxable capital gains, allowablecapital losses, recaptured depreciation, etc. are included inyour final tax return. Because of the capital gains


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deduction (see Chapter 9) and the extensive "rollovers"available to you in respect of property bequeathed to aspouse, a spouse trust or a child (see Chapter 7), thisdeemed disposition will not usually result in a significanttax liability.

If you compute your income for tax purposes on the cashbasis, the livestock, feed inventories and accountsreceivable that you bequeath to a beneficiary are givenspecial treatment under the Income Tax Act. Theseproperties, together with certain other assets such asuncashed bond coupons, (described in the Income Tax Actas “rights or things”) may be included in your final return,or in a separate return on which a second set of personalexemptions is claimed. If the rights or things aredistributed to your beneficiaries within one year of death orwithin 90 days after the mailing of the Notice ofAssessment for the year of death, whichever is later, thevalue of the rights or things is included in yourbeneficiaries’ income in the year in which they dispose ofthe properties. This rule has the effect of providing arollover for livestock, inventories and accounts receivablebequeathed to your beneficiaries.

As a result of the capital gains deduction, and the ability ofexecutors to select the values at which certain farm assetsare deemed to be disposed of for tax purposes when theyare transferred to a child (see Chapter 7), your personalrepresentatives have an added responsibility when theyarrange for the preparation of your final return. Assumingthe will empowers them to do so, they will generally wantto select the highest permitted transfer values that will notresult in taxes being paid by your estate.

The farming assets which are eligible for this treatment arethe “qualifying farm properties” (see Glossary) exceptquota. The transfer value selected for each asset must bebetween its “cost amount” (see Glossary) and its fairmarket value. In determining the optimum transfer valueyour personal representatives must take into account your

Special rules forlivestock, inventoriesand accountsreceivable…if youare on the cashbasis

Capital gainsdeduction increasesyour executor’sresponsibilities

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unused capital gains deduction. Fortunately, they no longerhave to consider the possibility of you being subject to thealternative minimum tax.

If you had sold farm property during your lifetime and hadbeen carrying forward a capital gain reserve in respect ofthe unpaid sale proceeds, the taxable portion of the reservemust be included in your final return as a taxable capitalgain. If the debt on which the reserve has been claimed isbequeathed to your spouse, the reserve flows through to thespouse provided a special election is filed with CanadaCustoms and Revenue Agency.

If you realize allowable capital losses in the year of death,or in the preceding year, they can generally be deductedfrom income from any source without restriction.Ordinarily, these losses, if incurred after May 23, 1985,may only be deducted from taxable capital gains. If youhave claimed the capital gains deduction in any year, theallowable capital losses which can be deducted fromincome other than capital gains is reduced by the amount ofthe deduction.

Gifts made to registered charities in the year of death, orbequeathed to them in your will, are eligible for a tax creditin your final return or in the return for the previous year.

Filing of Returns and Payment of TaxThe deadline for filing a tax return for a deceasedindividual depends on whether that person carried on abusiness in the year of death.

Capital gains reservecan flow through tospouse


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Filing DeadlineWhere There Where There

Taxation Year Is a Business Is No Business

Year ending priorto date of death

If death occursbefore June 16 –within 6 months ofdeath

If death occursbefore May 1 –within 6 months ofdeath

In other cases, byJune 15

In other cases, byApril 30

Year of death Generally later of 6months after deathor June 15 offollowing taxationyear

Generally, later of 6months after deathor April 30 offollowing taxationyear

If your will creates a spouse trust, the final return may befiled up to eighteen months after the date of your death. Ifthere is a separate return for rights or things, it must befiled by the later of one year from the date of death and thedate that is ninety days after the mailing of the Notice ofAssessment in respect of the final return.

Your estate must also file a return. If the administration iscompleted in less than a year there will be only one returncovering the period of administration. If it extends beyondone year, a separate return will have to be filed for each“taxation year”. The “taxation year” of an estate is theperiod for which the accounts are ordinarily made up.Usually, the taxation year of the estate will end on theanniversary of the date of death or on December 31. Thetaxation year cannot exceed twelve months and after theyear-end has been established it cannot be changed exceptwith the permission of Canada Customs and RevenueAgency.

Generally, the tax owing by a deceased individual for theyear of death is due on the later of 6 months after death orApril 30 of the following year. However, to the extent thatthe deceased has amounts included in his income in respectof rights or things or in respect of taxable capital gains or

Your estate mustfile a return

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recaptured depreciation arising from the deemeddisposition of capital property owned at death, the personalrepresentative can elect to pay the tax in up to ten annualinstalments. The government charges interest on theunpaid tax.

Clearance CertificateIt is important that your personal representative obtain aclearance certificate from Canada Customs and RevenueAgency before distributing your estate to yourbeneficiaries. If your personal representative fails to dothis he or she will become personally liable for the unpaidtaxes, interest and penalties.

Accounting RecordsExcept where your personal representative is the solebeneficiary, he or she must keep accurate accountssummarizing the administration of your estate. Theaccounts will generally include an inventory of the originalestate assets, details of all money received and disbursedand a summary of the assets on hand. The supportingbooks and records should be maintained until all clearancecertificates have been issued.

Conclusions

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ConclusionsEstate planning is a broad subject that isespecially important to you, as a farmer. Thecapital-intensive nature of your business meansthere is a need for a well-thought-out estate plan.If you neglect this job your family may sufferconsiderable anguish and there may be financialpenalties as well.

A good estate plan will not be “hashed out” on an“overnight” basis after an initial consultationwith a lawyer or accountant; nor is it somethingthat remains static except in the very late stagesof your life. A good estate plan will have to bediscussed by your family over a considerableperiod of time. It will incorporate the consideredopinions of all members of your immediatefamily. Your solicitor and accountant will beable to make a useful contribution in the earlystages by recommending how you shouldapproach the planning process. They will also beable to advise you of the estate planning tools atyour disposal.

A good estate plan will evolve over time. It will beflexible while your children are growing up anddeciding what they want to do. It will ensure youare well provided for during your retirement andyour children are treated equitably.

The time you devote to estate planning will berepaid many times over in the increased peace ofmind of your family and the savings in yourtaxes, estate management costs and propertytransfer procedures.

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BibliographyCanadian Estate Planning • Mary Louise Dickson and

And Administration James R. Wilson

Estate Planning Checklist • British Columbia Ministryof Agriculture, Food andFisheries

Estate Planning for Farmers • Kim E. Johnson

Taxation and the B.C. Farmer • British Columbia Ministryof Agriculture, Food andFisheries

Income Tax Implications • D.A.G. Birnie and J.of the Family Relations MargolisAct of British Columbia

These Taxing Times • W.S. Wallace

Managing the Multi- • Canadian Farm BusinessGenerational Family Management CouncilFarm (a series of fourhandbooks)

Illustrations of Family Farm Transfer Arrangements

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Appendix 1


An Unincorporated Dairy Farm

Situation

Alan is a dairy farmer aged 63 who is contemplatingretirement. He has a son, John, who would like to takeover the farm and three daughters who have married andmoved off the farm. Most of the farm assets were acquiredby Alan alone but there is one parcel of land on which hisresidence is located that is owned jointly with his wifeElaine. This additional parcel is ten acres, most of which isused in the farming business.

John and his wife already live on the main farm.

Virtually all of Alan and Elaine’s assets are tied up in thefarm. The particulars of these assets are as follows:

Fair Market Tax Value Value(1)

Main Farm (50 acres)Land $ 650,000 $ 150,000Buildings 200,000 100,000

Equipment 150,000 50,000Livestock 225,000 NilQuota 2,000,000 120,000

$ 3,225,000 $ 420,000Additional parcel (10 acres)

Land 200,000 50,000Residence 150,000 100,000

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(1) Represents the cost (or depreciated cost) for income taxpurposes. Sale proceeds in excess of this amount willresult in an income inclusion to Alan and/or Elaine(except for the residence).

What Are the Options?

Well, the first option might be to sell the main farm,equipment, livestock and quota at fair market value. This isnot likely to be acceptable, however, because there wouldbe a large tax liability. Alan’s capital gains deductionwould offset the capital gain on the land but there wouldstill be a substantial income inclusion in respect of thequota and livestock, and the recaptured depreciation on thebuildings and equipment.

An alternative would be for Alan to sell his land at fairmarket value so as to make use of his capital gainsdeduction, and to sell his buildings, machinery and quota athis tax values. The livestock would have to be sold at fairmarket value but because Alan reports his income on thecash basis, he wouldn’t have to pay tax on this sale until hereceived the proceeds.

If the transaction were structured on this basis, the saleprice would be $1,145,000, calculated as follows:

Fair Market Sale Value Price

Main FarmLand $ 650,000 $ 650,000Buildings 200,000 100,000

Equipment 150,000 50,000Livestock 225,000 225,000Quota 2,000,000 120,000

$ 3,225,000 $ 1,145,000

The problem with this arrangement is that Alan and Elainewould be giving John a very substantial gift by allowing


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him to acquire the farm at such a large discount. Alan andElaine would have to consider whether it is appropriate tomake this kind of gift at this stage. What happens if John’smarriage should fail? Would his equity in the farm($2,080,000, before tax) be viewed as a family asset thatwould have to be divided between him and his wife on a50/50 basis? What happens if John decides to give upfarming after three or four years? Will he have receivedmore than he should have done?

It is likely these issues would concern Alan and Elaine andwould cause them to reject this option.

A third option would be for Alan to sell his livestock,machinery and quota to John and to rent the main farm.The quota could be sold at a value that would enable Alanto use his capital gains deduction and the equipment couldbe sold at his tax value. Again, the livestock would have tobe sold at fair market value but Alan could defer tax untilhe received the sale proceeds.

If the transaction were structured on this basis, the saleprice would be approximately $895,000, calculated asfollows:

Fair Market Sale Value Price

Equipment $ 150,000 $ 50,000Livestock 225,000 225,000Quota 2,000,000 620,000(1)

$ 2,375,000 $ 895,000

(1) The sale price would likely be higher if there was arecapture of previous quota write-offs.

This is likely to be a better arrangement for the familybecause the gift to John is considerably smaller. It is notnecessarily the best option, however, because Alan would

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have to include in his income the amount of his previousquota write-offs. This could result in a substantial taxliability.

A fourth option that may be more attractive to Alan andElaine would be to transfer the farm assets to a company ona “rollover” basis. This type of arrangement could be putin place so that:

a) There would be no income tax payable at the time thefarm is transferred to the company (except perhapssome refundable minimum tax if Alan sells his land atfair market value – see (b) below). An income taxelection would have to be filed with Canada Customsand Revenue Agency.

b) Alan might make use of his capital gains deduction byelecting to transfer his land to the company at its fairmarket value of $650,000. As mentioned above, hewould have to consider whether there would be aliability for the refundable alternative minimum tax.

c) Alan would avoid tax on his other assets by electing totransfer them at his tax value.

d) On the assumption Alan elects to transfer his land atfair market value, he would receive the followingconsideration from the company:

Debt (which can be repaid free of tax) $ 920,000Fixed value, non-voting shares 2,305,000

$ 3,225,000

e) Some or all of the future increase in the value of thefarm would accrue to John through his ownership of thegrowth shares in the company.

f) The company would be controlled by Alan (and Elaineperhaps) through a separate class of voting, fixed-value,non-participating shares.


139

g) Alan and Elaine would receive an annual cash flowfrom the company to meet their living needs. This cashflow might be received in the following manner:

n directors fees

n wages

n interest on the debt owed to Alan

n dividends on the shares owned by Alan or

n debt repayments

h) Alan and Elaine would retain ownership of theadditional parcel of land on which their residence islocated. The farm portion of the property could be usedby the company. Perhaps the company or John couldbe given a first right of refusal in the event the propertyis offered for sale after the death of the survivor of Alanand Elaine, or at the time they vacate the property, ifearlier.

i) Alan would have an ability to gift some of the non-voting, fixed value shares to John, either during hislifetime or through his will.

j) Alan and Elaine would have the ability to bequeath thefollowing assets to their three daughters through theirwills:

n whatever remains of the $920,000 debt owed by thefarm company (the terms of repayment could bespecified in the parents’ wills);

n the additional parcel of land (if, subsequent to Alanand Elaine’s death, this parcel were to be sold bythe daughters to John then, depending on thecircumstances, any capital gain realized by themmight be offset by their capital gains deductions);and

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n some of the non-voting, fixed value shares.Depending on the circumstances, these shareswould probably transfer to the daughters on a“rollover” basis.

Subsequent to the parents’ death, these shareswould be re-purchased by the company or acquiredby John. At that point, there would be income taxconsequences to the daughters, or to John, thatwould have to be evaluated.

To prevent the daughters’ shareholdings from de-stabilizing the farm, Alan and Elaine would have toestablish before their death the manner in which thedaughters would be able to liquidate theirinvestment. This would probably be accomplishedthrough some sort of share repurchase agreementthat would be entered into with the company andJohn.

As part of the overall arrangement, Alan could have thecompany purchase insurance (on a joint and lastsurvivor basis) on the lives of himself and Elaine. Hewould have to seek advice from his accountant so thatthe policy didn’t disqualify the company as a familyfarm corporation. After the parents’ deaths, thecompany would receive the insurance proceeds andcould use them to repurchase the shares inherited by thedaughters.

By using insurance, John would be relieved of hisobligation to buy-out his siblings. Equally importantis the fact that, depending on the circumstances, thedaughters could have their shares repurchasedwithout any tax implications. Therefore, theinsurance has two benefits. First, it can fund the buy-out of the non-farming children and second, in the rightcircumstances, it can eliminate the income tax thatwould otherwise apply when the non-farming childrendispose of their shares.


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An Incorporated Nursery

Situation

Mark and Diane are aged 62 and are looking to bring theirthree children into their nursery operation. There are twocomponents to the business. The first is the growingoperation which is carried out on five 20 acre parcels andone 10 acre parcel. The product is shipped on a wholesalebasis to nurseries located throughout Western Canada aswell as to the family’s three nurseries located in B.C. Thegrowing operation is supervised by Mark with the help ofhis son John.

The nursery operation is run by Diane with the help of theother two children, Bob and Mary. Approximately 30% ofthe nursery’s products are grown on the family’s property;the remaining 70% are purchased for resale.

The nursery operation is operated by a family company(Nursery Co.) that is owned equally by Mark and Diane.The six parcels of land are also owned by Mark and Diane.

The 10 acre parcel is used almost exclusively by NurseryCo. There is no formal lease arrangement; the land issimply made available to the company. The other fiveparcels are used exclusively to grow product for the othernurseries.

Mark and Diane would like to bring Bob and Mary into theNursery Co. and to give John an ownership interest in thegrowing operation. Unfortunately, Bob’s marriage is indifficulties at the moment and there is no certainty it willlast very much longer.

Mark and Diane live on a property that is separate fromtheir farm.

Some Preliminary Comments

Nursery Co. is unlikely to be a family farm corporationbecause a substantial portion of its assets are likely

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associated with the purchase and resale of nursery products(rather than the sale of products that are grown by thecompany). If this is the case, the consequences will be asfollows:

n the shares of the company will not be eligible for“rollover” to the children

n the shares of the company may qualify as the shares ofa small business corporation and, in which case, thecapital gains deduction may be available

n the parcel of land that is used by Nursery Co. may notbe qualified farm property. If this is the case, it will notbe eligible for “rollover” to the children and it may notbe eligible for the capital gains deduction either.

It is possible Nursery Co. might become a family farmcorporation if it were to acquire the parcel on which itgrows its products. Whether this is the case would dependon whether more than 90% of the value of Nursery Co.’sassets would then represent property that is used principallyin the growing and selling of company-produced product.We will assume the value of purchased inventories is suchthat the above test would not be met and Nursery Co.would still not qualify as a family farm corporation.

What Are the Options?

An important element of any plan that Mark and Dianemight put in place should be to arrange for the parcel ofland used by Nursery Co. to qualify as farm property forpurposes of the “rollover” rules and the capital gainsdeduction. In the circumstances, the most appropriate wayof doing this might be for Mark and Diane to proceed asfollows:

a) Transfer the six parcels of land to a new company(Grower Inc.) that will be operated as a family farmcorporation for income tax purposes. This companywill grow products for sale to Nursery Co. and thearm’s length nurseries. (Mark and Diane wouldcontinue to own their residence.)


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b) The parcel used to supply product to Nursery Co. wouldbe “rolled” to the new company in exchange for debtand non-voting fixed value shares. An election wouldhave to be filed with Canada Customs and RevenueAgency.

c) The parcels used to grow produce for other nurseriesmight be transferred at or near fair market value so as tomake use of a portion of Mark and Diane’s capital gainsdeduction. If this were to happen, the consideration toMark and Diane might consist entirely of debt that canbe paid to them free of tax.

In deciding this matter, Mark and Diane would want totake into account that the accrued gain on theirinvestment in Nursery Co. will be taxed at some point(see below). This being the case, they may want to setaside a portion of their capital gains deduction to offsetthis future gain.

Mark and Diane would have to receive advice on theapplication of the refundable alternative minimum tax.

d) The company would be controlled by Mark and Dianebut some of the growth shares would be issued to John.

e) Ultimately, all of the growth shares would likely beinherited by John. The additional shares could be giftedor bequeathed to him in the future, without income taxconsequences, provided Grower Inc. remains a familyfarm corporation.

f) If necessary, to make the inheritances equitable, Boband Mary could acquire some of the non-voting sharesof Grower Inc. There would have to be an arrangemententered into beforehand setting out how these shares areto be repurchased by the company. This repurchasemight be funded with life insurance on the lives ofMark and Diane.

g) Grower Inc. would maintain its family farm status byusing all of its land to grow products for resale and by

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ensuring Mark, Diane or John are actively involved ona regular and continuous basis.

h) At some point, Mark and Diane might be prepared togive up their voting interest in Grower Inc. or NurseryCo. so that the two companies would no longer beassociated for income tax purposes and each of themwould be entitled to the low rate of tax on the first$200,000 of active business income.

In regard to Nursery Co., Mark and Diane need torecognize that because the entity is not a family farmcorporation, they will not have the ability to transfer theirshares to their children on a “rollover” basis. If thecompany is still owned on their deaths, the survivor ofthem will be deemed to dispose of their shares at fairmarket value and there may be a tax liability on the capitalgain resulting therefrom. Whether a tax liability will existwill depend to some extent on whether the shares of thecompany qualify as “shares of a small businesscorporation” and, as such, are eligible for the capital gainsdeduction. It also depends on whether this deduction stillexists at the time of death. Because of this, Mark andDiane may want to consider the following:

a) A freeze of their interest in the nursery company underwhich they would exchange their voting commonshares for non-voting fixed-value shares.

b) Depending on the circumstances, it may beadvantageous to structure the “freeze” so that Mark andDiane are treated for income tax purposes as havingdisposed of their shares to the company at or near fairmarket value. The resulting capital gain would beoffset by claiming the capital gains deduction (providedthe shares qualify as shares of a small businesscorporation).

As an alternative, Mark and Diane might choose to useall of their capital gains deduction on the transfer ofland to Grower Inc. (see above) and deal with theaccrued liability on their shares in Nursery Co. inanother manner. They could, for instance, decide to


145

gradually redeem their freeze shares over theirretirement years (perhaps in lieu of receiving a salary)so that on their death, the tax liability would besubstantially eliminated. Professional advice would beessential because there are several issues to beconsidered.

An election may have to be filed with Canada Customsand Revenue Agency.

c) Mark and Diane would control the company through aseparate class of voting, fixed-value shares.

d) A family trust might be created to acquire some or allof the growth shares. Because these shares would haveno value when issued, they would be issued for anominal price. The beneficiaries of the trust might belimited to Bob and Mary and, in which case, thetrustees would be Mark and Diane.

Because the trust would be discretionary, Bob wouldnot have any entitlement to the trust’s property untilMark and Diane exercise their discretion and distributeit to him. Accordingly, his future interest should not beexposed to a claim from his wife if their marriageshould fail.

Mark and Diane would have to realize that becausetrusts (other than spouse trusts) are generally treated ashaving disposed of their assets at 21 year intervals, thistrust would have to be wound-up before the end of the21 year period.

e) Mark and Diane would continue to receive an annualcash flow from the company in the form of:

n dividends on their freeze shares;

n directors fees;

n wages; or

n a repurchase of their freeze shares.

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f) The trust would be wound up within 21 years and, atthat point, Bob and Mary would acquire the sharesowned by the trust. The distribution from the trustwould not result in income tax.

g) Mark and Diane could bequeath the remainder of theirnon-voting fixed-value shares to Bob and Mary. If theymade use of their capital gains deduction on the estatefreeze, there may be little or no tax liability in respectof this asset on their death.

h) To the extent there is an accrued tax liability on theshares of Nursery Co., Mark and Diane’s will wouldprovide that this liability is to be borne by Bob andMary.

Estate Plan Information

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Appendix 2


Advisers and Other Persons

NAME TEL # ADDRESS

Accountant

Bank

Executors

Insurance agent

Solicitor

Witnesses to will

Others

(Update periodically)

Cut out and retain with records

Appendix 2

148

Business Information

ITEM # LOCATION

Chequing accounts

Safety deposit box

Savings accounts

Important Agreements or Other Documents

ITEM LOCATION

Shareholder agreement

Partnership agreement

Powers of Attorney

Leases

Other




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Major Assets

REAL ESTATE

PROPERTY ADDRESS % OWNED

MORTGAGES AND AGREEMENTS RECEIVABLEPRINCIPALAMOUNT

PROPERTYADDRESS

MORTGAGOR/PURCHASER

LOCATION OFDOCUMENTS

TERM DEPOSITS, SHARES, BONDS AND OTHER INVESTMENTSPRINCIPAL

AMOUNT OR #OF SHARES

DESCRIPTION OFINVESTMENT LOCATION OF SECURITY



Appendix 2

150

Major Assets (continued)

FARM MACHINERY, EQUIPMENT AND VEHICLES

ITEMYEAR, MAKE AND

MODEL LOCATION




151

Assets (continued)

FARM MACHINERY, EQUIPMENT AND VEHICLES

ITEMYEAR, MAKE AND

MODEL LOCATION

LIVESTOCK

NUMBER DESCRIPTION



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Insurance

INSURANCE POLICIESPRINCIPALAMOUNT

INSURANCECOMPANY POLICY #

LOCATION OFPOLICY

Liabilities

MORTGAGES AND AGREEMENTS PAYABLEPRINCIPALAMOUNT PROPERTY ADDRESS

LOCATION OFDOCMENTS

BANK LOANSPRINCIPALAMOUNT NAME AND ADDRESS OF BANK

INSURANCE POLICY LOANSPRINCIPALAMOUNT

INSURANCECOMPANY POLICY # USE OF FUNDS




153

Leased Property

NAME AND ADDRESS OFLANDLORD

ADDRESS OF LEASEDPROPERTY

RENEWALDATE

Credit Cards

COMPANY CARD #

Suppliers with Charge Accounts

NAME ADDRESS



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Location of Will

ADDRESS PERSON TO CONTACT

Date Information Last Updated:



Glossary of Terms Used in Estate Planning

155

Appendix 3


Adjusted cost base: The “tax cost” that is used to determine the capital gain orcapital loss realized on the disposition of a capital property.(See definition of capital property.)

The adjusted cost base (ACB) of land will generally be theamount paid for it although adjustments are required incertain situations. If the land was acquired before 1972, itsACB will generally be determined by reference to its fairmarket value at the end of 1971 (V-day value).

The ACB of buildings and equipment, etc. will generally bethe amount paid for it.

The ACB of an interest in a family farm partnership (seedefinition of family farm partnership) is determined foreach partner by reference to the cost of the interest, thecapital contributions made to the partnership, the partner'sshare of profits and losses and his or her drawings. If thepartnership existed at the end of 1971 there are someextremely complicated transitional rules to take intoaccount.

The ACB of shares in a family farm corporation (seedefinition of family farm corporation) will generally be theamount paid for them although adjustments are required incertain circumstances. If the shares were acquired before1972, their ACB may be determined by reference to theirfair market value at the end of 1971 (V-day value).

Administrator: An individual or corporation appointed by a court toadminister the estate of a person who dies without making awill, or the estate of a person who dies with a will, butwithout anyone prepared or able to act as executor.

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Agreement for sale: A sale transaction in which the seller receives the sale priceover a period of time and retains title to the sold propertyuntil all payments are received.

Allowable capital loss: The deductible portion of the capital loss realized on thesale of a capital property. (See definition of capitalproperty.)

Attribution rules: The rules in the Income Tax Act that require income from aproperty or a capital gain or loss from the disposition of aproperty to be included in the tax return of a person whodoes not own the property. These rules apply in certainsituations where funds or property are transferred by anindividual to his or her spouse or to his or her minor child.

Bequest: A gift received from an individual through a will.

Buy-sell agreement: An agreement between business partners or shareholderswhich sets out important matters concerning their businessrelationship, including the manner in which the interests ofeach of the partners or shareholders are to be purchased onretirement and on death.

Canada Pension Plan: A compulsory social security programme of the federalgovernment that provides a retirement pension and certainother benefits.

Capital beneficiary: A person who is entitled to a share of the assets held in atrust. (See definition of trust.) The interest of a “capitalbeneficiary” must be distinguished from that of an “incomebeneficiary”. (See definition of income beneficiary.)

Capital cost allowance: The deduction that is allowed for income tax purposes inrespect of the reduction in value of buildings, machineryand equipment that occurs through its use. This deductionis often loosely referred to as “depreciation” or C.C.A.

Capital property: A property that is acquired for investment purposes, or usein a business, that will give rise to a capital gain, and notan income gain, if it is sold at a profit. Land, buildings,


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machinery, equipment, shares in a farm corporation and aninterest in a farm partnership will usually be capitalproperty to the farmer.

Clearance certificate: A certificate to be obtained from Canada Customs andRevenue Agency by the personal representative of adeceased taxpayer before distributing the assets of theestate. Failure to obtain the certificate can make thepersonal representative personally liable for the deceased’soutstanding tax liability.

Codicil: An addendum to a will.

Cost amount: A term meaning the “tax value” of a particular property.

The “cost amount” of typical farming properties is asfollows:

Land - its adjusted cost base (see definition ofadjusted cost base);

Buildings, - its undepreciated capital cost (UCC) forequipment, tax purposes (see definition of UCC);etc., depreciated on the reducingbalance basis

Buildings, - its adjusted cost base (see definition ofequipment, etc., adjusted cost base):depreciated onstraight line basis

Intangible assets - 4/3 times the amount such as quota ofthe cumulative eligible capital (seedefinition);

Interest in a - its adjusted cost base (see definition offamily farm adjusted cost base);partnership

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Shares in a - their adjusted cost base (see definition offamily farm adjusted cost base).corporation

Cumulative eligible capital: The amount of a taxpayer’s undepreciated expendituresmade after 1971 on intangible assets such as quota. (Theseintangible assets are called eligible capital properties - seelater definition.)

Earned income: The income that may be contributed (within limits) to aregistered retirement savings plan in the year following theyear in which it is earned.

Eligible capital property: Intangible properties (such as quota or goodwill) acquiredin connection with a business. At the present time, three-quarters of the expenditure on such properties is added tothe taxpayer’s cumulative eligible capital and depreciatedfor tax purposes.

Family assets: The assets which, under B.C. Family Law, must be dividedbetween a husband and wife in the event of a marriagebreakdown, unless the court otherwise orders.

Family farm corporation: A farming corporation (company) that meets certain tests inthe Income Tax Act so that its shares may be transferredfrom one generation to the next on a “rollover basis”. (Seedefinition of “rollover”.) All or substantially all of its assetsmust have been used principally in carrying on a farmingbusiness in Canada and the farmer, his spouse or one of hischildren must have been actively involved in that businesson a regular and continuous basis. A holding company willqualify as a family farm corporation in certain situations.(Refer to separate definition of a “share of the capital stockof a family farm corporation” used in connection with thecapital gains deduction rules.)

Family farm partnership: A farming partnership that meets certain tests in the IncomeTax Act so that the partners’ interests may be transferredfrom one generation to the next on a “rollover basis”. (Seedefinition of “rollover”.) All or substantially all of itsassets must have been used principally in carrying on a


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farming business in Canada and the farmer, his spouse orone of his children must be actively involved in thatbusiness on a regular and continuous basis. (Refer toseparate definition of an “interest in a family farmpartnership” used in connection with the capital gainsdeduction rules.)

Family Relations Act: The legislation in British Columbia that deals with thedivision of assets that occurs when there is a marriagebreakdown.

Formal will: A document, usually type-written, setting out anindividual’s wishes regarding the disposition of assets afterhis or her death, signed by the individual and two witnessesin the presence of each other.

Guaranteed renewal A clause in a term insurance policy requiring the insurer toclause: renew the policy even when the insured’s health

deteriorates. (See definition of term insurance.)

Income beneficiary: A person who is entitled to share in the income earned onassets held in trust. (See definitions of trust and capitalbeneficiary.)

Income-splitting: An arrangement which has the effect of transferring incomefrom a “high tax-rate” person to a “low tax-rate” person sothat the overall tax liability is reduced.

“In specie”: Assets are distributed from an estate "in specie" if they aredistributed in their present form. (The alternative would beto sell them and distribute the cash proceeds.)

Interest in a family A term used in connection with the capital gains deductionfarm partnership: rules to describe a partnership interest that entitles the

holder to the $500,000 capital gains deduction. The term issimilar (but not identical) to the term “family farmpartnership” (see Glossary) which describes a farmingpartnership that entitles the partners to transfer theirinterests to their children on a rollover basis. For purposes

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of the capital gains deduction, the partnership need notcarry on the business of farming itself. Its property may beused in the business of farming by the individual partner,his or her spouse, children or parent or certain otherentities. Throughout a period of at least two years morethan 50% of the value of its assets must represent propertythat has been used principally in the business of farming inCanada and the partner, his or her spouse, child or parentmust have been actively engaged in that business on aregular and continuous basis. At the time of sale of theinterest, at least 90% of the value of its assets mustrepresent property that has been used principally in thebusiness of farming in Canada.

Inter-vivos: An “inter-vivos” transaction of a particular person is onecarried out during his or her lifetime rather than after death.

Intestate: The term used to describe the estate of a person who dieswithout leaving a will.

Investment expenses: Expenses which may restrict an individual’s ability to usethe capital gains deduction. These expenses include netrental losses, interest on funds borrowed to acquire passiveinvestments, losses from interests in limited partnershipsand 50% of certain tax shelter deductions (see definition ofinvestment income).

Investment income: Income of an investment nature that offsets investmentexpenses and makes it easier to use the capital gainsdeduction. This income includes dividends, interest andincome from rental properties (see definition of investmentexpense).

Issue: All persons descended from a common ancestor.

Joint tenancy: A form of co-ownership under which the interest of adeceased person automatically passes to the co-owners.


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Letters of Administration: A court-approved document giving a person the right toadminister the estate of a person who dies without leaving awill.

Life annuity: An annuity that is payable throughout the life of theannuitant. There may be a guaranteed minimum pay-outperiod or a “joint and last survivor option” under whichpayments continue until the death of the survivor of thetaxpayer and his or her spouse.

Life estate: An interest in property limited in time to the life of aparticular person.

Old Age Security: The “old age” pension payable by the federal governmentto persons who meet the age and residence tests.

Permanent insurance: A type of life insurance that continues its coverage throughto the death of the person insured. (See definition of terminsurance.)

Personal trust: A term used in connection with the capital gains deductionrules which is defined to include testamentary trusts (seeGlossary) and most inter-vivos trusts.

Per stirpes: The basis of dividing the share of a deceased beneficiaryamongst his or her descendants according to theirrelationship to the deceased. (e.g. A father dies and issurvived by his son and two children of his deceaseddaughter. On a per capita basis each would receive one-third whereas on a per stirpes basis the son would receiveone-half and each grandchild would receive one-quarter.)

Principal residence: An owner-occupied home that can be sold at a profitwithout paying income tax.

Qualifying farm assets: A term used in this publication to describe the farmingassets that can be transferred by an individual to his or herchild on a rollover basis (see Glossary for meaning of“rollover”). The property is:

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n land;

n buildings, equipment, etc. depreciated for income taxpurposes on the reducing balance basis;

n eligible capital property (e.g. quota) (see definition);

n a family farm corporation (see definition); and

n a family farm partnership (see definition).

The land, buildings and equipment, etc. must be owned bythe individual and, prior to the transfer, must have beenused by him, his spouse, or any of his children principallyin the business of farming in Canada. Moreover, theindividual, his spouse or his children must have beenactively engaged in the business on a regular andcontinuous basis.

Registered Retirement A fund administered by a financial institutionIncome Fund: and registered with Canada Customs and Revenue Agency,

into which an individual can transfer his or heraccumulated registered retirement savings plan monies onretirement. The individual would then withdraw amountsfrom the fund throughout the remainder of his or her life.

Registered Retirement A plan offered by a financial institution and registeredSavings Plan: with Canada Customs and Revenue Agency that allows an

individual to save for his or her retirement by contributingamounts to the plan each year. Within limits, the amountcontributed is deductible from the individual’s income andcompounds free of tax while it is held in the plan.

Representation Agreement B.C. legislation that came into force in 2000 thatAct: significantly expands upon the scope of enduring powers of

attorney.

Reserve: A deduction that may be claimed for income tax purposesin a particular year where a taxpayer sells a property andthe sale price is payable over a period that extends beyondthe end of that year.


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Rights or things: The term given to items such as livestock, inventories andaccounts receivable of a “cash-basis farmer” that are givenspecial treatment in the final income tax return of adeceased individual.

Rollover: A term used in this book to describe a transfer of propertyin which the person disposing of the property is notautomatically taxed as though he or she received fairmarket value. Property disposed of in a "rollover"transaction is usually treated as having been transferred at avalue between its cost amount (see Glossary) and fairmarket value.

Share of the capital A share in a farm corporation (company) that entitlesstock of a family farm the shareholder to the $500,000 capital gains deduction.corporation: The term is similar (but not identical) to the term "family

farm corporation" (see Glossary) which describes a farmingcorporation that entitles the shareholders to transfer theirshares to their children on a rollover basis. For purposes ofthe capital gains deduction, the corporation need not carryon the business of farming itself. Its property may be usedin the business of farming by the individual shareholder, hisspouse, children or parent or certain other entities.Throughout a period of at least two years more than 50% ofthe value of the company's assets must generally representproperty that has been used principally in the business offarming in Canada; and the farmer, his spouse, child orparent must have been actively engaged in that business ona regular and continuous basis. At the time of the sale ofthe share, at least 90% of the value of the company's assetsmust generally represent property that has been usedprincipally in the business of farming in Canada.

Siblings: Brothers or sisters.

Sole proprietorship: A business carried on by an individual.

Spouse: For purposes of the Income Tax, a spouse includes acommon-law spouse.

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Spouse trust: A trust established by a taxpayer for the benefit of hisspouse. Property transferred to such a trust is deemed to bedisposed of for income tax purposes on a “rollover basis” ifcertain requirements are met.

Taxable capital gains: The taxable portion of the profit realized on the dispositionof a capital property. (See definition of capital property.)

Tenancy in common: A form of co-ownership under which the co-owner’sinterest can be gifted, sold or bequeathed to any person.

Term annuity: An annuity payable for a specified number of years.

Terminal loss: The undepreciated capital cost (UCC) of a particular fixedasset class that can be deducted from income when allassets of that class have been disposed of. (See definitionof UCC.) There are rules which restrict the deduction of aterminal loss by a corporation, trust or partnership incertain situations.

Term insurance: A type of life insurance that is usually less expensive thanother types and is renegotiated on the policy anniversarydate. It becomes progressively more expensive as theindividual becomes older and may become non-renewableif the individual’s health deteriorates and there is noguaranteed renewal clause in the policy. (See definitions ofguaranteed renewal clause and permanent insurance.)

Testamentary trust: A trust established by the will of a deceased individual.(See definition of trust.)

Testator/Testatrix: The person who makes a will (testator - male; testatrix -female).

Trust: An arrangement under which assets are set aside by anindividual and administered by a trustee for the benefit ofanother person.


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Undepreciated capital The undepreciated expenditures in respect of buildings,cost (UCC): machinery and similar properties, calculated by asset class

and written off on a reducing balance basis.

Vest indefeasibly: A property “vests indefeasibly” if the person acquiring itobtains a right to absolute ownership in such a manner thatthe right cannot be taken away by any future event.

Wills Variation Act: A statute in British Columbia that allows a court to vary theprovisions of a will if it considers that the testator has notprovided adequately for his or her spouse or children.