Taxation on the Transfer of Farm Business Assets to Family Members
Table of Content
Every farm business, whether a sole proprietorship, partnership or corporation, will some day change ownership. This factsheet deals with the tax implications of transferring farm assets to family members and the options available to minimize tax.
Prior to any major transfer of assets it is critical to consult a tax advisor. Do this well in advance, since the best tax results often require a two or three year planning window.
For information on the sale of farm assets outside the family see OMAFRA Factsheet Taxation on the Sale of Farm Business Assets. For an overview of the succession planning process refer to the Farm Succession Planning Guide, Publication 70.
A change in farm ownership is often a significant transition, with two significant components. One is the "procedural" dimension dealing with the how, when and what to transfer. This could include tax implications, credit arrangements, business organization, operating agreements, insurance, wills and legal documentation.
The second is the "psychological" dimension. This involves the family and relationship dynamics that often determine the ultimate success of a family farm business transfer. Components include the meshing of personal and business goals, the willingness to let go of ownership, the selection and training of a successor(s) and communication among family members.
Transition Manager and Teamwork
A farm transfer and succession plan can be complex. Given the multitude of components an advisory team is essential. A business management advisor can help the family:
The accounting and legal advisors can fine tune the alternatives and implement the decisions made by the family.
The most successful farm business transfers usually reveal a strong transition manager who acts like a team captain. Ideally the farm business owner would fill this role, providing the leadership, attitude and patience needed for a successful transition.
Before formulating any meaningful transfer plans, it is crucial to clearly identify family and business goals and communicate these to all farm family members. Some farm families find this easy, others benefit from professional advice. A current business advisor may be able to help with this step or direct you to another professional.
Farm Business Viability
Since the business must be profitable, or have profit potential for a farm transfer to occur, determine the financial condition of the business early in the transfer planning process.
Financial Needs of Parents
If parents have other assets or sources of income, they could be more generous in both a transfer price and credit terms. However, this would not be the case if the parents have considerable cash needs.
A successful farm business transition is more likely where the successor(s) have management experience. This is often obtained through owning assets, revenue-sharing arrangements or where progressive management responsibility is given over time.
There are several methods of transferring farm business assets.
The Income Tax Act, 1985 allows farmers to defer tax on the transfer of farming assets to a spouse or child. This is called a "rollover". Spouses can also receive non-farming assets by way of rollovers. On a rollover of farming assets to a child any price between zero and fair market value can be chosen, although for tax calculation purposes the tax cost is used as the lowest value. The rollover provides significant flexibility in choosing appropriate transfer values. Even though the $1,000,000 capital gains exemption may be available, it is desirable to maintain the eligibility for the rollover.
The term "child" has an extended meaning and includes a daughter, son, grandchild, great grandchild, son-in-law, daughter-in-law, adopted child, stepchild or their spouses who are resident in Canada. In addition a person who, at any time before aged 19, was wholly dependent on the taxpayer for support and of whom the taxpayer had, at that time, in law or in fact, the custody and control is considered a child.2
Rollovers of property to a child must meet the requirements outlined below.
Requirements for Tax Deferral Rollovers From Parent To Child
To qualify for the rollover to a child the eligible property must, before the transfer, be principally used in a farming business in which the individual, the spouse, common-law partner or their child or parent, was actively involved on a regular and continuous basis.3
According to the Canada Revenue Agency (CRA) "principally used" means the property must have been farmed for more than 50% of the time of ownership by the transferor. See OMAFRA Factsheet Taxation on the Sale of Farm Assets for a more detailed explanation of the term "principally used".
Pitfalls That Could Negate Rollovers
Taxation of Capital Gains
50% of a capital gain is tax-free. The other half is subject to regular tax. This portion, called the taxable capital gain, is added to all other income in the year the gain occurs. Any allowable capital losses can be deducted from the taxable capital gain. If the capital gain occurs on a corporately owned asset, 50% of the gain is tax-free and is allocated to the Capital Dividend Account. Dividends from this account are received tax-free by the shareholder. The other half of the gain is taxable in the corporation.
Some tax credits may be affected in the current year and/or the year after reporting a capital gain, even though the capital gains exemption is used. This is because the taxable capital gain is reported on your tax return and affects the calculations of tax credits even though the exemption is used to reduce the tax paid. The increased net income may result in the claw back of some benefits such as the Old Age Security and Child Tax Benefits in the current year and may also reduce them in the year following the capital gain.
$1,000,000 Capital Gains Exemption5
In 2015, the Capital Gains Exemption was increased to $824,176 (up from $813,600 due to indexing) plus an additional exemption amount of $175,824 bringing the total Lifetime Capital Gains Exemption to $1,000,000 for dispositions occurring after April 20, 2015. The $1,000,000 Capital Gains Exemption is available to individuals on the sale of qualified farm property. Anyone who used the entire $100,000 general exemption when it was eliminated in 1994 has $900,000 remaining.
The exemption is also available to partners in a partnership, since capital gains in a partnership flows directly to the partners who can then use the exemption. The capital gains exemption is not available to corporations; however, the shares of a family farm corporation are eligible for the exemption.
Qualified farm property6 includes:
Equipment and machinery are not eligible for the capital gains exemption. However, in a partnership or corporation, the value of equipment and inventory is included in the corporate shares or partnership interest.
Qualified farm property must meet the following definitions7:
Property purchased prior to June 18, 1987:
Property purchased after June 17, 1987:
In all cases, the qualifying individuals - whether farming as a sole proprietorship, a partnership or corporation - must be actively engaged in management and/or the day-to-day activities of the business.
Definition of "Principally Used"
Similar to the requirements under the rollover provision, the CRA defines "principally used" to mean "more than 50%" from either a time or usage perspective.
1994 $100,000 Capital Gains Election
In 1994, the $100,000 capital gains exemption for general property was eliminated. At that time, individuals were allowed to elect to increase the adjusted cost base of their property by up to $100,000, but not exceeding the February 1994 value. If you made such an election on your qualified farm property, you are deemed to have disposed of the property and reacquired it in 1994. As a result you must now meet the more difficult post-June 17, 1987 rules for qualified farm property on a future sale.
Splitting Capital Gains Between Spouses
If both spouses contributed to the purchase of property, they can split the gains to reduce taxes. Although both may be on title, it is the contribution toward the purchase that is the most critical. Generally, the capital gains from assets that are transferred to a spouse by way of gift attribute back to the spouse who transferred the asset. However the timing of the transfer is important.
Spouses added to title on or before December 31, 1971, would likely be able to split the capital gains. However, if they were added after that date, attribution rules would prevent splitting. See Section 6 for an explanation of the spousal attribution rules.
If the property is the asset of a spousal partnership, the capital gains will flow through to each partner based on their percentage ownership.
Calculating Your Capital Gain
Adjusted Cost Base
To calculate a capital gain or loss, you must know the adjusted cost base (ACB). This is the amount deducted from the selling price to determine a capital gain or loss. For property obtained before 1972, the ACB is the greater of original cost or the December 31, 1971 value. If obtained after 1971, the ACB is the purchase price plus costs. The cost base of land is adjusted by adding any non-depreciable capital improvements, legal and realty fees to the adjusted cost base. The ACB of buildings is increased by any capital improvements or additions, beyond just the normal maintenance and repair.
Table 1. Calculating Capital Gain, shows an example of a capital gain calculation.
Table 2. Within family transfer of assets provides a quick summary of the transfer options
In the act and this factsheet it is stated that certain eligible assets can be transferred to a child at values anywhere between their tax cost and fair market value (FMV). While these values are used to calculate tax implications, it does not prevent an asset being transferred below the tax cost, as in the case of a gift. For depreciable assets the tax cost is the undepreciated capital cost (UCC) and for land and other capital property it is the adjusted cost base (ACB). These values are used to calculate taxes.
Utilizing the Capital Gains Exemption
The $1,000,000 capital gains exemption makes it attractive for both parties to sell as close to FMV as possible. This provides the parent with tax-free proceeds (except for possible application of the alternative minimum tax (see Section 9)) and the child an asset with a higher ACB. To help finance the business and reduce debt charges, the parent can charge a low interest rate. The parent may even forgive a mortgage in his or her will. Holding a mortgage from a child also qualifies as a reserve and can spread capital gains over 10 years, if needed, to avoid minimum tax.
A parent sells a piece of eligible land to a child for $50,000. The fair market value (FMV) of the property was $200,000 and it was purchased for $100,000 (ACB). What would be the outcome?
The parent would have proceeds of $50,000 - with no capital gain and no tax to pay because that amount is below the ACB. The child will pay $50,000 but for future tax calculation he or she is deemed to have acquired the land at the ACB of the parent or $100,000. The same result occurs if the parent gifted the property to the child.
If the selling price falls between the ACB and FMV, part of the tax liability is incurred and part is deferred.
In general terms capital property,8 which includes most farm assets such as land, buildings, machinery, shares and partnership interests, can be transferred to a spouse or common-law partner on a rollover basis that is fully tax deferred. This can occur before or after death. There is also an option to elect out of the rollover and allow the asset transfer at its FMV. This can be done on an asset-by-asset basis.
On a transfer to a spouse or common-law partner there is no opportunity to set the price between the ACB and the FMV as there is on a transfer to a child.
Transfers of inventory and quota are the exceptions to the general rules. Inventory can be transferred on a rollover basis on death to any beneficiary, however, it must be transferred at FMV while alive.
Quota is considered eligible capital property and a rollover to a spouse, while alive or on death, is allowed as long as certain conditions are met. The conditions are:
However, there is no opportunity to elect to have the quota transfer take place at FMV.
Assets transferred to a spouse can result in income, such as interest or capital gains being attributed back to the transferring spouse. If, for example, a property was rolled over to a spouse and the spouse subsequently sold the property and incurred a capital gain, the capital gain would be attributed to the spouse who transferred the property and they would have to include the taxable capital gain in their income. Business income on the other hand is not attributed back to the transferring spouse.
In order to prevent these attribution rules from applying three conditions must be met:
Attribution rules can also apply to transfers to minor children (income but not capital gains) and loans to non-arms length persons.
This section deals with the tax implications of transferring various types of assets to a child. Any differences between a transfer while alive and at death are highlighted for the various types of assets.
Inventory - Livestock11, Crops and Supplies
Transfer While Alive
The tax treatment of inventory is significantly different depending on when it is transferred to a child and how the farm files taxes.
Transfers on Death
On death inventory can be rolled over to any beneficiary on a tax-deferred basis. When the inventory is sold it becomes income to the beneficiary. Farmers who file income tax on the cash basis have three options for reporting inventory and accounts receivables (these are called "rights or things"12) on death:
Buildings, Machinery and Equipment - Purchased After 1971 (Part XI Depreciable Assets)
Transfers While Alive
Buildings, machinery and equipment are usually transferred at or below their tax cost or in tax terminology their undepreciated capital cost (UCC). This is because values above UCC may generate "recapture". Recapture is the repayment of previously used deductions of capital cost allowance (CCA).
These assets can be transferred for any value between UCC and Fair Market Value (FMV). Table 3 illustrates the results of some alternative family sale prices.
These adjustments do not apply on a transfer at death.
Table 3. Alternative transfer prices for part XI assets
1 Assume a building and that the parent used the capital gains exemption. The child's cost for CCA purposes will be reduced to $20,000 due to parent's use of the capital gains exemption. See Income Tax Act, 1985 Paragraph 13(7)(e).
2 Because most parents want to avoid recapture, the UCC is a common sale price.
Transfers on Death
On death, buildings, machinery and equipment automatically roll over to beneficiaries at their undepreciated capital cost (UCC). This defers any recapture or capital gains. Similar to the transfer while alive an election can be made to elect out of this automatic rollover and select a price between UCC and FMV. Table 4 gives some examples.
Table 4. Part XI assets to a child
Buildings, Machinery and Equipment - Purchased Before 1972 (Part XVII Depreciable Assets)
There is no tax deferral for buildings, machinery and equipment purchased before 1972. They must transfer at their fair market value regardless of the sale price. The deemed proceeds for the parent is the fair market value while the cost to the child is the amount paid. However, if the parent transfers these assets as an outright gift, the child is considered to have paid the FMV.
Most depreciable assets, such as equipment, have decreased in value and disappeared since 1971, creating no tax concerns; but good buildings may have accrued capital gains since 1971. There is no recapture on the transfer of these assets. The rule of thumb is to transfer at either zero or FMV.
Transfers on Death
On death there is no rollover for pre-1972 assets. They pass to a child at FMV. Such assets are not subject to recapture of capital cost allowance, but can incur a capital gain. Any capital gains on pre-1972 buildings would be eligible for the $750,000 capital gains exemption.
Transfers While Alive
Generally a principal residence is deemed to transfer at FMV regardless of the sale price to the child. This is usually not a concern since a principal residence is exempt from capital gains. However, since the cost to the child is the price he/she paid, it is to the child's advantage to have the transfer take place at either zero or FMV as Table 5 illustrates.
Table 5. Alternative transfer prices for personal residence
A principal residence may also be eligible for the rollover and capital gains exemption if it is used principally in the farming business as described below.16
Corporate Ownership of Residence
A residence owned by a corporation is considered to be used principally for farming business if more than 50% of its use is to accommodate persons, or their dependants, actively employed in the farming business. Furthermore, the residence must be provided to these persons in their capacity as employees rather than as shareholders, and the residence must be part of the business operation in that it provides accommodation for employees whose services may be required at virtually any time by virtue of the nature of the farming operations.
Life and Remainder Interest
Obtain professional advise if an option being considered is to maintain a life interest in the farm house and transfer the remainder interest in that house to a child. This strategy can have unintended consequences for the child who receives the remainder interest.
Remainder Interest Transfer to Child
On the death of the parent, the child will have to report in his/her income the accrued capital gain that has occurred since the child received the remainder interest. However, the child will not have the benefit of the principal residence exemption since the parent's house is not a principal residence to the child. This could be a significant amount if 10 or 15 years have passed.
Quota - Eligible capital property
The tax rules for buying and selling quota are complex. What follows is a review of how tax is calculated on the sale of quota, followed by a discussion of the implications of a transfer within the family.
Depreciating (Amortizing) Quota and the Cumulative Eligible Capital (CEC) Account
Quota is a type of property called eligible capital property. When quota is purchased, three quarters (75%) is added to an account called the cumulative eligible capital account or CEC account. This account is used to determine the annual allowance for depreciation and to keep track of the quota that you buy and sell.
Quota is depreciable at a rate of 7% annually. The other one quarter of your quota purchase is non-depreciable. If you bought quota worth $100,000, $75,000 (75%) would be added to your cumulative eligible capital account and depreciated at a rate of 7% per year, on a declining basis.
The sale of quota can generate two types of taxable income:
Recapture on quota sales is similar to that of buildings, machinery and equipment. Recapture occurs when the cumulative eligible capital account falls below zero; a portion of the sale is recaptured and added to your income.
Increase in Value of Quota
If the quota has appreciated, the increase in value can be reported as either: (1) business income that is eligible for the capital gain exemption and, as such, is not subject to Alternate Minimum Tax (AMT); or (2) an election can be filed that deems the increase in the value of quota to be a capital gain similar to that on land or other non-depreciable capital property.17 The use of the election results in the following:
The election can only be used where there are recognized gains and not losses. A calculation can determine if the election would be advantageous or not. Table 6 shows an example of a quota sale.
Table 6. Example of quota sale. Information Needed for the Calculation:
1 Quota sold in fiscal period ending after Oct. 18, 2000 - the inclusion rate is 50%, down from 75%, which means an adjustment of 2/3
Quota Calculation Details
In the example shown in Table 6, $20,000 of recapture is added to the farm income, plus the farming income as a result of the increase in the value of the quota.
The $4,000 pre-1988 depreciation adjustment occurs because, in 1988, the capital gains inclusion rate was raised to 75% from 50%. Eligible Capital Property accounts were adjusted by 50% to account for the change in the amount of quota that was now eligible to be depreciated.
Depreciation taken before 1988, however, was not recalculated, so an adjustment is required at the time of sale to reduce the income from the quota sale by 1/2 the pre-1988 depreciation. This is depreciation that is allowed under the post-1988 rules. In this example, the depreciation taken before 1988 is $8,000, so the adjustment is $4,000, which is subtracted from the farming income from the quota sale.
Transfers While Alive
Quota can be transferred to a child on a completely tax deferred basis or at any price up to Fair Market Value (FMV). The tax deferred price is based on the following formula (4/3 x CEC) + 1971 Value, where the CEC is the cumulative eligible capital account and the 1971 value is the FMV quota holdings as of December 31, 1971. This amount would represent the highest price that would trigger no income. A sale between this value and FMV would trigger some gain and possibly recapture.
On the child's side there are potential reductions to the amount of the quota that can be added to the CEC and thus available for depreciation.
These deductions are only relevant for determining the amounts allowed for additions to the cumulative eligible capital account. They do not affect the cost used for determining future capital gains.
Table 7 illustrates the results of some alternative family sale prices. The examples assume that all quota was purchased after 1971 and thus the 1971 value deduction is zero. The FMV is $600,000. The current CEC balance is $50,000 and $40,000 of depreciation has previously been taken, one-half before 1988 and one-half after 1987. The parent claims a capital gain exemption.
There is no Alternative Minimum Tax calculation on quota if the election described above has not been taken.
Transfers on Death
On death there is no opportunity to elect out of the rollover provisions.18 While this means that the transfer takes place on a tax-deferred basis, it also means that on the final tax return the quota value cannot be bumped up to create a capital gain and utilize the parent's capital gain exemption.
A rollover of quota is allowed to any beneficiary, not just children. The quota is deemed to transfer at four-thirds (4/3) of the undepreciated balance of the cumulative eligible capital account (CEC). This results in no income to the deceased person with the beneficiary taking the deceased person's place for future tax calculations.
Table 7. Alternative transfer prices for quota (post-1971)
1 Deemed taxable capital gain = $400,000 - ($40,000 recapture) - (1/2 of $20,000 pre-1988 depreciation) = $350,000. Then use a 2/3 adjustment for the 50% inclusion rate, which equals $233,333.
2 If the parent uses the capital gains exemption, the child's tax cost is reduced by two times the taxable gain. In the first example this would be 2 x $233,333 = $466,666. This would reduce the child's cost from $600,000 to $133,334 ($600,000 - $466,666).
Land - Capital Property
Transfers While Alive
Farmland can be transferred at any value between ACB and FMV, both before and after death. Because land usually appreciates in value, parents often want to use their $1,000,000 capital gain exemption on the transfer. This strategy also benefits the child by giving them a higher ACB from which future capital gains are calculated.
In order to trigger a capital gain a sale must occur. Since children often cannot afford the full FMV, one option is for the parent to sell the property at the FMV and hold a mortgage or note on the property. On death, the outstanding debt is forgiven in the will. Forgiveness of debt outside of the will can have negative tax consequences and should be avoided.
Table 8 illustrates the results of different family sale prices.
Several exemptions from the land transfer tax are allowed on the transfer of farmed land to related individuals. To qualify the land must be used predominantly in farming by the individual or the related individuals prior to the transfer. The land must also be farmed by those family members after the transfer.19 The exemptions are:
There are circumstances where the exemption will not apply because the specific requirements for exemption have not been met. The exemption will not apply where:
Table 8. Alternative transfer price for land
Table 9. Transfer of partnership interest or corporation shares
Farm Family Parternerships and Corporations
Transfers While Alive
The Income Tax Act also provides for the deferral of tax on the transfer of an interest in a family farm partnership and shares in a family farm corporation. Both of these structures are defined in the Act.20 In order for the rollover provisions to apply, the partnership or corporation must meet the specific requirements outlined in the Act. These are complex; contact your tax advisor well in advance of any planned transfer since adjustments can be made to bring a partnership or corporation in line with the definitions (which are a requirement for the rollover treatment), but this must be done in advance of any transfer.
Like land, an interest in a family farm partnership and shares in a family farm corporation can be transferred at any value between ACB and FMV. This can occur either before or after death. Any capital gain generated can be offset by any available capital gains exemption.
Table 9 illustrates the results of alternative transfer prices. When the capital gain exemption is available it can be beneficial to sell an interest or shares at close to FMV to take advantage of the capital gains exemption and have a higher ACB for the child. This higher ACB would only be an advantage if the child sold the shares and not the individual assets. The alternative minimum tax may be a factor in some cases. For more information on partnerships and corporations see OMAFRA factsheets Farm Corporations and Farm Partnerships.
Transfers on Death
On death, farmland can be transferred on a rollover basis and all tax deferred, or at any price up to FMV. If the deceased parent has any capital gains exemption available, the transfer can take place at any value between the accumulated cost benefit (ACB) and fair market value (FMV) in order to incur some capital gain and provide the child with a higher ACB. The alternative minimum tax (AMT) does not apply in the year of death.
Land Transfer Tax
Land transfer tax is a tax levied by Ontario on the transfer of land that includes any buildings. Land transfer tax is normally based on the amount paid for the land, in addition to the amount remaining on any mortgage or debt assumed as part of the arrangement to buy the land.
The tax is levied on the consideration received and therefore gifts of land are not taxable. The tax rate is graduated, based on the transfer value.
The example in Table 10 shows that the land transfer tax on a property transferred for $800,000 would be $10,475.
Table 10. Land transfer tax on land. Transfer Value = $800,000.
Transfers on Death
On death, an interest in a family farm partnership and shares in a family farm corporation can be transferred at any value between accumulated cost benefit (ACB) and fair market value (FMV). The legal representative of the deceased may elect between the ACB and FMV in order to incur some gains and provide the child with a higher ACB at no tax cost to the estate if the $1,000,000 exemption remains. The alternative minimum tax (AMT) does not apply in the year of death.
Farm Business Transfer Example
From the above discussion, it is clear various values can be used depending on the needs and desires of the family. Capital gains can be deferred or triggered, recapture deferred or the farm business transferred at a price the child can afford. While there is no single strategy, there are general approaches.
A common strategy might be:
The highest transfer price that allows maximum deferrals is the combination of land at ACB, quota at (4/3 x CEC) - 1971 value, Part XI assets at UCC, Part XVII assets at FMV and personal residence at FMV.
Table 11. Transfer at fair market value (FMV)
1 UCC is the undepreciated capital cost and CEC is the cumulative eligible capital.
2 The calculation for the deemed taxable capital gain on quota is more complex than just taking 50% of the increase in value, as is the case with an asset such as land. The calculation for quota is based on $50,000 post-1988 depreciation, 1971 value of $0 and a CEC of $100,000.
Table 12. Transfer at tax cost, land at fair market value, note for inventory to defer income
Capital Gains Reserves
What is a reserve?
A reserve allows for a deferral in reporting either business income or taxable capital gains. It is allowed when all or part of the proceeds of the sale are not payable until after the end of the year in which the property is sold. A reserve is also available for quota, provided an election under section 14(1.01) of the act is made.
Usually a mortgage or a note is sufficient evidence that an amount remains outstanding. However, a promissory note without restrictions as to when payment can be demanded represents "absolute payment" of the debt and in such a case, a reserve will not be allowed. The note should contain restrictions, such as payable 366 days after demand, to ensure that a reserve can be used.
A 5-year reserve is allowed on dispositions to unrelated parties. A minimum of at least 20% of the gain must be brought into income each year.
A 10-year reserve is allowed on the disposition of land, depreciable property or a share in a family farm corporation or an interest in a family farm partnership to a child. Accordingly, a minimum of 10% of the gain must be brought into income each year.21
A reserve is not available to an individual who transfers property to a corporation that they control or did control or to a partnership in which they hold a majority interest.22 A reserve is not available in the year of death.23
Why use a reserve?
There are several circumstances where a reserve might be useful. Firstly, if a large capital gain has been triggered, alternative minimum tax (AMT) may be payable even though the capital gains exemption is used. The use of a reserve could spread the gain over a number of years, reducing the possibility of paying AMT. As the capital gain is removed from the reserve, the capital gains exemption can be used.
The second circumstance is where the capital gains exemption is not available or has been fully used. Spreading the taxable capital gain over a number of taxation years may prevent income levels from reaching the higher tax brackets. It may also reduce the clawback of benefits and the possible application of the AMT.
How is it calculated?
The amount available for a reserve is the lesser of two amounts:
Forgiveness of debt24
Forgiving the debt of a child while alive by way of a gift that reduces a note or mortgage, or any other indebtedness, can result in negative tax consequences for the recipient. The results could include reductions in farm losses, net capital losses and restricted farm losses. If none of these are available for reduction, then the ACB of the capital asset is reduced or 50% of the forgiven amount can be included in the income of the debtor. If a parent wants to gift money to a child while they are alive, he/she should consult with his/her accountant about the best way to do that. Simply writing off of debt or an exchange of cheques should be avoided.
Forgiveness of debt in a will (by bequest), on the other hand, does not have any of the negative tax consequences mentioned above. For example, a parent might sell a piece of property to a child at FMV to trigger a capital gain, which is offset by their capital gains exemption. The child may pay a portion of the debt while their parents remain alive and then the remaining amount is forgiven in the parents' wills.
Alternative Minimum Tax25 (AMT) is a tax on dividends from Canadian corporations and capital gains. The AMT calculation is an alternative calculation of taxable income that includes the non-taxable part of the capital gain. The calculation shown in Table 13 uses the approach outlined in the act, which includes a four-fifths (80%) downward adjustment of the capital gain followed by the deduction of the taxable capital gain. A simplified approach is to include 30% for the entire gain (30% x $500,000 = $150,000).
The AMT allows an exemption of $40,000, which means that the AMT has no effect until a gain of more than $133,333 is realized (the $133,333 times 4/5 equals $106,666, which equals a taxable capital gain of $66,666 (133,000 x 0.5) which when subtracted leaves $40,000, which is the amount of the exemption).
This amount can also be higher when the personal credits are used in the calculation. This alternative calculation is then compared to the regular tax calculation and, if it is higher, the additional amount is payable.
Any minimum tax paid can be carried forward up to seven years, and used as a credit against tax payable in those years.
Ontario also has an AMT, which is 33.67% of the basic federal tax calculated under the AMT calculation.
Table 13. Alternative minimum tax calculation
1 The calculation for the alternative minimum tax adjusts the capital gain downward by multiplying the gain by 0.80. This is done because of the capital gain inclusion rate change from 75% to 50%. (30% of the total gain of $500,000 can be used to arrive at the untaxed capital gain upon which the AMT is applied)
2 To calculate the regular tax payable, the 2015 federal tax rates were used. Federal tax rates are 15% on the first $44,701, 22% on income between $44,701 and $89,401, 26% on income between $89,401 and $138,586, and $29% on income of $138,586 and over. To calculate the federal tax payable in the minimum tax calculation, the rate is a flat 15%. The Ontario provincial minimum tax rate is 33.67% of the federal minimum tax.
3 Only the basic personal tax credit of $11,327 and the CPP credit have been used in this approximate calculation of federal and provincial tax payable, for the sake of simplicity. The use of other credits would further reduce the tax payable.
This factsheet is intended as general information and not as specific advice concerning individual situations. Although it outlines some of the legal and tax considerations of transferring farm assets, it should not be considered as either an interpretation or complete coverage of the Income Tax Act, 1985 or the various laws affecting family transfers. The Government of Ontario assumes no responsibility towards persons using it as such.
Discuss all asset sales or transfers with your accountant and lawyer before they are undertaken.
This factsheet was originally written by Rob Gamble, BSc. (Agr), MTax, Finance and Business Structures, Program Lead, OMAFRA, Guelph and revised by Dave McLeod, Business Finance Program Lead, OMAFRA, Guelph. It was produced, in part, from a paper written by Ralph Winslade, formerly with OMAFRA. The author would also like to thank Ed Mitukiewicz, C.A. of Collins Barrow, Chartered Accountants, Elora, Ontario for his review of this Factsheet.
1 Income Tax Act, 1985, Section 69
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