If you are contemplating buying farmland, the following are some important questions to ask your advisor and to consider yourself.
The main consideration is who will be the legal owner of the land. This is important for several reasons including:
- GST registration,
- Paying for the land,
- Reporting capital gains on the eventual sale of the land, and
- Income from the use of the land.
It is important that a buyer of farmland be registered for GST prior to the purchase. A GST registrant who purchases farmland does not pay GST on the purchase, rather you must self-assess GST and report the purchase on the GST return in the reporting period that includes the transaction. An equal and offsetting GST input tax credit would be claimed on this return with a net nil result – meaning you simply have to report the transaction, but no GST will be paid.
If the legal owner will be a proprietor, a partnership, a corporation, or a trust, the GST registration must be consistent with the legal owner.
Tax Considerations When Paying for the Land
The cost of farmland is not tax-deductible; therefore, the purchaser must have after-tax dollars to pay for it; you must pay tax to buy farmland. If the owner of the land is a farm corporation, the income tax rate could be as low as 11% in Alberta, meaning the farm corporation will have an 89-cent dollar after tax to pay for the farmland.
If the owner of the land is an unincorporated proprietor, partnership or trust, tax rates will be much higher, likely as much as 30%, meaning the unincorporated owner will have a 70-cent dollar after tax to pay for the farmland.
Reporting Capital Gains on the Sale of the Land
You may conclude, you should always use a corporation to purchase farmland, however, corporations do not get access to the capital gains deduction currently $1,000,000 per individual taxpayer. Therefore, on an eventual sale, the farmland owned by a corporation will result in a taxable capital gain with no capital gains deduction.
This is where speaking with an advisor comes in to assist with this decision-making process, a balancing act, that determines which option is better suited for you. In practice, a hybrid is often the solution; enough farmland owned outside of the corporation to maximize your capital gains deduction and the remaining farmland owned by the corporation.
If the conclusion is to buy the land without a corporation, it almost always makes sense to have both spouses’ names on the title for income splitting purposes and potentially accessing a second capital gains deduction.
Income From the use of the Land
If the owner of the land and the operator of the land are different, i.e., the farmer and spouse own the land but farm through a corporation, land rent can be charged to the corporation providing the farmer and spouse with the income necessary to pay for the land.
Another consideration would be to consider what you are buying. A purchase of farmland may include:
- Fences and corrals
- Bins and outbuildings
The value of these items can be carved out of the purchase price and depreciated for income tax purposes.
In addition, the purchase of farmland may be freehold or leasehold. The cost of purchasing a leasehold interest can also be depreciated for income tax purposes.
And finally, financing the purchase of farmland. Farmland values have increased substantially in recent years making it almost impossible to afford without another source of income or an inheritance. Lenders like Farm Credit Corp (FCC) recognize this and currently offer loans to buy farmland that is interest-only obligations, potentially forever.
Sounds scary, but perhaps the price of farm commodities will increase in the future and catch up with farmland values.
Before purchasing farmland, a call to your trusted advisor would make sense to ensure the land fits into your operation and your financial plan.
Meet Ward Thompson, CPA, CA, our senior Partner and author.
In addition to serving his many accounting and tax clients, he serves as a mentor for partners and managers and carries out special projects for clients as well as for the firm. Ward obtained his Bachelor of Commerce degree from the University of Alberta in 1985 and his CPA designation with Deloitte in 1990. He was admitted to the KBH partnership in 1994. Ward is an outdoorsman and an active real estate investor.
Ward learned a long time ago that accounting is not so much about numbers as it is about people; an accountant needs to know his client before he can serve his client. Ward responds to 100% of telephone calls, texts and e-mails, usually within an hour and strives to add value to every client situation. Many hours of professional development every year help Ward stay on top of changes to tax laws ensuring his clients get access to the best tax planning strategies available. In addition, Ward’s experience allows him to serve as a consultant for clients needing assistance with business management, growth, financing, mergers and acquisitions, corporate reorganizations, succession planning, wealth planning and estate planning.
Ward is also our resident expert in all things farm and agriculture-related.