Siblings who are farmers: Should they own land jointly, or as separate parcels? What are the tax implications?

One important tool in your farm succession toolbox is transferring land to your children on a “farm rollover” basis, either during life or at death. It’s pretty simple. But should you make two or more of your children co-owners of one parcel of land? How does this affect their future tax exposure?

Sean Rheubottom, B.A., LL.B., TEP

If you’re a farmer thinking about your estate or succession plan, you’re almost certainly thinking about transferring some of your personally-owned land to your children, either during life or through your Will. The “farm rollover” rules in the Income Tax Act (Canada) can make this transfer quite simple and probably even tax-free.

When you first acquired your land, you may have been advised that it was best to own it jointly with your spouse. This is generally good advice - you likely intend that on the death of one spouse the land will pass to the surviving spouse. Joint ownership makes that transfer simple, and you avoid having to pay probate fees since the land passes to the survivor without going through an estate. Probate fees aren’t very expensive in Saskatchewan ($7 for every $1,000 of estate value), but why pay the fees for no reason?

But is it the same for your children who are going to take over the farm?

Should siblings own land together as joint owners? What about a “tenants-in-common” arrangement in which they own a single parcel of land together but with separate “undivided interests” they can pass to others through their Wills?

The answer most likely “no” - don’t give or leave land to your children as co-owners. Give your children separate parcels if possible. There are a few reasons, one of which is tax-related.

Way back in April, 2000, the Canada Revenue Agency (CRA) answered a question about a situation involving two brothers who owned some farmland together as “tenants in common”, each with a 50% undivided interest. The question was whether either brother could be considered to have used the land “principally” in the business of farming.

CRA: “Principally” means “greater than 50%”

The tax rules regarding the “farm rollover” as well as the $1,000,000 capital gains exemption (“CGE”) available in respect of farmland require, among other things, that the property be used "principally" in the business of farming. CRA says that “principally” means that more than 50% of the asset's use is in the particular business of farming.

CRA: No rollover, no capital gains exemption

CRA noted that each brother owned a 50% interest in the land, in an arrangement under which each brother’s part could not clearly be identified, each had a right to occupy the property in respect of all its areas, and neither brother could point to a particular part as being his share. Accordingly, CRA concluded that each brother could, at most, be considered to use 50% of the property. As a result, based on the limited information provided to them, CRA’s view was that the "principally" used test would not be satisfied. This would mean that in the future neither brother would be able to use the “farm rollover” to transfer the land to his own children, or use the $1,000,000 CGE in the event of a sale or transfer, or at death.

CRA also noted that the result would not be any different if the brothers were “joint tenants” rather than “tenants in common”.

It’s hard to say whether CRA would give such a harsh interpretation to every case, or in cases where the facts are more complex or carefully planned with a better business structure. But if you’re simply transferring land directly to your kids, let each of them own separate properties if you can. They can still farm together under a partnership arrangement or by incorporating the farming business (but they probably shouldn’t transfer the land to a corporation).

Fortunately the above-described problem can be avoided with good estate planning and business structuring. If you’re already in the situation these brothers were in, it can be resolved with help from your professional estate, succession and tax planning team.

© Heritage Private Wealth Law

General information only; not intended as legal or tax advice. Readers are encouraged to obtain legal and tax advice before acting in their specific circumstances.