Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide – Chapter 7 – Capital gains

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This chapter explains the capital gains rules for people who farm. General capital gains rules are covered in Guide T4037, Capital Gains.

Throughout this chapter, we use the terms sell, sold, buy, or bought. These words describe most capital transactions. However, the information in this chapter also applies to deemed dispositions or acquisitions. When reading this chapter, you can use the terms sold instead of disposed of, and bought instead of acquired, if they more clearly describe your situation.

List the dispositions of all your properties on Schedule 3, Capital Gains (or Losses) in 2023. You can get this schedule and other forms and publications at Forms and publications or by calling 1-800-959-5525.

You may be in a partnership and receive a T5013 slip, Statement of Partnership Income. If the partnership has a capital gain, it will allocate part of that gain to you. The gain will show on the partnership's financial statements or on your T5013 slip.

Find out what a capital gain is

You have a capital gain when you sell, or are considered to have sold, a capital property for more than its adjusted cost base plus the outlays or expenses you incurred to sell the property. To calculate your capital gain, subtract the adjusted cost base of your property from the proceeds of disposition. From this amount, subtract any outlays or expenses you incurred when selling your property.

In most cases, capital property includes land, buildings, and equipment that you used in your farming business. Therefore, capital property includes depreciable and non-depreciable property.

You must include your taxable capital gain in income. Not all your capital gain is taxable. For 2023, generally, your taxable capital gain is one-half of your capital gain.

A disposition of depreciable property may result in a recapture of capital cost allowance (CCA).

Find out what a capital loss is

You have a capital loss when you sell, or are considered to have sold, non-depreciable capital property for less than its adjusted cost base plus the outlays or expenses you incurred to sell the property. To calculate your capital loss, subtract the adjusted cost base of your property from the proceeds of disposition. From this amount, subtract any outlays or expenses you incurred when selling your property.

Not all your capital loss is deductible. For 2023, your allowable capital loss is one-half of your capital loss. You can only deduct an allowable capital loss from a taxable capital gain.

A loss on a disposition of depreciable property may only result in a terminal loss.

Before you can determine your capital gain or capital loss, you will need to know the following terms.

Proceeds of disposition – in most cases means the sale price of the property. See the definition of Proceeds of disposition.

Adjusted cost base (ACB) – the original cost of the property (including amounts you paid to buy it, such as commissions and legal fees). ACB includes other costs such as the cost of any additions, or the cost to renovate or improve the property.

Outlays and expenses – amounts you incurred to sell your property. They include costs such as commissions, surveyors' fees, transfer taxes, and advertising costs.

Fair market value (FMV) – generally the highest dollar value you can get for your property. See the definition of Fair market value.

How to calculate your capital gain or loss

To calculate your capital gain or loss, use the following formula:

Proceeds of disposition

$
Line 1

Adjusted cost base

$
Line 2

Line 1 minus line 2

$
Line 3

Outlays and expenses

$
Line 4

Capital gain (loss) = Line 3 minus line 4

$
Line 5

Note

You have to calculate the capital gain or loss on each property separately.

If you sold in 2023 capital property that you owned before 1972

If you did, you have to apply a special set of rules when you calculate your capital gain or loss because you did not have to pay tax on capital gains before 1972. To help you calculate your gain or loss from the sale of property you owned before 1972, use Form T1105, Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972.

Disposing of farmland that includes your principal residence

Your home is usually your principal residence. If your home was your principal residence for every year you owned it, you generally do not pay tax on any capital gains when you dispose of it. Therefore, if you sold farmland that included your home in 2023, only part of the gain is taxable.

The sale must be reported, along with any principal residence designation, on Schedule 3, Capital Gains (or Losses) in 2023, under "Qualified farm or fishing property" or "Real estate, depreciable property, and other properties." The CRA can accept a late designation in certain circumstances, but a penalty may apply.

For information on change in use rules or on deemed dispositions from a full or partial change of use of a property, see Guide T4037, Capital Gains.

You can choose one of two methods to determine your taxable capital gain. Try both methods to see which one is best for you.

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to one half hectare (1.24 acres). If you can show that you need more land to use and enjoy your home, you can consider more than 1.24 acres as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than one half hectare.

Method 1

Separately calculate the capital gain on your principal residence and each of your farm properties. To do this, apportion the proceeds of disposition, the ACB, and any outlays and expenses between:

Then, calculate the taxable capital gain on your principal residence, if any, and each of the farm properties.

Value the land that is part of your principal residence at one of the following two amounts, whichever is more:

Note

If your home was not your principal residence for every year you owned it, there could be a capital gain on it you have to include in your income. Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), will help you calculate the number of years you are entitled to designate your home as your principal residence and calculate the part of your gain, if any, that is taxable. For more information on how to report the disposition of your principal residence, see Guide T4037, Capital Gains.

Example

On February 1, 2023, Helena sold her 32-acre farm, which included her principal residence. One acre of land is part of her principal residence. Helena has these details:

Value of land when she purchased her farm

FMV of similar farmland per acre
$3,750

FMV of a typical residential building site in the area

$15,000

Value of land when she sold her farm

FMV of similar farmland per acre
$6,250

FMV of a typical residential building site in the area

$25,000

Adjusted cost base – actual purchase price

Land
$120,000
House
$60,000
Barn
$16,000
Silo
$4,000

Total

$200,000

Proceeds of disposition – actual sale price

Land
$200,000
House
$75,000
Barn
$20,000
Silo
$5,000

Total

$300,000
Proceeds of disposition
Principal residence
Farm properties
Total
Land
Footnote 1$25,000
$175,000
$200,000
House
$75,000
 
$75,000
Barn
 
$20,000
$20,000
Silo
 
$5,000
$5,000
 
$100,000
$200,000
$300,000

Minus ACB:

Land
Footnote 1$15,000
$105,000
$120,000
House
$60,000
 
$60,000
Barn
 
$16,000
$16,000
Silo
 
$4,000
$4,000
 
$75,000
$125,000
$200,000

Gain on sale

$25,000
$75,000
$100,000

Minus: Gain on principal residenceFootnote 2

$25,000
 
$25,000

Capital gain

$0
$75,000
$75,000

Taxable capital gain
(1/2 × $75,000)

 
$37,500

Method 2

Determine the capital gain on your land and your principal residence. Then subtract $1,000 from the gain. Subtract an additional $1,000 for each year after 1971 that the property was your principal residence and you were a resident of Canada. Using Method 2, you can reduce a gain to nil, but you cannot create a loss.

To calculate your capital gain, use the following formula:

Proceeds of disposition

$
Line A

Adjusted cost base

$
Line B

Line A minus line B

$
Line C

Outlays and expenses

$
Line D

Capital gain before reduction (Line C minus line D)

$
Line E

Method 2 reduction

$
Line F

Capital gain after reduction (Line E minus line F)

$
Line G
Note

Transfer the entries from lines A, B, D, and G to the relevant columns on Schedule 3, Capital Gains (or Losses) in 2023, under "Qualified farm or fishing property" or "Real estate, depreciable property, and other properties."

If you choose this method, attach a letter to your income tax return that includes the following information:

As proof of the value of your property, regardless of the method you choose, keep documents that have the following information:

For more information, see Income Tax Folio S1-F3-C2, Principal Residence.

Restricted farm losses

You may have a capital gain from farmland you sell in 2023. You may also have restricted farm losses from previous years you have not yet used. In this case, you can deduct part of these losses from the gain. The part you can deduct is the property taxes and the interest on money you borrowed to buy the land, if you included these amounts in the calculation of the restricted farm loss in question.

You cannot use the restricted farm loss to create or increase a capital loss on the sale of your farmland.

Qualified farm or fishing property and cumulative capital gains deduction

The following is a list of updated definitions effective January 1, 2014:

Find out what a qualified farm or fishing property is

QFFP is certain property you or your spouse or common-law partner own. It is also certain property owned by a family-farm or family-fishing partnership in which you or your spouse or common-law partner holds an interest. We define spouse and common-law partner in the Federal Income Tax and Benefit Information.

Qualified farm or fishing property includes:

Cumulative capital gains deduction

If you have a taxable capital gain from the sale of QFFP, you may be able to claim a capital gains deduction.

For dispositions in 2023, the maximum base capital gains deduction for qualifying properties is $971,190.

The lifetime capital gains exemption (LCGE) for QFFP sold after April 20, 2015, increased to $1,000,000. The additional deduction is the difference between $500,000 (50% of $1,000,000) and the amount of the existing maximum base capital gains deduction for qualifying properties of $485,595 (50% of $971,190) for 2023. The value of this new deduction will phase out as the maximum base capital gains deduction for qualifying properties increases through indexation.

This additional deduction for taxable capital gains from the disposition of QFFP can only be used after the existing maximum base capital gains deduction that applies to both QFFP and qualified small business corporation shares ($485,595 for 2023) is used.

Existing rules on the base capital gains deduction also apply to the additional deduction for taxable capital gains from the disposition of QFFP.

Where a trust determines and designates an amount as a beneficiary's taxable capital gain from the disposition of QFFP after April 20, 2015, the beneficiary is deemed to have a taxable capital gain of that amount from the disposition of QFFP after April 20, 2015. Therefore the additional deduction for taxable capital gains from the disposition of QFFP is available to the beneficiary.

For more information on how to calculate your capital gains deduction, see Form T657, Calculation of Capital Gains Deduction for 2023, and Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2023.

You may be a member of a partnership that sold capital property. In this case, the partnership would allocate any taxable capital gains or allowable capital losses to the partners. If you are allocated a share of a taxable capital gain on QFFP, you may be entitled to claim a capital gains deduction.

The LCGE rules on certain farming or fishing property, shares or interests include taxpayers involved in a combination of farming and fishing businesses.

Real property or property included in Class 14.1

Real property or property included in Class 14.1 is qualified farm or fishing property only if it is used to carry on a farming or fishing business in Canada by any of the following:

We will consider real property or property included in Class 14.1 to be used to carry on a farming or fishing business in Canada if you meet the following conditions:

Real property or property included in Class 14.1 bought before June 18, 1987

You may have bought or entered into an agreement to buy real property or property included in Class 14.1 before June 18, 1987. We consider you to have used this property in carrying on a farming business in Canada if you meet one of the following conditions:

Transfer of farm or fishing property to a child

You may be able to transfer Canadian farm or fishing property to your child. When you do this, you can postpone tax on any taxable capital gain and any recapture of capital cost allowance until the child sells the property. To do this, both of these conditions have to be met:

The rules on intergenerational transfers of certain farming and fishing property from an individual to the individual's child include taxpayers involved in a combination of farming and fishing businesses.

Where an individual carries on a farming or fishing business as a sole proprietor, or through a partnership, in order to be eligible for the intergenerational transfer, the qualifying property must be used mainly in a farming business or a fishing business. Eligibility for the intergenerational transfer extends to property of an individual used mainly in a combination of farming and fishing.

Your children include:

The following types of property qualify for this transfer:

Furthermore, a share of the capital stock of a family-farm or family-fishing corporation and an interest in a family-farm or family-fishing partnership also qualify for this transfer if your child is a resident of Canada just before the transfer.

The rules on intergenerational transfers of certain farming and fishing property from an individual to the individual's child include taxpayers involved in a combination of farming and fishing businesses.

For most property, the transfer price can be any amount between the ACB and its FMV. For depreciable property, the transfer price can be any amount between its undepreciated capital cost (UCC) and its FMV.

Example

Wade wants to transfer these farm properties to Vicky, his 19-year-old daughter.

Land
ACB
$85,000
 
FMV at the time of transfer
$100,000
Combine
FMV
$9,000
 
UCC at the time of transfer
$7,840

Therefore, Wade can transfer the following:

  • the land at any amount between $85,000 (ACB) and $100,000 (FMV)
  • the combine at any amount between $7,840 (UCC) and $9,000 (FMV)

If Wade transfers the land at a price equal to its ACB and the combine at a price equal to its UCC, he postpones any taxable capital gain and any recapture of capital cost allowance (CCA). Also, if he does this, we consider that Wade's proceeds of disposition and the amounts Vicky paid to acquire the properties are $85,000 for the land and $7,840 for the combine. When Vicky disposes of the land and the combine, she includes in her income any taxable capital gain and recapture that Wade postpones.

Transfer of farm or fishing property to a child if a parent dies in the year

We allow a tax-free transfer of a deceased taxpayer's Canadian farm or fishing property to a child if all of these conditions are met:

Note

The rules under Transfer of farm or fishing property to a child may also apply in this section if the deceased's legal representative doesn't elect to have paragraph 70(9.01)(b) of the Income Tax Act apply in respect of the property.

The following types of farm or fishing property qualify for this transfer:

For most property, the transfer price can be any amount between the ACB and its FMV.

For depreciable property, the transfer price can be an amount between the property's FMV and a special amount. For more information, see Chapter 4, "Deemed disposition of property," in Guide T4011, Preparing Returns for Deceased Persons.

The deceased's legal representative can elect, under paragraph 70(9.01)(b), to choose the amount in the year of death. We consider the child to acquire these properties at the amount chosen.

Similar rules apply for property that a deceased person leased to the family-farm or family-fishing corporation or partnership.

If a child gets a farm or fishing property from a parent and the child later dies, the property can be transferred to the surviving parent based on the same rules.

Shares or other property of a family-farm or family-fishing holding corporation can also be transferred based on the same rules, from a spouse or common-law partner trust to a child of the settlor. The settlor is the person who sets up a trust, or the person who transfers property to a trust.

For more information on these transfers, see Interpretation Bulletin IT-349, Intergenerational Transfers of Farm Property on Death.

Transfer of farm or fishing property to a spouse or common-law partner

A farmer can transfer farm property to a spouse or common-law partner or to a spousal or common-law partner trust during the farmer's lifetime. At the time of transfer, the farmer can postpone any taxable capital gain or recapture of CCA.

If the spouse or common-law partner later disposes of the property, the farmer, not the spouse or common-law partner generally has to report any taxable capital gain. This rule applies where the farmer is living at the time the spouse or common-law partner sells the property. However, there are exceptions to this rule. For more information, see Interpretation Bulletin IT-511, Interspousal and Certain Other Transfers and Loans of Property.

A transfer of farm property can also occur after the farmer dies. For more information, see Chapter 4, "Deemed disposition of property," in Guide T4011, Preparing Returns for Deceased Persons.

The rollover provisions available for farm properties also apply to land and depreciable property used mainly in a woodlot farming business. They will apply where the deceased, the deceased's spouse or common-law partner, or any of the deceased's children were engaged in the woodlot operation as required by a prescribed forest management plan for the woodlot.

Other special rules

You may also be able to postpone paying tax on capital gains in the following situations.

Reserves

When you dispose of a capital property, you usually receive full payment at that time. However, sometimes you receive the amount over a number of years. Generally, a reserve allows you to defer reporting part of the capital gain to the year in which you receive the proceeds.

For example, you may sell a capital property for $50,000 and receive $10,000 at the time of the sale. You receive the remaining $40,000 over four years. In this situation, you can claim a reserve. However, there is a limit to the number of years you can do this.

For more information on reserves, see Guide T4037, Capital Gains, and Form T2017, Summary of Reserves on Dispositions of Capital Property.

Exchanges or expropriations of property

There are special rules that apply when you dispose of a property and replace it with a similar one, or when someone expropriates your property. For more information, see Income Tax Folio S3-F3-C1, Replacement Property.

Information reporting related to reportable transactions and notifiable transactions 

If you are a taxpayer, advisor or promoter who engages in or who is entitled to certain fees in relation to certain tax avoidance transactions, you are subject to new reporting requirements.

Reportable transactions

Effective for transactions entered into after June 21, 2023, a transaction is reportable if it is an avoidance transaction as defined in subsection 237.3(1), previously 245(3), of the Income Tax Act and has at least one (previously two) of the following three characteristics:

To learn more about these hallmarks, go to Mandatory disclosure rules – Guidance.

Note

The definition of tax benefit under subsection 245(1) was amended to include tax attributes that have not yet become relevant to the calculation of tax. This is important in determining whether there is an avoidance transaction for the purposes of the reportable transaction rules.

A reportable transaction does not include a transaction that is, or is part of, a series of transactions that includes the acquisition of a tax shelter or issuance of a flow through share for which an information return has been filed with the minister of national revenue under subsection 237.1(7) or 66(12.68), respectively. This is the case unless it is reasonable to conclude that one of the main reasons for the acquisition of a tax shelter, or the issuance of a flow through-share, was to avoid the reportable transactions provisions under section 237.3.

Notifiable transactions

You have to report notifiable transactions. The minister of national revenue has the authority to designate, with the agreement of the minister of finance, a transaction or a series of transactions as notifiable. Reporting requirements (and any exceptions to the rule) similar to those for reportable transactions entered into after June 21, 2023 apply, with the inclusion of a prescribed form. A notifiable transaction is a transaction that is the same as, or much like, a designated transaction, or a transaction in a series of transactions that is the same as, or much like, a designated series of transactions. This applies to notifiable transactions entered into after June 21, 2023.

For a list of notifiable transactions designated by the minister of National Revenue, go to Notifiable transactions designated by the Minister of National Revenue. You can subscribe to CRA's electronic mailing list at Canada Revenue Agency electronic mailing lists to receive an email when the minister designates new notifiable transactions.

Filing requirements

For reportable transactions and notifiable transactions entered into after June 21, 2023, you have to file Form RC312, Reportable Transaction and Notifiable Transaction Information Return. You must send it to us within 90 days of the earlier of the day the business or a person transacting for it:

An extended reassessment period may apply under paragraphs 152(4)(b.5) and 152(4)(b.6)of the Income Tax Act.

For reportable transactions entered into before June 22, 2023, you have to file a previous version of Form RC312 by June 30 of the calendar year following the calendar year in which the transaction first becomes reportable. 

File this return separately from your tax return. Before you file it, make a copy for your records. Send the original return, amended return, and any other information to:

Winnipeg Tax Centre
Data Assessment and Evaluation Programs
Validation and Verification Section
Foreign Reporting Returns
66 Stapon Road
Winnipeg MB  R3C 3M2

Penalties

Failure to report could result in suspension of the tax benefit and a penalty.

For transactions entered into after June 21, 2023, penalties will apply for each failure to report a reportable transaction or a notifiable transaction:

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