Self employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 7 – Capital gains

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This chapter explains the capital gains rules for people who farm or fish. 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.

Did you sell in 2018 capital property 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.

farm icon Capital gains for farmers

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 2018, 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 2018, under "Qualified farm or fishing property" or "Real estate, depreciable properties, and other property." The CRA can accept a late designation in certain circumstances, but a penalty may apply. For more information, 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 adjusted cost base (ACB), and any selling expenses between:

  • your principal residence
  • each of your farm properties

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:

  • the FMV of the land
  • the FMV of a comparable residential building site in the area
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.

Example

On February 1, 2018, 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 (ACB) – 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
Proceeds of disposition Principal residence Farm properties Total
Land Footnote 1$25,000 $175,000 $200,000
House $75,000 not applicable $75,000
Barn not applicable $20,000 $20,000
Silo not applicable $5,000 $5,000
Total $100,000 $200,000 $300,000
Minus ACB:
Proceeds of disposition Principal residence Farm properties Total
Land Footnote 1$15,000 $105,000 $120,000
House $60,000 not applicable $60,000
Barn not applicable $16,000 $16,000
Silo not applicable $4,000 $4,000
Total $75,000 $125,000 $200,000
Gain on sale
Principal residence Farm properties Total
Gain on sale $25,000 $75,000 $100,000
Minus:
Gain on principal residenceFootnote 2
$25,000 not applicable $25,000
Capital gain $0 $75,000 $75,000
Taxable capital gain (½ × $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
$ Blank space for dollar value
Amount A
Adjusted cost base
$ Blank space for dollar value
Amount B
Line A minus line B
$ Blank space for dollar value
Amount C
Outlays and expenses
$ Blank space for dollar value
Amount D
Capital gain before reduction (Line C minus line D)
$ Blank space for dollar value
Amount E
Method 2 reduction
$ Blank space for dollar value
Amount F
Capital gain after reduction (Line E minus line F)
$ Blank space for dollar value
Amount G
Note

Transfer the entries on lines A, B, D, and G to the relevant columns on Schedule 3, Capital Gains (or Losses) in 2018, under "Qualified farm or fishing property" or "Real estate, depreciable properties, and other property."

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

  • a statement by you that you sold your farm and are electing under subparagraph 40(2)(c)(ii) of the Income Tax Act
  • a description of the property you sold
  • the number of years after 1971 that the farmhouse was your principal residence during which you were a resident of Canada (if you purchased your farm after 1971, give the date you purchased it)

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

  • a description of the farm, including the size of the buildings and construction type
  • the cost of the property and the date of purchase
  • the cost of any additions or improvements you made to the property
  • the assessment for property tax purposes
  • any insurance coverage
  • the type of land (arable, bush, or scrub)
  • the type of farm operation

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

Restricted farm losses

You may have a capital gain from farmland you sell in 2018. 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.

How to calculate your capital gain or loss

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

Proceeds of disposition
$ Blank space for dollar value
Line 1
Adjusted cost base
$ Blank space for dollar value
Line 2
Line 1 minus line 2
$ Blank space for dollar value
Line 3
Outlays and expenses
$ Blank space for dollar value
Line 4
Line 3 minus line 4 = Capital gain (loss)
$ Blank space for dollar value
Line 5

Note

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

farm icon fish icon Qualified farm or fishing property and cumulative capital gains deduction

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

  • the new definition qualified farm or fishing property (QFFP) replaced the two previous definitions:
    • qualified farm property (QFP)
    • qualified fishing property (QXP)
  • the new definition interest in family-farm or family-fishing partnership replaced the two previous definitions:
    • interest in family-farm partnership
    • interest in family-fishing partnership
  • the new definition share of the capital stock of a family-farm or family-fishing corporation replaced the two previous definitions:
    • share of the capital stock of a family-farm corporation
    • share of the capital stock of a family-fishing corporation

What is qualified farm or fishing property?

Qualified farm or fishing property (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 Income Tax and Benefit Guide.

Qualified farm or fishing property includes:

  • a real property, such as land and buildings
  • a fishing vessel that was used in the course of carrying on a fishing business
  • a share of the capital stock of a family-farm or family-fishing corporation you or your spouse or common-law partner own
  • an interest in a family-farm or family-fishing partnership you or your spouse or common-law partner own
  • a property included in Class 14.1 used in the course of carrying on a farming or fishing business in Canada, such as:
    • milk and egg quotas for farmers
    • fishing permits or licenses with an unlimited period

Cumulative capital gains deduction

If you have a taxable capital gain from the sale of qualified farm or fishing property (QFFP), you may be able to claim a capital gains deduction.

For dispositions in 2018 of QFFP, the lifetime capital gains exemption is $848,252.

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 ($424,126 for 2018). 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 ($424,126 for 2018) 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 2018, and Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2018.

You may be a partner in 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.

  • Property held directly or through a partnership:
    • 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 LCGE, the qualifying property must be used mainly in a farming business or a fishing business. Eligibility for the LCGE extends to property of an individual used mainly in a combination of farming and fishing
  • Shares or partnership interests:
    • In order for an individual's shares in a family corporation or interest in a family partnership to qualify for the LCGE, all or substantially all (generally interpreted as 90% or more) of the fair market value of the property of the entity must be property used mainly in a farming business or a fishing business. A property held by a family-farm corporation or partnership that is used in a combination of farming and fishing must be used mainly in farming in order to count towards the "all or substantially all" test. A similar rule applies for a property held by a family-fishing corporation or partnership
    • Eligibility for the LCGE extends to an individual's shares in a corporation, or interest in a partnership, where the corporation or partnership carries on both a farming business and a fishing business. In particular, if a property of the corporation or partnership is used mainly in either business, or is used mainly in a combination of farming and fishing, the property will count towards the "all or substantially all" test
    • Also, throughout any 24-month period ending before that time, more than 50% of the FMV of the property of the entity was attributable to property. That property must have been used principally in the course of carrying on a farming or fishing business in Canada in which a qualified user was actively engaged on a regular and continuous basis by any of the following:
      • you, your spouse or common-law partner, or any of your parents or children
      • the beneficiary of a personal trust, or the spouse or common-law partner, parent, or child of such a beneficiary
      • a family-farm or family-fishing corporation where any of the above persons owns a share of the corporation
      • a family-farm or family-fishing partnership where any of the above persons (except a family-farm or family-fishing corporation) owns an interest in the partnership

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:

  • you, your spouse or common-law partner, or any of your parents or children
  • the beneficiary of a personal trust, or the spouse or common-law partner, parent, or child of such a beneficiary
  • a family-farm or family-fishing corporation where any of the above persons owns a share of the corporation
  • a family-farm or family-fishing partnership where any of the above persons (except a family-farm or family-fishing corporation) owns an interest in the partnership

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:

  • throughout the 24 months before the sale, you, your spouse or common-law partner, any of your children or parents, a personal trust from which one of these persons acquired the property, or a family-farm or family-fishing partnership (in which any of these persons has an interest) must have owned the property
  • you meet one of the following two conditions:
    • While the property was owned by any of the above persons in at least two years; the property or the property it replaced was mainly used in a farming or fishing business in Canada in which any of the above persons was actively engaged on a regular and ongoing basis. Also, while the property was owned by any of the above persons in at least two years; the person's gross income from the business was larger than the person's income from all other sources in the year
    • A family-farm or a family-fishing partnership or corporation used the property for at least 24 months, to carry on a farming or fishing business in Canada. Also, during this time, you, your spouse or common-law partner, any of your children, or your parents must have been actively engaged on a regular and ongoing basis in the business

fish icon Note for fishers

Qualified fishing property does include a fishing vessel.

farm icon Real property or property included in Class 14.1 bought before June 18, 1987 for farmers

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:

  • in the year you disposed of it, the property or the one it replaced was used in a farming business in Canada by any of the above persons, a family-farm partnership, a corporation, or by a personal trust from which one of the above individuals acquired the property
  • the property, or the property it replaced, was used in a farming business in Canada for at least five years by any of the above persons, a family-farm partnership, or corporation, or by a personal trust from which one of the above individuals acquired the property. During this time, the property was owned by any of the above persons or a family-farm partnership or corporation

farm icon fish icon 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:

  • your child was a resident of Canada just before the transfer
  • the farm or fishing property was land in Canada, or depreciable property in Canada of a prescribed class, in respect of a farming or fishing business carried on in Canada, and has been used in the business in which you, your spouse or common-law partner, or any of your children were actively engaged on a regular and ongoing basis 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.

Where an individual carries on 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:

  • your natural child, your adopted child, or your spouse's or common-law partner's child
  • your grandchild or great-grandchild
  • your child's spouse or common-law partner
  • another person who is wholly dependent on you for support and who is, or was immediately before the age of 19, in your custody and under your control

The following types of property qualify for this transfer:

  • farmland
  • land used in a fishing business
  • depreciable property, including buildings

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.

Shares or partnership interests:

  • In order for an individual's shares in a family corporation or interest in a family partnership to qualify for the intergenerational transfer, all or substantially all (generally interpreted as 90% or more) of the FMV of the property of the entity must be property used mainly in a farming business or a fishing business. Eligibility for the intergenerational transfer extends to an individual's shares in a corporation, or interest in a partnership, where the corporation or partnership carries on both a farming business and a fishing business. In particular, if a property of the corporation or partnership is used mainly in either business, or is used mainly in a combination of farming and fishing, the property will count towards the "all or substantially all" test

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

farm icon Example for farmers

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 chooses to transfer the land at its ACB and the combine at its UCC, he postpones any taxable capital gain and any recapture of CCA. Also, if he does this, we consider that Vicky acquires the land at $85,000 and the combine at $7,840. When Vicky disposes of the land and the combine, she includes in her income any taxable capital gain and recapture that Wade postpones.

fish icon Example for fishers

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

Fishing boat
ACB
$85,000
FMV at the time of transfer
$100,000
Fishing licence
FMV
$9,000
UCC at the time of transfer
$7,840

Therefore, Wade can transfer the following:

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

If Wade chooses to transfer the fishing boat at its ACB and the fishing licence at its UCC, he postpones any taxable capital gain and any recapture of CCA. Also, if he does this, we consider that Vicky acquires the fishing boat at $85,000 and the fishing licence at $7,840. When Vicky disposes of the fishing boat and the fishing licence, she will include 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:

  • the child was resident in Canada just before the parent's death
  • the property was used under the current law, mainly in a farming or fishing business on a regular and ongoing basis by the deceased, the deceased's spouse or common-law partner, or any of the children before the parent's death
  • the property was transferred to the child no later than 36 months after the parent's death. In some cases, we may allow the transfer even if it took place later than 36 months after the parent's death

Note

The rules under Transfer of farm or fishing property to a child also apply in this section.

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

  • land and buildings, or other depreciable property used mainly in a farming or fishing business
  • 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

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 will 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.

farm icon Note for farmers

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

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

If the spouse or common-law partner later disposes of the property, the farmer or fisher, not the spouse or common-law partner, generally has to report any taxable capital gain. This rule applies where the farmer or fisher 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-511R, Interspousal and Certain Other Transfers and Loans of Property.

A transfer of farm or fishing property can also occur after the farmer or fisher dies. For more information, see Chapter 4, "Deemed Disposition of Property," in Guide T4011.

farm icon Note for farmers

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 in respect of 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 Interpretation Bulletin IT-259R4, Exchange of Property, and Interpretation Bulletin IT-491, Former Business Property, and its Special Release.

Information reporting of tax avoidance transactions

Taxpayers, advisors and promoters who engage in or who are entitled to certain fees in relation to certain tax avoidance transactions are subject to new reporting requirements.

The measures apply to certain avoidance transactions entered into after 2010, and avoidance transactions that are part of a series of transactions that started before 2011 and were completed after 2010.

A transaction will be reportable if it is an avoidance transaction as defined in subsection 245(3) of the Income Tax Act for purposes of the general anti-avoidance rule (GAAR) and has at least two of the following three characteristics:

  • the advisor or promoter has or had an entitlement to certain types of fees
  • the advisor or promoter has or had confidential protection with respect to the transaction
  • the taxpayer or the advisor or promoter (including any non-arm's length parties) has or had contractual protection for the transaction (other than as a result of certain types of fees)

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 under subsections 237.1(7) or 66(12.68), respectively.

Information return RC312, Reportable Transaction Information Return, must be filed on June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction for the person. An extended reassessment period is allowed under paragraph 152(4)(b.1) of the Income Tax Act.

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

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

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

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