Capital Gains 

Qualified Property for the Lifetime Capital Gains Exemption (LCGE)

The eligibility requirements for qualified farm or fishing property (QFFP) depend on when the property was acquired and how it was used.

1. Property acquired before June 18, 1987

If a farmer bought (or entered into a written agreement to buy) land before June 18, 1987, the property can generally qualify if:

• The property is used principally in the business of farming in Canada in the year of sale by the owner or certain family members (spouse/common‑law partner, children, grandchildren, parents, grandparents), or
• If it is not used in farming at the time of sale, it was used in farming for at least five years during the period it was owned by the owner or those family members.

For this pre‑1987 property there is no gross‑revenue test – the focus is on farming use and length of time.

2. Property acquired after June 17, 1987

For land purchased on or after June 18, 1987, the tests are more stringent. In general:

• The property must usually be owned for at least 24 months before sale; and
• For any two years while the property was owned:
  • A qualified user (the current owner, or their spouse/common‑law partner, parent, grandparent, child, or grandchild) must have been actively engaged in the farming business, and
  • That person must have earned more gross revenue from that farming business than from all other sources of income in those years (the “gross‑revenue test”).

These rules are detailed and fact‑specific — particularly when land has been rented out, used partly for non‑farm purposes, or held in corporations or partnerships. To ensure you qualify for the LCGE, work with a professional accountant or tax advisor familiar with farm taxation.

Current LCGE Limit for Farm Property

For qualified farm or fishing property and qualified small business corporation (QSBC) shares:

• For dispositions before June 25, 2024, the LCGE limit was $1,016,836 (2024 indexed amount).
• For dispositions on or after June 25, 2024, the LCGE limit is $1,250,000.
• Indexation is paused for 2025 and is expected to resume in 2026.

That $1.25 million limit applies per person over their lifetime and is shared across all QFFP and QSBC dispositions.

Capital Gains Inclusion Rate

What was proposed in Budget 2024

Budget 2024 announced that the capital gains inclusion rate would increase from ½ to ⅔:

• For corporations and trusts: on all capital gains.
• For individuals: on the portion of annual net capital gains above $250,000, after deductions and exemptions (including the LCGE).

These proposals caused significant concern for farm succession, especially for incorporated family farms and land held in corporations.

What happened

The inclusion‑rate increase never received Royal Assent and was ultimately cancelled on March 21, 2025. The federal government confirmed that the capital gains inclusion rate will remain at 50%, and that the higher LCGE of $1.25 million for farm, fishing and small business property will be maintained.

As of late 2025:

• Individuals, corporations and trusts all include 50% of net capital gains in taxable income.
• There is no higher ⅔ inclusion rate for gains above $250,000.
• LCGE‑eligible gains on QFFP can still be sheltered up to the $1.25 million lifetime limit.

Why It Matters for Farmers

Even with the inclusion‑rate increase cancelled, capital gains remain a core issue for farm families:

• Land values have risen dramatically in Ontario, so many family farms now have gains well above $1.25 million, especially if multiple parcels are sold.
• The LCGE is more valuable than before (higher limit with the same 50% inclusion rate), but is still not enough to fully shelter many modern farm operations.
• Alternative Minimum Tax (AMT) changes from 2024 onwards increase the chance that large one‑time gains, even if partly or fully sheltered by the LCGE, can trigger AMT.

Careful planning around timing of sales, intergenerational transfers, use of reserves, and ownership structures remains critical.

OFA Advocacy Efforts

Capital gains and farm succession

Throughout 2024 and 2025, OFA has worked with the Canadian Federation of Agriculture (CFA) and others to:

• Oppose the proposed increase in the capital gains inclusion rate and highlight the disproportionate burden this would place on capital‑intensive family farms.
• Support the increase of the LCGE to $1.25 million for QFFP and advocate for further increases and ongoing indexation so the exemption better reflects farm asset values.
• Press for LCGE‑eligible gains to be excluded from AMT calculations, so that the LCGE functions as a true exemption rather than simply deferring tax through the AMT system.

Alternative Minimum Tax (AMT)

How AMT works (simplified)

Each year the CRA calculates your tax in two ways:

1. Regular tax system – where exemptions, deductions and credits (like the LCGE or dividend tax credits) can reduce your tax.
2. AMT system – where:

1. • Certain preferences are limited or added back (for example, a larger share of capital gains, including some LCGE‑eligible gains; limited recognition of certain deductions and credits).
   • A separate AMT rate is applied to this broader base.

You pay whichever result is higher – your regular tax or the AMT.

If you pay AMT in a year, you may be able to recover it over the next seven years by using it as a credit against future regular tax (to the extent your regular tax exceeds AMT in those years).

Why AMT is a concern for farmers

• Farmers often have relatively modest taxable income in retirement, but a very large one‑time capital gain when selling land, quota, or a farm corporation and using the LCGE.

Recent AMT changes:

• Increase the AMT rate,
• Broaden the base (including a portion of LCGE‑eligible gains and limiting some credits), and
• Are explicitly targeted at high‑income individuals with large preferential gains.

For farmers who trigger AMT in the year they sell the farm, they may not earn enough taxable income in the following seven years to recover the AMT credit – effectively turning AMT into a permanent extra tax on succession.

OFA’s position

To prevent AMT from becoming a permanent tax on farm succession, any capital gain that is eligible for the LCGE should be excluded from the AMT calculation. OFA has recommended specific AMT amendments in its 2025 federal pre‑budget submission.

Farmers considering a farm sale or transfer should ask their tax advisor for explicit AMT projections, not just regular tax calculations.

Restricted Farm Losses

The restricted farm loss rules (section 31 of the Income Tax Act) apply where farming is not the taxpayer’s chief source of income – essentially affecting part‑time farmers or situations where off‑farm income is dominant.

For taxation years ending after March 20, 2013:

• The annual maximum farm loss that can be deducted against other income is $17,500; this threshold remains in effect.
• If your net farm loss is $32,500 or more, and the restricted loss rules apply, you can deduct a maximum of $17,500 from other income in that year.
• If your net farm loss is less than $32,500, the amount deductible from other income is the lesser of:
  • Your actual net farm loss for the year, or
  • $2,500 + 50% × (net farm loss − $2,500).

Any remaining farm losses become “restricted farm losses”. They can only be applied against farming income in other years and can be:

• Carried back three years; and
• Carried forward up to 20 years.

Example

If a farmer incurs a $20,000 net farm loss in a year and their off‑farm income is higher than their farm income:

• Maximum current‑year deduction against other income =
  $2,500 + 50% × ($20,000 − $2,500) = $2,500 + 0.5 × $17,500 = $2,500 + $8,750 = $11,250.
• The remaining $8,750 becomes restricted farm loss, usable against future farm income.

OFA and CFA have long argued that the restricted farm loss regime unfairly targets rural and farm businesses, and have called for more generous limits or repeal of these provisions.

Accelerated Capital Cost Allowance (ACCA) & Budget 2025

Capital Cost Allowance (CCA) is the tax system that lets you deduct the cost of depreciable assets (buildings, equipment, vehicles, quota, etc.) over time. Under normal rules:

• Each asset class has a fixed CCA rate (e.g., many farm equipment items in Class 10 at 30%).
• The “half‑year rule” usually limits the first‑year deduction to half of the net additions, so Class 10 gear bought late in the year might only generate a 15% deduction in year one.

The Accelerated Investment Incentive (AII) and related measures override these rules for eligible assets by:

• Removing the half‑year rule; and
• Allowing a much higher first‑year deduction (often 1.5–3× the normal CCA rate) for property that becomes available for use in a specified window of years.

What Budget 2025 does

Building on prior measures, Budget 2025:

1. Re‑establishes and extends enhanced first‑year CCA (AII) for most depreciable property acquired on or after January 1, 2025, delaying the phase‑out of accelerated CCA to later years.
2. Introduces immediate expensing and very high first‑year CCA rates for eligible manufacturing and processing buildings that are first used before 2034.
3. Confirms and extends other clean‑technology CCA and tax‑credit measures that can apply to some farm energy and environmental projects.

How this impacts farm equipment

Most common farm machinery and equipment (e.g., tractors, combines, sprayers, many implements) are in CCA classes that qualify for the Accelerated Investment Incentive, so the enhanced first‑year CCA continues/returns for assets acquired in the new window.

Example

Suppose an incoporated farm business buys a new tractor for $300,000 in an eligible CCA class with a 30% rate:

• Under normal rules with the half‑year rule, first‑year CCA would be:
  • $300,000 × 30% × ½ = $45,000.
• Under the accelerated rules (no half‑year rule and 1.5× first‑year factor), the first‑year CCA can be up to:
  • $300,000 × 30% × 1.5 = $135,000.

That’s an extra $90,000 deduction in year one. At the 12.2% small‑business corporate rate in Ontario, this is roughly $11,000 in tax deferral for that year alone.

Key points:

• Total CCA over the life of the asset doesn’t change – you’re just deducting more upfront and less later.
• This can be very helpful to smooth income in high‑profit years (e.g., when you also trigger capital gains), but it also means less CCA shelter in future years.
• For sole proprietors and partnerships, similar logic applies in the personal tax system.

Manufacturing/processing buildings and on‑farm value‑adding

Budget 2025 introduces immediate expensing for certain buildings used in manufacturing or processing goods for sale or lease, plus very high first‑year CCA rates for buildings first used in 2030–2033 (75% then 55%).

For most conventional farm buildings used only for primary production, this will not apply.

However, it may be relevant where an Ontario farm Operates an on‑farm processing plant that meets the tax definition of manufacturing/processing.

In those cases, the ability to expense the full cost of an eligible building in the year it is first used (or claim very high CCA rates) can materially reduce tax in the early years of a project, improving cash flow for expansion.

Small Business Tax Rate

As of 2025:

• The federal small business tax rate for Canadian‑controlled private corporations (CCPCs) on active business income up to $500,000 is 9%.
• The Ontario small business corporate tax rate is 3.20%.

This gives a combined small‑business corporate tax rate of 12.2% on the first $500,000 of active business income earned by an Ontario CCPC (subject to standard associated‑corporation and taxable‑capital rules).

For many incorporated farm operations in Ontario, this lower combined rate:

• Provides an opportunity to retain and reinvest after‑tax earnings inside the corporation;
• Can complement accelerated CCA by sheltering more income at a low rate during high‑investment years; and
• Requires careful planning with personal withdrawals (salary vs. dividends) and contributions to RRSPs and TFSAs.