Capital Gains

Qualified Property for the Lifetime Capital Gains Exemption (LCGE)

The eligibility requirements for qualified property vary depending on how long the seller has owned the land. If a farmer has owned the land since before June 17^th, 1987, there are two simple eligibility criteria:

• The property be used principally in the business of farming at the time of sale or
• If it is not being used in farming at the time of sale, then it must have been used for farming for at least five years in the past.

If a farmer purchased that land after June 17^th, 1987, then there are more strict eligibility criteria:

• For any two years, a qualified user (the current owner or the parents, grandparents, great grandparents, or children or grandchildren), must have been actively engaged in farming and
• Earned more gross revenue from that farming business than from all other sources of income.

To ensure you qualify for the Lifetime Capital Gains Exemption, consult with your accountant

Proposed Changes to Capital Gains Inclusion Rate

In the 2024 budget, the federal government announced proposed changes that will increase the inclusion rate from one-half to two-thirds for all capital gains realized by corporations and trusts, as well as for individual capital gains exceeding $250,000 after deductions and exemptions. While individuals with capital gains will maintain the old 50% inclusion rate on capital gains under $250,000 incorporated businesses including farms will pay tax on the higher inclusion rate on the first dollar of capital gains.

While the government seeks to boost tax revenue through these changes, OFA is deeply concerned about the added burden this places on Ontario’s farmers, particularly during a crucial period for farm succession planning.

On a positive note, Budget 2024 also proposes to increase the Lifetime Capital Gains Exemption (LCGE) for qualified farm property from $1 million to $1.25 million, with adjustments for inflation post-2026.

Why It Matters

The increased inclusion rate presents a complex challenge for farmers selling farm assets, especially within a corporate structure. This change makes farm succession planning less financially viable and creates significant obstacles for farmers reinvesting in their businesses. According to OFA’s recent farm business confidence survey, tax burden remains the number one concern for Ontario farmers. The proposed changes would only exacerbate this issue, leading to a substantial increase in the tax burden for our farmers.

OFA & CFA Advocacy Efforts

Another issue that was proposed in Budget 2024 was the introduction of the Canadian Entrepreneurs Incentive which one fully phased in would tax capital gains of eligible business assets at a reduced 33% inclusion rate for the first $2 million in gains.

The initial wording of the Canadian Entrepreneur Incentive would have excluded farm business assets from eligibility in the program. However, OFA successfully lobbied to amend the program so that  any qualified farm property that is eligible for the Lifetime Capital Gains Exemption be made eligible for the Canadian Entrepreneurs Incentive.

OFA continues to work with CFA and others to address the issues of increased inclusion rate and further increases to the LCGE in the future.

Additional Resources

To help our members better understand these proposed changes, OFA recently hosted a webinar with BDO’s National Tax Leader, Kurt Oelschlagel. You can access the webinar recording [here].

Alternative Minimum Tax

Exactly as the name suggestions, Alternative Minimum Tax (AMT) is an alternative method to calculate your total taxes payable. Often applicable when you have claimed a preferential tax deduction like capital gain exemption or other tax credits such as the dividend tax credit.

Each tax year, your tax payable is calculated using two methods; the standard method, in which tax exemptions and tax credits can reduce your tax payable and then a second calculation is done where you do not receive these exemptions or credits, which increases net income, but it is taxed at a lower rate.

The difference between the first method of calculating tax and the second is the AMT. When you trigger AMT, it is possible to recover the full amount of AMT by subtracting the AMT from your tax payable over the next 7 years. In this regard AMT might be thought of as a pre- payment of future tax

However, if over the next 7 years your tax payable is less than the AMT, you lose the opportunity to recover the full amount and you fall into a tax trap.

This is common with farmers who are entering retirement, and use their Lifetime Capital Gains Exemption (LCGE) when selling off qualified farm property, triggering AMT and then not having enough income over the first 7 years of their retirement to reclaim the full AMT.

For this reason it is OFA’s position that To prevent AMT from becoming a permanent tax burden, any capital gain eligible for the LCGE should be excluded from the calculation of AMT.

Restricted Farm Losses

In 2013, the federal government proposed to increase the annual maximum deduction used in the calculation for Restricted Farm Losses from $8,750 to $17,500 for taxation years that end after March 20, 2013. This means that if your net farm loss is $32,500 or more and you are subject to the Restricted Farm Losses provisions, you will now be able to deduct $17,500 ($2,500 plus 50% of the next $30,000 in losses) from your other income. If your net farm loss is less than $32,500, the amount that you will be able to deduct from your other income is the lesser of:

• Your net farm loss for the year or
• 2,500 plus 50% x (your net farm loss minus $2,500)

Note that restricted farm losses will apply in cases where a taxpayer’s chief source of income for a year is neither farming nor a combination of farming and some other source of income. In other words, restricted farm loss rules will apply unless all other sources of income are subordinate to farming income. Any remaining farm losses can be applied against farming income earned in other taxation years and can be carried back three years and carried forward a maximum of 20 years.

Example: Joe incurs a $20,000 loss from his farming business in 2015. Joe has off farm income that exceeds his farming income. The loss Joe can deduct against his other sources of income is $11,250 ($2,500 + (50% x ($20,000- $2,500))

The Canadian Federation of Agriculture has stated its disappointment with the changes to the Restricted Farm Loss provisions proposed in the 2013 Federal Budget. OFA and CFA has suggested a greater increase in the annual maximum deduction was needed and applying these provisions to more farmers is undesirable.

Small Business Tax Rate

In 2023, the federal tax rate for incorporated small businesses is 9% and the provincial tax rate is 3.2% for a combined tax rate of 12.2%.

The small business tax rate will benefit small to moderate farming operations in Ontario. The small business tax rate applies to Ontario farm operations with $500,000 or less in farm income. The reductions in the small business tax rate will allow smaller farm operations to reinvest in their farming operations.