basics of farm rollover

A farm rollover is an extremely useful and popular procedure for farm owners who want to pass farming operations on to the next generation.

The word rollover means that the transaction of transferring ownership of the farm takes place without any tax being payable immediately. The transaction is not tax-free but is tax-deferred, meaning the payment of taxes that normally would arise on a transaction is deferred until a future time.

Normally capital gains tax is payable when a business (including a farming business) changes hands. The reality is that the tax liability can be very high. Farming operations are particularly vulnerable to taxation when they are transferred, because they do not usually have a lot of cash on hand compared to the other assets such as land, equipment, buildings, vehicles, livestock and crops. Because of this, the farm rollover is available to protect the farming unit.

There are restrictions on who can do a farm rollover. The transaction is designed so that a farm can be transferred from parent to child. "Child" includes biological child (born inside or outside marriage), adopted child, son-in-law, daughter-in-law, stepchild, grandchild, great-grandchild, and any person who is "adopted in fact".

The parent (or the parent's spouse or child on his behalf) must have been actively engaged on a regular and continuous basis in the farming business. Each of these words has a defined meaning under the Income Tax Act.

"Actively engaged" means that the parent does actually have to be farming, or to have hired someone who do the hiring on their behalf. Someone must be using that land for farming on behalf of the parent. This means that if a farmer has leased out his or her land to someone who does their own farming with no involvement by the farmer/owner, the rollover is not available.

"On a regular and continuous basis" means that if the farmer/owner is involved only occasionally, there could be a problem using a rollover. Canda Revenue Agency will look at the use of the land for a number of years and will also look at the farmer's source of income.

"In the farming business" is something that is decided on a case-by-case basis by looking at how the land is used, whether other businesses operate there as well, whether other family members are involved, whether the property is used for personal use and many other factors.

If you are a farmer who is considering handing on the operation to the next generation, it is never too early to think about a farm rollover. As this is a complicated legal and tax transaction, you should consult an estate-planning lawyer or an experienced accountant.

My book, "Succession Planning Kit for Canadian Business" talks about farm rollovers in detail.