Death of a Farmer

 
 
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 Depreciable Assets | Actual Dispositions | Cash Basis Considerations | Optional and Mandatory Inventory Adjustments | Restricted Farmers | Deferred Grain Sales | Farm Crops
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When the owner of a farm property dies, various tax consequences may occur. At the time of death, the farmer is subject to a deemed disposition. In other words, the taxpayer is considered to have disposed of any capital assets immediately prior to death and to have received proceeds equal to fair market value of those assets. For all capital property, the fair market value must be determined, and the gain or loss resulting from the deemed sale must be declared on the deceased taxpayer’s final tax return.

Where property qualifies under any of the rollover provisions, the deemed disposition rules do not apply. Where a farmer is gifting or bequeathing property to heirs, it is important to ensure the requirements of the rollover rules are met to defer the taxes on the property. Deemed disposition rules do not apply on a disposition to a spouse (unless elected otherwise).

Depreciable Assets
The deemed proceeds on depreciable assets of a prescribed class is an amount equal to fair market value of the assets in the class. The following example shows how this is calculated:
Example

Capital Cost$8,000
Fair Market Value$6,800
Undepreciated Capital Cost$4,900
Deemed Proceeds$6,800
Recaptured Capital Cost Allowance
Deemed Proceeds -
Unclaimed Capital Cost (UCC) = $6,800 - $4,900
$1,900


In the above example, the taxpayer will be deemed to have received proceeds of $6,800. The recaptured capital cost allowance for the assets in the class ($1,900) will be included in the taxpayer’s income in the year of death. The deemed proceeds in the example are less than the capital cost, so there is no capital gain.

Where a capital gain occurs, one-half would be added to the deceased’s income and, subject to the capital gains exemption, be taxed at normal rates.

Where a farmer has assets on the straight-line method of capital cost allowance, the assets are transferred at the fair market value without the incidence of recapture. The beneficiary of the asset must then claim capital cost allowance on the declining balance method. As well, the beneficiary is deemed to have acquired the property at a cost equal to the deemed proceeds of the deceased.

The rollover rules may apply for depreciable property being transferred to spouses or children. Under these provisions, declining balance assets can be transferred at their undepreciated capital cost.

Tips and Traps
  • It may be best to exclude certain assets from the rollover provisions to make use of any remaining capital gain exemption. To avoid the normal spousal rollover in a transfer to a spouse, an election can be made by a letter attached to the tax return.

    Actual Dispositions
    The deemed proceeds of disposition established at death may vary from the amounts on an actual subsequent disposal. In this situation, the Income Tax Act permits an adjustment for losses incurred within twelve months after death. If the estate incurs either a capital loss or terminal loss, the deceased’s income is recalculated taking this loss into consideration. In effect, the loss has been carried back to offset any gains accrued at the time of death. An exception to the capital loss carry-forward provisions allows any unabsorbed capital losses in the year the taxpayer dies to be applied against any income for the year of death or for the immediately preceding year. However, these capital loss carry-forwards would not be available if the deceased had claimed the capital gains exemption in the year or in a prior year.

    Cash Basis Considerations
    Farmers on a cash basis may have inventories and receivables on hand at the time of death. Cash basis inventory and receivables are considered to be “rights or things.” As a result, they may be reported on the deceased taxpayer’s final return, included on a rights or things return or transferred to the beneficiaries (Canadian resident or not) to be taxed in their hands. Where the farmer was on the accrual basis of farming, the inventory and receivables would have to be included on the final return.

    Optional and Mandatory Inventory Adjustments
    An optional or mandatory inventory add-back is deducted in the following year (see the section on Inventory). When a taxpayer dies, any adjustment recorded on the last tax return would also be eligible for deduction on the rights or things return against the inventory income. This treatment would avoid a potential unusable loss on the final return.

  • Where the inventory is transferred to a beneficiary, a loss will be created through the deduction of the prior year's inventory with no corresponding income to offset it.
  • Additionally, the income will be fully taxed in the hands of the beneficiary.

    Restricted Farmers
    Restricted farmers are those whose chief source of income may not be farming (see the discussion under Losses). Restricted farmers are not eligible for all the loss deductions available to full-time farmers. However, if the taxpayer is carrying on the business of farming immediately before death, even as a restricted farmer, the farmer may qualify for a tax-free rollover.

    Deferred Grain Sales
    At the time of death, the farmer may have received a cash purchase ticket or a deferred cash purchase ticket from the public elevator. Farmers on the cash basis recognize the income when it is received. As a result, uncashed tickets held at the time of death are included as income on the rights or things return (or they can be taxed in the final return or transferred to a beneficiary).

    Farm Crops
    A farmer who farms land owned or rented or who rents farm land out through a crop share arrangement may have an interest in a standing crop (unharvested) at the time of death. The Canada Revenue Agency takes the position that the value of any interest in an unharvested crop does not have to be included in the final returns of the taxpayer. Where the value is not included in the final returns of the deceased, the eventual proceeds from the crop will be taxable in the hands of the beneficiaries or the estate.

    The deceased taxpayer’s legal representative may elect to have the value of the standing crop included in the taxpayer’s final return where desirable. In the event the amount is included in the final return, the following conditions apply:

    1. In the case of a deceased taxpayer who farmed land he owned or rented, the value of the deceased’s interest in the crop at the time of death is included in income as a right or thing;
    2. In the case of a deceased taxpayer who rented land in a crop share arrangement, the value of the deceased’s interest at the time of death is included in his income on the final return. However if the legal representative takes advantage of the election provision, the value may be included as a right or thing.

    Farm land owned by the deceased taxpayer may be sold after death but before the crop is harvested. Where there has been a sale, the value of the unharvested crop will not be included in the income of the deceased, the estate or the beneficiaries unless the agreement for sale, or other instrument, specifies the crop’s selling price.

    If the land rented by the deceased is not retained under lease by his or her estate or beneficiaries until the crop is harvested, no amount for the crop is included in the income of the group unless a payment regarding the crop is received upon or after the lease being relinquished. If the person harvesting the crop pays the specified price or makes such a payment on the lease being relinquished, then that person may deduct the amount in computing his or her income. Although the estate or beneficiaries may be subject to tax on the unharvested crop, they are not eligible to deduct any seeding or other expenses incurred by or allowed to the deceased taxpayer.
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    For more information about the content of this document, contact Joel Bokenfohr.
    This document is maintained by Nicole Halvorson.
    This information published to the web on July 21, 2014.