Rollovers

 
 
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 A rollover occurs when eligible property is transferred between two non-arm’s length parties, and the recognition of a capital gain or loss or recaptured depreciation is deferred for tax purposes. Transferring farm property can be very complicated, so this is an area that must be approached very carefully.
Whenever taxpayers dispose of anything to a non-arm’s length person for proceeds less than fair market value, they will be deemed to have received fair market value unless the transfer qualifies under one of the special rollover provisions.
In all cases where property is transferred to a related party, the income and capital gain attribution rules should be reviewed. In some cases, even after an asset has been transferred to a related party, income and, in certain cases, capital gains earned with respect to the transferred property will attribute and be taxed in the hands of the transferor.

Farm Property Transferred to Children
One of the important rollover provisions for farmers is the rollover provisions allowed under Subsection 73(3.1) of certain farm property to a child. To take advantage of this rollover, certain conditions must be met.
The conditions for a Subsection 73(3.1) rollover stipulate that the property must be a qualifying property (depreciable property, land or eligible capital property but not inventory) that was: before the transfer, [the property was] used principally in the business of farming in which the taxpayer, the taxpayer’s spouse, the taxpayer’s parent or any of the taxpayer’s children was actively engaged on a regular and continuous basis.

Tips and Traps
  • The Department of Finance used the example that if real property had been farmed actively by the parent for 15 years, rented on a crop-share basis for 2 years and then transferred to the child who would actively farm the real property, they would permit a rollover of the farm property.
  • However, if parent had farmed the property for 10 years, had rented the property out for 20 years and then transferred the property to the child who would actively farm the property, the rollover treatment would not be available. Unfortunately, Interpretation Bulletin 268R4, does not allude to this issue or provide any further guidance.
Percentage of Time
The bulletin does, however, go on to add a comment in Paragraph 24:
There is no requirement that the property be used immediately before the transfer in the business of farming. However, if the property is used for some other purpose other than farming for some time, a question may arise as to whether the property was used primarily for that other purpose rather than in the business of farming.
This comment is consistent with the view of the Department of Finance when the wording was changed from “immediately before” to “before.” The example used in the explanatory notes referred to a situation of farm land used for 15 years in the business of farming and then rented for 2 years. This land would qualify for rollover while the land farmed for 10 years and rented for 20 years would not qualify.
The ability to take inactive farm land that has been held for several years and farm it actively for one or two years to meet the rollover rules appears to have disappeared.
The Subsection 73(3.1) rollover is not available for farm inventories.

Tips and Traps
  • The Subsection 73 (3.1) rollover is automatic; no forms need to be filed. However, situations may exist where the taxpayer does not want the rollover to apply (e.g. available loss carry-forwards or wants to use the capital gains exemption). Since no election is available to avoid the rollover, the structure of these transactions must be carefully reviewed.
  • This approach would normally involve structuring a sale for actual proceeds equal to the desired value (between adjusted cost base and fair market value) to use loss carry-forwards or the capital gains exemption.
Farm Property Transferred to a Spouse
  • Transfers of any type of capital property can occur to a Canadian resident spouse on a rollover basis according to Subsection 73 (1). This rollover is not limited to qualifying farm property. This rollover also happens automatically, and no forms need to be filed. An election is available to negate the rollover and have the transfer occur at fair market value (perhaps to use loss carry-forwards or the capital gains exemption).
  • Taxpayers may wish to avoid the rollover on a transfer to a spouse. If so, they should attach a signed statement to their tax return electing not to have the provisions of Subsection 73 (1) apply to the particular transfer and report the transfer at fair market value for the year of the asset transfers.
  • In the case of a transfer to a spouse, the transfer can only occur at cost or fair market value and not at any value in between. These conditions are significantly different from the rules discussed previously for transfers of farm property to children.
 
 
 
 
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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 24, 2014.