Relocation of Farm Operation

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 A farmer looking to relocate a farming operation will likely dispose of the property currently used in the operation. Normally, a disposition of the land and buildings for proceeds in excess of the cost will result in a capital gain and recaptured capital cost allowance in the year of sale.
The Income Tax Act provides special provisions to defer tax where a voluntary disposition of a business property occurs. The tax rules allow a tax-deferred rollover of certain business assets if they are replaced by similar business assets before the end of the taxation year immediately following the year of disposal. To qualify for this rollover:
The assets must be land or buildings used in a business immediately before the disposition;
  • The replacement asset must be purchased before the end of the first taxation year following the year of the disposition of the original assets;
  • A letter of election must be filed with the tax return for the year the replacement property is acquired;
  • The replacement asset must be used in the same or similar business as the original asset; and
  • If the owner was not a Canadian resident, the property must be taxable Canadian property
Tips and Traps
  • Farmland being crop shared would not qualify under these rules, nor would rented property (unless used by a related person in gaining or producing income from a business)
  • Where a replacement property is not acquired until the following taxation year, any tax owing on recaptured capital cost allowance or capital gain must be paid in the year of sale. When the replacement property is purchased (within the time limits set out above) and the relevant election is made, the tax return for the year of sale will then be reassessed to determine the amount of the refund.
  • It is possible to use the replacement property rules on replacement property purchased prior to the disposition of the former business property. The replacement property election must be filed in the year the replacement property is purchased; there is no time restriction for selling the property to be replaced.
  • The Canada Revenue Agency at one time had taken the position that these rules were not available in situations where farm size increased but no longer appear to take that position.
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For more information about the content of this document, contact Joel Bokenfohr.
This information published to the web on July 24, 2014.