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 A farm quota is a right granted by the government that allows a producer to sell certain specified farm commodities. For tax purposes, quota is treated as an intangible asset. When a quota is purchased, three-quarters of the quota cost is added to the Cumulative Eligible Capital (CEC) account. Regardless of whether the farmer calculates tax on the cash or accrual basis, the purchase cost is the amount paid plus any other amount owing or outstanding because of the quota purchase.
At the end of the year, the balance of the CEC account is amortized on the declining balance basis at a maximum rate of seven per cent per year. In other words, seven per cent of the value of the CEC account is recorded as an expense similar to capital cost allowance. The balance in the CEC account is similar to the undepreciated capital cost of a depreciable asset.

When a farm sells quota the tax rules are quite complex. In general terms the sale of quota results in two income sources. The first is an income inclusion reflecting the amortization taken (if any) on the original purchases of quota. The second is an income inclusion which may be eligible for the capital gain exemption in the case of an individual or treated as business income in the case of a corporation.

Tips and Traps

  • Transfer to a corporation - a farmer can roll a quota into a corporation and claim the enhanced capital gains exemption on the increase in value. However, the increase in value of the quota (the "bump") cannot be added to the CEC pool and depreciated. This "bump" will, however, reduce any gain on a future sale by the company, and often a tax-paid shareholder loan can be created on transferring the quota to a company (allowing the farmer to draw cash against this loan without further personal tax).
  • Increases in value - if a farmer anticipates a future increase in the value of a quota, it would be beneficial to hold the quota personally rather than in a corporation. This would ensure that any gains on sale would qualify for the capital gains exemption provided the exemption still exists.
  • Income from the sale of quota by a company (where the quota was used in an
  • active business) will qualify for the small business deduction and normally be taxed at approximately 14 per cent.
  • In many operations (especially poultry), it may be beneficial on a sale to ensure the allocation of proceeds separately between buildings and quota in the sale agreement. This allocation would ensure the appropriate portion is allocated to quota (which may be eligible for the exemption in the case of an individual) and would minimize recapture on buildings
  • Remember that personally owned quota does not rollover to a child on the death of a former.
Capital Gains Exemption - Qualified Farm Property and Quota
The definition of Qualified Farm Property includes an eligible capital property, providing the property was owned for a period of at least 24 months prior to the sale. A situation could arise where some quota was owned for more than 24 months and some was acquired within 24 months. In this instance, the Canada Revenue Agency has given comfort in some situations that the portion of the gain that qualifies for the exemption would be determined by pro-rating the gain over the total quota and claiming the exemption on the portion that had been held for 24 months.
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For more information about the content of this document, contact Joel Bokenfohr.
This information published to the web on July 28, 2014.