| | Tips and Traps | Farm Houses | Tips and Traps | Tax Treatment of Farm Family Home | What Special Alternatives Exist for Farmers? | Can a Husband and Wife Each Have a Principal Residence? | Can a Farm Corporation Own the Family Home? | Can a Parent and Child Each Have a Principal Residence on the Farm? | Can a Partnership Have a Principal Residence?
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Self employed farmers can write off all eligible home office expenses. These expenses include rent, mortgage interest, property taxes, utilities, telephone, outside maintenance, minor repairs and supplies, and home insurance. The eligible portion of the expense is based on the fraction of the house used for the office (based on square footage). The 25 per cent rule of thumb used by many farmers could be subject to challenge by the Canada Revenue Agency.
Tips and Traps
- A deduction for home office expenses is allowed only if the following two conditions are met: the home is the principal place of business, or it is used on a regular and continuous basis for meeting clients or customers.
- Home office expenses cannot be used to produce a loss. However, losses disallowed because of this rule can be carried forward and used in any later year against income generated from the same business .
- If capital cost allowance is claimed on a fraction of the house, the principal residence exemption may be disallowed (potentially on the entire house value).
Farm Houses
Farmers have the option of owning their house personally or through a farming corporation. If the farmer owns the house personally, a reasonable portion of light, power, water, telephone and fire insurance is deductible as a farm expense. A reasonable portion of house repairs are also deductible. Capital cost allowance may also be taken on the dwelling in proportion to the business portion of the house.
Tips and Traps
- As noted above, a capital cost allowance claim on a farm house may disqualify the farm house for the principal residence exemption (potentially on the entire house value).
- Although the house is personally owned, expenses related to the house may be paid through the farming corporation. The proportion of the expense such as utilities or property taxes relating to personal usage should be charged back to the shareholder. This can be done by way of a charge to the shareholder loan account, or as a wage to the shareholder or as a taxable benefit.
- A farmer may also personally own farm buildings other than the principal residence. As an alternative to having the farming corporation pay rent to use the building, the corporation could pay the insurance cost for the building on the farmer's behalf, in lieu of rent. Technically, a rental statement would be required, but presumably the rent would be offset by the capital cost allowance and other expenses.
Tax Treatment of Farm Family Home
While most capital gains are subject to tax, any gain that an individual realizes when a principal residence is sold is still tax free in most cases.
What is a principal residence for tax purposes? Generally, it is a housing unit ordinarily inhabited in the calendar year by the taxpayer, the taxpayer’s spouse or former spouse or by a child of the taxpayer. The housing unit will include only that land which “contributes to the use and enjoyment of the housing unit.” Up to one-half hectare will be accepted without question.
If the claim states that more than this one-half hectare contributes to the “use and enjoyment,” then the Canada Revenue Agency may challenge the claim. Several factors will be considered in allowing such a claim - see paragraphs 15 to 17 of Interpretation Bulletin 120R6.
What Special Alternatives Exist for Farmers?
The Income Tax Act allows a farmer two ways to calculate the exemption from the capital gains tax on the principal residence when the property is disposed of.
Under the first method, the farm can hypothetically be divided into two sections. One section will be the farm house plus one-half hectare (or more if necessary to contribute to the use and enjoyment). The other section will be the rest of the farm property. A reasonable allocation of the sale proceeds must then be made between the two parts. The capital gain on the principal residence portion will most likely be exempt from tax, and the rest of the property will be treated in the normal manner for capital gains and recapture of depreciation
Under the second method, the farmer will not have to segregate the principal residence portion of the property. Instead, to arrive at the capital gain, the selling expenses and the adjusted cost base are subtracted from the total proceeds. The capital gain can be reduced by an amount equal to $1,000 plus $1,000 for every year that the house has been the farmer’s principal residence since December 31, 1971. Part years count as full years for this purpose. To take advantage of this second method, a farmer must file a special letter with his or her tax return that sets out certain information concerning the property.
Can a Husband and Wife Each Have a Principal Residence?
Prior to January 1, 1982, it was possible for a husband and wife to each designate a home as a principal residence and have any capital gain on the house exempt from tax. After December 31, 1981, a family unit may designate only one property for any year after 1981. Where a family unit owned two properties on December 31, 1981, any capital gains on the properties to that point may be exempt from tax, but the gains on only one property will be exempt after that date.
Can a Farm Corporation Own the Family Home?
The tax exempt status of the principal residence is lost for company-owned homes.
Can a Parent and Child Each Have a Principal Residence on the Farm?
In many situations today, a parent and a child are jointly farming the same farm where each has a principal residence. In determining whether or not two principal residences can be designated, the concept of ownership is important. Each may designate a principal residence if they both own the farm property as tenants in common or joint tenants. Only one principal residence may be designated if either the parent or the child owns the farm.
Can a Partnership Have a Principal Residence?
Interpretation Bulletin 120R6 indicates that a partnership is not a taxpayer and cannot use the principal residence exemption. However, a member of the partnership could use the principal residence exemption to reduce or eliminate the portion of any gain allocated to that partner (assuming the partner resided in the residence for the years in question). |
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