1. Capital Gains
The income tax implications of purchase or sale of cottage properties and farm properties - particularly to family members - can be significant. Such dispositions can trigger substantial capital gains tax liability in the hands of the transferor. The purchaser and/or the vendor should discuss any such consequences or implications with their accountants. The Canada Revenue Agency also supplies Guide, numbered T4003, dealing with farming income and capital gains.
2. Harmonized Sales Tax (HST)
1. Personal use Property
Sales of personal use property by an individual or a trust are exempt from HST. "Personal use property" includes any real property other than a residential complex, capital property used primarily in a business or real property sold or leased in the course of a business. Most vacation properties and hobby farms qualify as a personal use property.
Generally speaking, sales of farmland previously used by the seller in a farming business are taxable transactions, unless an exemption applies. For these purposes, "farmland" means land that is regularly used by a person for the purpose of gaining or producing income from a farming business carries on by him or her. It may also include vacant land such as a bush area that may not be used directly in a farming business, along with any buildings that form part of the farmland. Where the land is used by the buyer in a farming business, the buyer is eligible for an input tax credit. However, if the land is sold as an ongoing farming business, (and provided both the buyer and seller agree and make an election accordingly using Form GST44 , no HST will apply. In such cases, the buyer must acquire possession or use of all or substantially all (90 percent or more) of the property required to carry on the business being purchased. The election is not available in situations where the seller is registered for HST, but the buyer is not. If the sale of farmland includes a residence or house, then the sale is viewed as two separate sales - (1) the portion that includes the house plus additional land needed for the use and enjoyment of it; and (2) the remaining portion of the land. Because the sale of used residential housing is generally exempt from HST, the rules respecting HST on farmland sales pertains to the remaining portion of the land only.
Under the Excise Tax Act, there are scenarios which are exempted from HST. They are:
- Sale or transfer to a person or former spouse/common-law partner. The farmland must be acquired from a relative who was in the business of farming prior to the transfer, and must have been purchased for the buyer's individual use and enjoyment. The farmland may not have been used in any other commercial activity immediately prior to the transfer. In some circumstances, the exemption can cover sales by individual farmers to his or her spouse, or a conversion of land from its use in the business of farming, to personal use by the same owner.
- Sale by a partnership, trust or corporation to a partner, beneficiary, shareholder or related person. This exemption covers those sales where, immediately prior to the transfer, all or substantially all of the property belonging to the partnership, trust or corporation is used in the business of farming. The purchasing partner, beneficiary, shareholder or child of that individual must be actively engaged in the farming business. For these purposes, "all or substantially all" means 90% or more of the property.
- Sale or transfer of personal use property by an individual or a trust. This exemption only applies where the land that is sold or transferred that has not been primarily in a farming business. The exemption does not apply to land held by corporations or partnerships, or to land previously subdivided or severed into more than two parts, except where those parts were sold to a related person, former spouse or common-law partner for their own personal use and enjoyment.
Assuming the farmland is not eligible for one of the available exemptions, the process for collecting the applicable HST will vary according to the circumstances, Specifically:
- If the farmland is being sold to a person who is registered for HST, the seller is not required to collect the HST generated by the sale. Rather, the buyer will report the HST payable and will claim an offsetting income tax credit in the first HST return after the sale has closed. In such circumstances, it is therefore prudent for the seller to confirm prior to closing that the buyer is officially registered for the HST. Buyers who are using 90% or more of the farmland in a farming business are eligible to claim the full input tax credit.
- If the sale is to a buyer who is not registered for the HST, then the seller must collect and remit the HST to the Canada Revenue Agency. If the land be used in a farming business, the buyer can then register for the HST, and can claim an input tax credit in order to recover the HST that been paid on the purchase and sale. Generally speaking, Canada Revenue Agency will back date an HST registration for up to 30 days in order to facilitate the buyer's recovery of the HST paid in such scenarios.
3. Land Transfer Tax
A with other kinds of real estate transactions, the purchase and sale of farmland is subject to the provisions of the Land Transfer Tax Act, which imposes a tax obligation tied to the value of the property. Previously, different considerations applied so that non-residentbuyers were subject to a higher rate, but this distinction has now been removed. In this same vein, the Non-Resident Agricultural Land Interests Registration Act - which previously required non-residents to file a registration report within 90 days - has been repealed, along with its General Regulation which had authorized the collection of relevant information.