There are a wide variety of tax and non-tax elements to be considered as part of the estate planning process for business owners, such as capital gains planning, minimizing taxes on death and the use of trusts, to name a few. Winery owners are often in a unique position because, in addition to all of the usual considerations, they may be able to take advantage of some of the “farming” provisions available in the Income Tax Act.
The Income Tax Act has a long history of providing favourable tax treatment for farmers. Most notably, this includes provisions that will permit, in certain circumstances, farm property (or farm property held through a corporation) to be passed down through the generations without triggering tax. Presumably the reasoning behind this is that farmers often have significant value in land but little cash to pay capital gains tax and, absent a mechanism to avoid paying capital gains tax on death or other transfer to a family member, the family farm would have to be sold to pay the tax.
The ability to transfer farm property to the next generation without triggering tax is available in two ways: using the lifetime capital gains deduction or using the “rollover” provisions. Currently, the lifetime capital gains deduction permits an individual to exempt $800,000 of capital gains from tax during his or her lifetime. This deduction is available in respect of farm property and shares in a family farm corporation, provided certain conditions are met. The “rollover” provisions allow a parent to transfer farm property and shares of a family farm corporation, again provided certain conditions are met, to a child or grandchild on the basis that the deemed proceeds from the transfer are equal to the cost, with the result that there is no capital gain. The child or grandchild will acquire the property or shares with the same cost base. Note that both of these provisions are available in respect of transfers during lifetime or transfers upon death.
In the case of a winery owner, if the winery operation includes the growing of grapes or something that would otherwise qualify as “farming”, the above-noted provisions may be available provided things are structured correctly. Because strict tests must be met under the Income Tax Act to make use of these provisions, it is important to ensure that planning is done well ahead of any contemplated transfer.
In addition, it is important that such planning includes a consideration of how the use of these provisions might interact with the use of other tools available in the Income Tax Act to minimize taxes. For instance, consider a winery owner that both grows grapes on land that he/she owns and distributes wine in a way that constitutes an “active business” for the purposes of the Income Tax Act. That owner may be able to fully use the $800,000 lifetime capital gains deduction in respect of the “active business” aspect of the winery business plus use the rollover provisions for the farm property, but only if things are structured properly. For example, if both aspects of the business are combined under one corporation, the rollover provisions may not be available.
In conclusion, there are some excellent tools available in the Income Tax Act that allow for tax minimization. Winery owners are often in a good position to use these tools, with careful planning.
Melodie Lind can be reached at 250-869-1210 or at [email protected]
