Family farms have historically received favourable tax treatment under several different taxing statutes. For policy reasons, legislators have sought to facilitate transfers of the family farm amongst family members. One such taxing statute that provides favourable tax treatment is British Columbia’s Property Transfer Tax Act.
Absent an exemption, whenever a transfer of real property is registered with the Land Title Office, property transfer tax is payable based on the fair market value of the property, at the rate of 1% on the first $200,000 and 2% on the balance. This can result in a significant bill, particularly when farm land is being transferred amongst family members and there are no proceeds of sale with which to pay the bill.
One of the exemptions available to property transfer tax is the family farm exemption. Simply put, a family farm can be transferred to a related individual if the farm is classified as farm land under the Assessment Act and is “used, owned and farmed” by certain persons. There are other requirements, but this is the gist of it.
The language of the Property Transfer Tax Act and the way it is being interpreted by the Property Transfer Tax office results in a couple of potential “traps” for the unwary.
One such potential trap is that it is considerably more difficult to claim the family farm exemption upon a person’s death than it is if that person transferred the property during his/her lifetime. A transfer made as a result of a person’s death (e.g. through his/her will) will only be exempt if the deceased was farming the land immediately before death. The way the Property Transfer Tax office is interpreting this requirement is that if there is any period of time immediately before the deceased’s death that he/she was not able to farm the land, the exemption will be lost. In other words, a hospital stay before death could result in the loss of the exemption. Conversely, if the farm land is transferred during a person’s lifetime, the “farming” requirement can be met if any of the transferor’s family members are farming the land.
Another potential trap is that, while some non-farm business use does not necessarily result in the loss of the exemption, operating that non-farm business through a corporation may. As noted above, one of the requirements for the exemption to apply is that the farm is used, owned and farmed by the owner or by his/her family members. If a corporation is operating that non-farm business and reporting the income from the business, the land is being used by a person other than the owner and his/her family members and the exemption will be lost.
So, although the family farm exemption exists to enable transfers of the family farm amongst family members, the availability of the exemption should always be carefully considered when planning how best to transfer the family farm to the next generation.
For more information on tax law, contact Melodie Lind at: (250)869-1210 or [email protected]
