Canada: Transferring Farm Property From Partnerships To Individuals

Inter-generational farm transfers are common as succession plans. When parents transfer farms to their kids, they have rights that other business owners do not have. For example, if a farm or fishing property meets the criteria for a favourable intergenerational transfer, they can transfer at less than fair market value. However, many farming operations function as unincorporated partnerships, which can lead to complications. Typically, this is a mom and dad type scenario, where both parties are individuals farming multiple pieces of land, and they want to transfer one piece to the next generation.

In these cases, people often think they can transfer one piece of the property at any value between cost and fair market value because it's qualifying farm property. While this is true when the transfer is from an individual to his or her child, it does not apply when the property is owned by a partnership. In the case of a partnership, there are certain steps that need to be taken to first wind up or dissolve the partnership, so that the property can be transferred from individual to individual. Land coming out of an unincorporated partnership directly to the next generation cannot be transferred at less than fair market value. This is a common mistake, and it can result in substantial tax penalties for both parties. To avoid headaches of this kind, it's a good idea to consider all the issues related to transferring farm property from partnerships to individuals.

The biggest misconception

Some businesses that function as partnerships believe they are functioning as individuals because the business is personally owned and in their individual names. However, if you are classified as a partnership, you cannot transfer to an individual below fair market value. If you transfer the land out of the partnership to an individual, there is a serious risk that the CRA will determine that the transfer should have been made at fair value, bumping up the value and triggering a gain on the sale.

Once the CRA's involved, there's no turning back

With most businesses, the issue of fair value is not even discussed. It's simply a given that you cannot provide a perceived benefit to the next generation. While farmers are allowed to do this in certain cases, they sometimes do it incorrectly by not going through all the necessary steps. Unfortunately, if you make this mistake, there's no turning back. Once your case has been assessed by the CRA, you are usually stuck with their conclusions.

Making your land eligible

In order to sell your land below fair value, you must first wind up your partnership. That means everything comes out of the partnership, and the partners take a percentage ownership of the land and other assets on an individual basis. From that point on, you can transfer that land to your child below fair market value. In a sense, this is a technicality, but it's an opportunity that should not be overlooked.

The importance of planning ahead

Imagine a scenario where two parents have a partnership. When they wind up the partnership, mom now owns 50% and dad owns 50%. As individuals, they can transfer their undivided interests in the property to the next generation, but they have to wind up the partnership first and there are some nuances in doing that. For one, they can't do it retroactively. In fact, they have to open up individual HST accounts as sole proprietors in advance that show them acquiring their percentage interest from the partnership and transferring it as individuals to the next generation. There are also tax election forms that need to be filed to document the wind up.

Keeping part of your land

If you want to keep farming part of your land after selling another part, winding up a partnership can get especially complicated. Even if you want to transfer only one piece of the land, you have to wind up the entire partnership. Of course, you can always set up a new partnership after the transfer and consider other options like keeping the remaining land out of the next partnership. Any way you approach it, transferring farm property is a complex process, so be sure to consult the experts at Collins Barrow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.