Farmers say changes to capital gains tax could complicate family transfers

Jake Leguee knows the fields of his Saskatchewan grain farm well, as part of the third generation to help harvest the land. And at 36, he’s already preparing to eventually transfer the business to his three young sons.

“The goal of every farmer, really, especially when their kids are young, is maybe someday they’ll be interested,” said Leguee, who farms 6,400 hectares near Fillmore, a small community about 100 kilometres southeast of Regina. 

But with rising costs, including recent changes to the capital gains tax, he’s concerned they could face challenges. 

“They’re going to be paying more when it comes time to make the next transition to generation four,” he said. “It’s something we’re definitely already thinking about.”

Farmers like Leguee are joining national agriculture groups in speaking out against the tax changes, arguing that the added strain they put on land transfers will deter the next generation from taking over and contribute to a decline in family farms. 

The federal government, however, says the changes are about delivering “tax fairness” and include measures carefully designed to protect family farms.

Ottawa now taxes two-thirds of capital gains — such as the profit made from selling a farm — up from the original inclusion rate of 50 per cent. The changes took effect last week, just a few months after they were announced.

Groups including the Canadian Federation of Agriculture, the Canadian Cattle Association and Canadian Seed Growers Association have spoken out against the new inclusion rate. The Grain Growers of Canada is calling on Ottawa to keep family farms at the original rate. 

That group’s executive director says the increased cost complicates retirement plans and makes the situation more challenging for farmers’ children.

“It’s going to increase the cost for that next generation that are looking to take over, and if they don’t have the means or the funds to take over, large corporate farms are going to move in and buy up all that land,” said Kyle Larkin.

Rising farmland values

Based on historical land values, a 320-hectare farm purchased in Ontario in 1996 for $1.28 million, would sell for about $15 million today. 

That would result in more than $13 million in initial profits for the farm owner, prior to paying taxes. 

Under the previous capital gains system, the family would pay $3.79 million. Now the tax bill would be $4.79 million — an increase of $1 million. 

The federal government says the changes are a way to ensure the wealthiest Canadians pay their fair share.

Finance Minister Chrystia Freeland told reporters on June 19 that the changes were carefully designed to deliver tax fairness and help farmers.

She said an increased lifetime capital gains exemption to $1.25 million — up from $1 million — and the new Canadian Entrepreneurs’ Incentive, which would apply to a family that founds a farm, would make the change easier. There are also exemptions in place for intergenerational land transfers to allow taxes to be deferred.

“You are going to be better off under the new system than you were previously if you are a founding farmer or entrepreneur and that is per individual,” she said. 

“These are significant measures that we put in place because, as we were designing this, we were careful. It was important for us to have this measure be very targeted.”

Impact varies widely: tax expert

Ryan Kehrig, national leader of agricultural tax with the accounting firm MNP, says every farmers’ situation is different and the impact of the changes will vary. Based out of Saskatoon, he works with clients on sales, tax filing and intergenerational transfers.

“The ones that are probably almost at the goal line in terms of implementing their succession plan, they’re taken aback a little bit in terms of this last-minute wrench that has been thrown in,” Kehrig said.

When a farm is passed from one generation to another, parents typically transfer the property to their children and are paid back in instalments from its day-to-day profits, to fund their retirement.

But with a higher capital gains tax on those instalments, the parents would see less money, putting a strain on the family finances as a whole. 

Kehrig says the farmers he works with are most concerned about the short timeline between when the tax change was announced and took effect — particularly those on the brink of retirement. He said some are revisiting their plans.

“It’s caused some stressful conversations among some particular clients and people in the industry,” he said.

At his grain farm, Leguee said he’s glad he took over well before the changes took effect. He’s now contemplating how an inter-generational transfer could work once his children enter the business.

“Everything that we have here is because of the efforts of my grandparents and parents,” he said.

“It’s only right that we continue that tradition and try to continue building this farm for the next generation,” he said.