What should I expect from the Canada Revenue Agency if I sold my $2‑million property to one of my three farming sons for $1 to avoid paying capital gains tax? I bought the land myself in 1968 for $2, and I sold it in 2022 for $1. I have used the land for hay and run a few beef cattle for more than 20 years. —Richard
How farm status and a principal residence affect tax
Whether the property contains your home matters a great deal for tax purposes. If you have lived on the property and it qualifies as your principal residence, the sale or transfer can be exempt from capital gains tax. To claim the principal residence exemption you must have ordinarily inhabited the dwelling and not claimed the exemption for another property in the same years. For most properties, the residence and its immediate yard must be no larger than one‑half hectare to qualify automatically. Land beyond one‑half hectare can qualify only if the extra land is necessary for the housing unit to properly serve as a residence rather than for recreational or lifestyle uses.
Common exceptions to the one‑half hectare guideline include situations where additional land is required for access to public roads or when a minimum municipal lot size applied at the time of purchase. If your home sits on farm property and the land beyond the house is essential for the residence, more than one‑half hectare may still be acceptable for the exemption.
Two approaches when a farm includes a principal residence
When a principal residence sits on land used in a farming business, you generally have two ways to treat the capital gains on disposition:
- Allocate the total value between the portion representing the principal residence and the portion used in farming. You must reasonably divide the adjusted cost base (ACB) and sale proceeds between the two parts to compute the capital gain for each. The residence portion may then qualify for the full principal residence exemption — potentially eliminating tax on that portion — while the farming portion could remain subject to capital gains tax unless it qualifies for a farm exemption.
- Elect to deduct a nominal amount based on years of ownership (historically a flat dollar amount plus an annual amount). Practically, this method is unlikely to be useful for a property where real estate values have appreciated substantially.
Gifting land to family and deemed disposition rules
Be aware that when you transfer or gift property to a family member, tax rules generally treat that transfer as a deemed disposition at fair market value. In other words, transferring the land for $1 will not avoid a taxable capital gain if the fair market value is much higher — the Canada Revenue Agency will treat the sale as if it occurred at market value. Gifting may, in some provinces or municipalities, affect land transfer tax obligations or exemptions, but you should confirm local rules with a real estate lawyer.
Lifetime capital gains exemptions for qualified farm property
There is a lifetime capital gains exemption specifically for qualified farm properties. Under current rules, the lifetime exemption for qualified farm property can shelter up to $1 million of capital gains (indexed in some years). A qualified farm property can include:
- Shares of a family farm corporation that you or your spouse/common‑law partner owns,
- An interest in a family‑farm partnership that you or your spouse/common‑law partner owns,
- Real property such as farmland and buildings used in farming,
- Certain quota or license types included in Class 14.1 capital cost allowance (for example, milk or egg quota),
- Fishing licences, where applicable.
For property acquired long ago, timing matters. You bought this land in 1968, before capital gains were taxed in Canada. Capital gains became taxable in 1972, so the adjusted cost base for tax purposes is generally the fair market value at that time. Additionally, taxpayers were able to claim a $100,000 lifetime capital gains exemption on certain assets prior to 1995 if they elected it; some people used that election to increase their tax cost base. If you or an adviser made such an election in the past, it could raise your ACB and reduce taxable gain.
To qualify for the farm lifetime capital gains exemption at disposition, the property must generally have been principally used in farming in the year of disposition or in at least five of the preceding ten years. The CRA also allows certain rollover or deferral provisions: you may be able to defer tax if you transfer the property to a child who is a Canadian resident and who is actively engaged in the farming business on a regular and ongoing basis before the transfer. That deferral can postpone the tax until the child later disposes of the property.
Practical considerations and estate planning
Given the principal residence rules, the historical $100,000 election, and the $1‑million farm lifetime exemption, it is possible that very little or no tax would be payable on a transfer of the farm — depending on the facts. However, gifting the property outright to one child has important non‑tax consequences. You would lose control of the asset, which could be problematic if you might need it later or if you live on the farm. Gifting to only one of three children also raises estate planning issues: the other two children may need to be compensated or provided for in other ways to keep your estate plan fair and effective.
Before taking any steps, consult a qualified tax professional and a real estate lawyer who understand farm property rules, the principal residence exemption, the qualified farm property exemption, and any provincial transfer tax issues. They can review your ownership history, any past elections that affect your ACB, and whether a rollover to a child or an exemption applies in your situation.
Jason Heath is a fee‑only, advice‑only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell financial products.
Read more on income real estate:
- Understanding the 1994 capital gains tax election
- Cutting down capital gains tax on real estate sales
- Should you buy real estate through a corporation?
- Where to buy real estate in Canada: national ranking