When it comes to transferring land, handing the farm to the next generation can be expensive.
Ontario’s Land Transfer Tax (LTT), more specifically, can take a significant bite out of a family’s farm succession finances if an exemption can’t be achieved. Consequently, it’s important for farmers to know when LTT applies — and how to legitimately avoid it.
Why it matters: Knowing what characteristics are required for an exemption to Land Transfer Tax can save farm families thousands of dollars.
How much is LTT?
As described by the Ontario Federation of Agriculture (OFA), current LTT rates for farmland stand at two per cent for property valued at more than $400,000. This increased rate has existed since the provincial Ministry of Finance raised it by 0.5 per cent in 2016. Rates for values below $400,000 increase in intervals: five per cent up to $55,000; one per cent between $55,000 and $250,000; and 1.5 per cent between $250,000 and $400,000 values.
So currently, if a parent transfers a 50-acre field to their son or daughter and that land is valued at $10,000 per acre — and the Land Transfer Tax family farm exemption does not apply — the application of LTT will currently cost the child (the transferee) $6,475 on the $500,000.
This, says the OFA, amounts to a significant added expense for farmers looking to expand, not to mention those just starting out. The organization adds these expenses coincide with already high farm assessments and property values.
Consequently, the OFA and other farm groups have been pushing for the elimination of LTT whenever transfers are made within farm families.
Keep the (immediate) family farming
But what constitutes “family” in LTT regulations? Mary-Lou Fletcher, a dairy farmer and real estate, will, estate, and corporate commercial lawyer from the Drayton area, says exemptions only apply when those involved in the transfer are directly related.
As a partner with Woods, Clemens, Fletcher & Cronin Professional Corp., a law firm located in Drayton and Elmira, Fletcher has helped many clients process family farm transfers.
Common grandparents, she says, are as far the LTT exemption tree can go. This means aunts, uncles, and first cousins are included, but that’s the limit.
“The land must be farmed by family and transferred to a family member for the principal purpose of the transferee continuing to farm the land,” says Fletcher.
A related qualifier emphasizes the importance of actually farming the land. More specifically, the land being transferred must have been predominantly used for farming, by the family members, prior to the transfer.
“Renting out the family farm is not considered ‘farming the land’, unless it’s share-cropping,” says Fletcher. “The ministry does audit these files, and if there is no farming income but only rental income, it will likely be caught on an audit.”
Record keeping critical
Given the burden of proof required for exemptions, Fletcher stresses family members who are working on and benefiting from non-rental, farm-sourced income need to keep records detailing their involvement.
Tom Blonde, a chartered professional accountant and partner with Baker Tilley GWD, an audit and tax advisory firm in Guelph, Wellington, and Dufferin, reiterates Fletcher’s sentiments. He adds keeping receipt records from both before and after a land transfer are critically important to achieving an LTT exemption. Such receipts also need to be in the name or names of those involved in the actual transfer.
Because LTT regulations still contain some rather ambiguous linguistics, though, Blonde says he and his colleagues try to keep proof-of-farming records for at least one or two years before and after the transfer takes place.
“It’s certainly a hassle to do that. There’s a lot of bookkeeping work,” he says.
Not all business structures equal
Not all business structures can qualify for LTT exemptions, either.
Families may qualify when individuals transfer to other individuals, a family partnership, or family farm corporation — though with the latter, each shareholder must be a qualifying family member of the individual transferor. Similarly, a family farm corporation can qualify if land is being transferred to one or more family members directly, though all involved still need to be immediate members of the family.
Transfers between two family corporations, however, do not qualify. Fletcher says this distinction can, and does, come as a surprise to some.
“We now find that farms are owned by their family farm corporation, and people expect to transfer to a family member’s family farm corporation without LTT, which cannot be done. A transfer from a corporation to a corporation triggers the tax,” she says.
In his experience, Blonde says holding companies can also be a complicating factor.
“The issue with holding companies is the holding company isn’t farming.
“The people behind the company are, but the company is not,” he says.
“It’s a bit ridiculous… regardless of the label placed over the business, it’s still the same people farming.”
Regardless, there’s no getting out of LTT in corporation-to-corporation transfers thanks to anti-avoidance rules. These, says Fletcher, stop people from doing things like transferring land to an individual family member, and the individual member immediately transferring that same land to their own family farm corporation.
“You can’t do indirectly what can’t be done directly,” she says.
Planning and timing
Families transferring land are automatically exempt from LTT if the right conditions are met. Fletcher says her clients sign an affidavit confirming they qualify and the tax does not have to be paid on closing. If the transfer does not qualify for the exemption, though, the tax must be paid within 30 days of the effective date of the transfer.
“Sometimes we receive instructions from the accountant, which are retroactive six months, to effectively transfer a farm at year end (on) Dec. 31,” Fletcher says.
“This is a problem if the LTT exemption does not apply because technically interest and perhaps penalties, will apply if the transfer effectively happened (on Dec. 31) and tax was not paid by Jan. 31.”
Overall Fletcher says it’s important for family members to not assume they qualify for LTT exemption just because everyone is related.