Originally published on January 22, 2007


During the life of a farmer or at his death, the Income Tax Act allows for a rollover of farmland, depreciable property and eligible capital property (grain condos or quotas), from a farmer to his child without the necessity of realizing accrued gains on the property or any income in the form of recaptured depreciation that might result from a transfer at fair market value.

Where the rollover rules apply, the farmer is able to transfer certain qualifying farm properties to a child at any amount between the cost of the property and the fair market value of the property.  In the case of depreciable properties the cost of the property is made up of its representative share of the undepreciated capital cost (UCC) which can be found on the farmer’s income tax return.   The amount chosen is accepted as the proceeds of disposition for tax purposes and becomes the child’s cost.

Since farmers are well-known for their aversion to income and probate taxes, the rollover rules which are found in subsections 73(3) and 73(4) of the Income Tax Act provide farmers with a simple and efficient way of transferring their farmland, farm buildings and farm equipment during their life-time to their children.  To many farmers, this is their way of “getting their financial affairs in order before they die”.

To qualify under the farm rollover rules, the following conditions must be met.

1.   Before the transfer, the property must be used principally in the business of farming

This is often referred to as the “50% farm business usage test”.  If you have a tractor and manure-wagon which you use both on your farm and in your corral cleaning business then you must determine which enterprise holds the tractor and wagon’s primary use.  If this equipment is used 50% or more of the time on the farm then it is eligible for the farm rollover to spouse or child.   If this equipment is instead used 50% or more of the time in the corral cleaning business then any transfer of this equipment to the child must be recorded at its fair market value.  The Canada Revenue Agency applies this test on a property-by-property basis.

There is no requirement for the property to be used immediately before the transfer in the business of farming.   For example, if Dad acquired farmland sixty years ago and he farmed 100% of the land for fifty years before retiring and in the last ten years he rented out 100% of his land to a non-related party then his farmland continues to qualify under the farm rollover rules.   His primary use of the land was in farming (50 years farmed / 60 years owned = 83%).

Subsection 70(9.8) of the Income Tax Act is a deeming provision designed to permit a rollover of farm property where it is owned by the taxpayer but leased to a family farm corporation or partnership.  Without this provision, farmland leased to your family farm corporation or partnership would not qualify for rollover treatment since it would not pass the 50% farm business usage test.  The farmland is not used by you but rather your corporation or partnership in the business of farming.   This provision deems property leased to a family farm corporation or partnership to be “used at that time in the business of farming”.

2.   Before the transfer, the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children must be actively engaged in farming on a regular and continuous basis

The Canada Revenue Agency states that “it must be determined on the facts of each case whether a particular person is actively engaged on a regular and




continuous basis in the business of farming.”  Typically the management and day-to-day activities of the farming business for such things as which fields will be planted, the type of crops to be seeded and the times for spraying and harvest must be carried out by the taxpayer, his spouse or any of his children.  Custom farming or hiring another person to undertake all or part of the work associated with the farming activity would not necessarily disqualify a taxpayer from rolling farm property to a child.

It is important to realize that it is the one child who is actively farming on a regular and continuous basis that makes all of other the children eligible for the rollover of farm property from the parent on a tax deferred basis.  Without that one active farming child, the parents are not able to use the rollover rules to transfer their remaining farm properties at any value between its cost and fair market value.

The Income Tax Act extends the meaning of the word taxpayer’s “child” to include grandchild, great-grandchild, adopted child or the spouse of a child.   What surprised me was the exclusion of “step-children”.  For example if a farmer married a woman who already had children, then upon the death of the spouse the farmer would not be able to rollover farm property to his step-children.   The Canada Revenue Agency says that “an individual will no longer qualify as the child of the step-parent after the death of the individual’s natural parent for all purposes of the Act.”

Watch out for the denial of farm rollover rules due to sale of farm property by the child

Subsection 69(11) of the Income Tax Act is meant to stop dispositions of property at less than fair market value so that the person receiving the property is prevented from applying a deduction to offset the gain realized on the subsequent sale of the property.  This provision applies whenever the property is sold within three years of the rollover or when “arrangements for the subsequent disposition are made” within three years.

For example, widowed mom dies in 2006 with no available farm capital gains exemption.  In her estate she uses the rollover rules to transfer farmland with an accrued gain of $200,000 to her son, while her daughter receives $200,000 in cash and investments.   The son who receives the farmland sells it immediately but reports no capital gain since he claimed the $200,000 capital gains exemption.  Canada Revenue Agency reassesses mom’s 2006 date of death return and assesses $88,000 in additional income taxes, by applying subsection 69(11) of the Income Tax Act.  The daughter who was to receive mom’s leftover cash and investments is now seeing a lawyer to contest the Will.  In this example, to protect the daughter, the Will should have issued a note payable from the son to the estate for any unforeseen taxes payable.  This note would be called by the executors of the estate should tax occur.

There is a purpose test contained in subsection 69(11) of the Income Tax Act and if it can be argued that “one of the main purposes” was not to obtain the benefit of any deduction or exemption available to the child then this onerous provisions of the Act would not apply.  For parents implementing their own succession plans, they might consider restricting their children from selling property for three years.

Eight out of ten farmers will use the rollover rules either during their lifetime or through their estates.  A little planning can go along way in ensuring that your intended results are achieved tax efficiently with no surprises.



Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at or website All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.