Capital Gains Exemption on Selling Farmland in Ontario

If you are selling farmland, the lifetime capital gains exemption (LCGE) may reduce or remove the tax on part of your gain. It is one of the most valuable tax rules available to farmers, but it only applies when the property and the seller meet specific tests.

This article explains the exemption in plain terms, the tests the CRA applies to farmland, how a farmhouse is treated, and the forms involved. It is general information, and your accountant should confirm how the rules apply to you.

What the exemption does

The LCGE lets an individual deduct some of a taxable capital gain on qualified farm or fishing property. In the Income Tax Act, the deduction under s. 110.6(2) uses a $625,000 cap formula, which is half of a $1,250,000 exemption, reduced by earlier deductions you have claimed. Because it is a lifetime amount, earlier claims can reduce what is left.

The limit has changed over time. The CRA gives these deduction limits by period:

For a tax year that includes June 25, 2024, an extra deduction of up to $116,582 may be claimed for qualified farm or fishing property sold on or after that date, but only after claiming the maximum under the main provisions. For a sale in 2026, confirm the current limit with the CRA or your accountant, since the figure may change.

What counts as qualified farm property

Qualified farm property covers real property or a fishing vessel used in a farming or fishing business in Canada. It also includes shares of a family farm corporation, interests in a family farm partnership, and Class 14.1 property such as milk and egg quota. The property must be owned by you, your spouse or common-law partner, or a family farm partnership.

For land and Class 14.1 property, the CRA's ownership test requires that the property was owned throughout the 24 months before the sale by you, your spouse or common-law partner, your children or parents, a qualifying personal trust, or a family farm partnership.

The CRA's use test has two alternatives:

• While owned by those persons for at least two years, the property was mainly used in an active farming business, and your gross farming income exceeded your income from all other sources in the year.
• A family farm partnership or corporation used the property for at least 24 months, and you, your spouse, children or parents were actively engaged in the business on a regular and ongoing basis.

Property used in farming by the owner or family for at least five years before June 18, 1987 can qualify under a separate pre-1987 test.

Selling shares or partnership interests

If the farm is held through a corporation or partnership, extra tests apply to the entity. The CRA says all or substantially all (generally 90% or more) of the fair market value of the entity's property must be used mainly in farming, and over any 24-month period more than 50% of its value must be attributable to property used in an active farming business. Because these tests look back over time, restructuring just before a sale can cause problems. Get advice early.

The farmhouse, transfers to children and the forms

If the farmland includes your home, the land usually counts toward the principal residence only up to one-half hectare (1.24 acres), unless more is needed to use and enjoy the home. The CRA gives two ways to split the gain: Method 1 splits proceeds and cost between the home and the farm property, and Method 2 uses a $1,000-based formula. A property qualifies as a principal residence only if it was ordinarily inhabited in the year by you or certain family members and was designated for that year, with only one property designated per family unit.

If you are passing the farm to a child, the rules differ. A farmer can transfer qualifying farm property to a Canadian-resident child at any price between adjusted cost base and fair market value to postpone the tax, and 'child' includes grandchildren, great-grandchildren, stepchildren and a child's spouse. On a parent's death, a tax-free transfer to a resident child is allowed if made within 36 months of death, or later in some cases.

Report the sale on Schedule 3 and the exemption claim on Form T657. Claim the result on line 25400. If you have had investment income or expenses since 1988, Form T936 is needed for the cumulative net investment loss calculation, which can reduce your deduction. For a principal residence sold in 2016 or later, the exemption is allowed only if the sale and designation are reported on the return.

What to do next

• Gather purchase records, earlier tax returns and any past exemption claims, since earlier deductions reduce your limit.
• Document who owned the land, for how long, and how it was used each year.
• Ask your accountant about Form T657 and, if needed, Form T936.
• If your home is on the farm, decide how to split the gain between the home and the farm.
• Check the current-year limit with the CRA before you finalize the price.
• Do this planning before you sign an agreement of purchase and sale.

Frequently asked questions