Farms – Sales of Land and Related Rights: Business Income or a Capital Gain?

If the sale of a property is considered to be on “account of capital,” the tax is generally half of what it would be had it been on “account of business.” The income tax could even be completely eliminated if the disposition is:

• considered to be on account of capital;
• in respect of a qualified farm or fishing property; and,
• within the lifetime capital gains exemption limit of the individual ($813,600 for 2015). (For eligible farm and fishing properties sold after April 21, 2015, the limit has been increased to $1,000,000.)

 
It is important to note that even if income tax is eliminated, alternative minimum tax (AMT) may be imposed. However, AMT is viewed as a deposit by some since the amount paid can often be used to reduce future income taxes payable.

If the factors as a whole indicate that the farm owner’s sale of the property or rights constitute a business, then the gains will be taxed as business income rather than under the preferential rates associated with capital sales.

Before purchasing or acquiring certain rights, consider whether the eventual disposition may benefit from a preferential tax treatment.