The family farm.

• Author: Taerum, Chastine M.
• Position: SPECIAL REPORT on Farming and Ranching

Farmers who are considering estate planning have a multitude of options available. This article will focus on two of the three main estate planning issues which will arise when deciding on which options to use for a particular situation:

* Inter-Vivos Transfers (transfers between living people);

* Testamentary Transfers (transfers through a will); and

* The $500,000 Capital Gains Exemption (this will be dealt with in a subsequent Tax Law column.

In general, when making either an inter-vivos transfer or testamentary transfer there are three questions that one should ask when transferring property:

* What is the nature of the property involved in the transfer?

* Are we dealing with the person at arm's length?

* Are there any rollover provisions available?

Inter-Vivos Transfers

Passing the farm to the next generation when the farmer-owner is still alive (an inter-vivos transfer) has both advantages and disadvantages. This type of transfer allows a farmer to show clear intent; there will be no misunderstanding of the farmer's wishes, and the value of the farm assets will be taken into account. An inter-vivos transfer is an appropriate choice if the farmer does not need a future income stream. One should note that if the farmer is transferring property which is considered a "homestead", under Alberta's Dower Act, consent is needed by the spouse of the farmer, prior to the disposition of such property. Another issue to be considered is that there may be tax implications when the transfer of property takes place, if there are no rollover provisions available.

Additionally, if the transfer of property is to a non-arm's length party, the application of subsection 69(11) of the Income Tax Act (the Act) and attribution rules need to be considered (see below).

Nature of the Property--Income

Generally, if a farmer uses a cash basis method of reporting farm income and is dealing at arm's length with a purchaser, a transfer of property will not be included in income until the purchase price is paid. Alternatively, if a farmer uses an accrual method of reporting farm income and is dealing at arm's length with a purchaser, there will be an income inclusion in the taxation year of the sale and a deduction for the purchaser in that year.

However, if a farmer is not dealing at arm's length with the purchaser (suppose the purchaser is a sibling for example), one will need to consider section 78 and section 69 of the Act. Section 78 deals with unpaid amounts between non-arm's length parties. The charts on the following pages may help clarify these rather complex matters.

Additionally, under section 69, if a taxpayer has acquired property from a person with whom he or she was not dealing at arm's length and has paid more than the fair market value, the taxpayer will be deemed to have acquired it at fair market value. Thus, the taxpayer may not be able to deduct an amount greater than the fair market value.

Furthermore, if a taxpayer has disposed of property to a non-arm's length party, for no proceeds, for proceeds less than fair market value, or by way of a gift inter-vivos, the taxpayer shall be deemed to have disposed of the property at fair market value. Thus, the taxpayer may have to pay taxes on that...