Ottawa-Proposed changes to the federal capital gains tax could undermine the viability of the agriculture sector because they undermine plans that are often decades in the making and challenge the financial stability of capital-intensive multi-generational family farm operations, says the Canadian Federation of Agriculture (CFA).

In a brief to the Commons finance committee, which is studying the proposed changes, CFA said it is concerned the changes will result in those who can afford to pay for tax planning advice being better off and those who cannot afford these services being worse off. “These sudden, fundamental reforms to Canada’s capital gains taxation, undermine plans that are often decades in the making and challenge the financial stability of capital-intensive multi-generational family farm operations.”

The government should consider implementing additional measures to support the understanding, adoption and full use of the changes including enhanced communications and online tax planning tools to support individual producers.

“For decades, farmers have focused on reinvesting in their operations to maintain competitiveness, enhance productivity and continually improve practices to do more with less. For most Canadian farmers, these investments are made with an understanding that the assets they invest in will position them to maintain both the financial health of the business and ensure they can maintain quality of life into retirement.”

CFA was encouraged by changes to the Canadian Entrepreneurs’ Incentive (CEI) as requested by many farm organizations, which wanted elimination of the founding requirement and broader eligibility of the program to successive generations of farm families.

“It is common in a farm family for the next generation to receive shares in a company through a parent's donation. The vast majority of Canadian farms are proudly owned and operated by farm families, and we appreciate the clarification that the CEI eligibility has now been expanded to reflect a minimum ownership time of any continuous 24-month period, at any time since the business’ founding.”

To fully provide the benefits of this expanded eligibility, CFA “strongly recommended that assets transferred under fair market value, through measures such as the agriculture rollover provisions, be eligible for relief under the CEI as well. Otherwise, this holds the potential to undermine the utility of these provisions, which remain critical to the smooth transfer of multi-generational family farms.”

While the increase in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million “was a step in the right direction when it comes to bringing farmland values more in line with current market values, we feel that a further increase is warranted given the appreciation of farmland values and capital demands in agriculture over recent years, which are making it more difficult for young farmers to enter the sector.”

Farm Credit Canada (FCC) says the average value of cultivated Canadian farmland increased by 11.5 per cent in 2023, which was the second highest increase reported since 2014, and far exceeds the LCGE increase. “This is particularly important in the context of Canadian farms continuing to increase in size, to support economies of scale and global competitiveness,” CFA said.

CFA is also concerned about the potential impacts associated with the proposed increase to the capital gains inclusion rate from one half to two thirds for corporations and trusts and from one half to two thirds on the portion of capital gains realized in a year that exceed $250,000 for individuals on or after June 25th, 2024.

“Despite the increased LCGE and CEI, the impact of the increased inclusion rate presents additional challenges for the financial health of family farm transfers and farm sales,” CFA said. FCC said that between 1970 and 2020 the number of farms in Canada decreased by 50 percent, average farm size doubled, and farm value per acre almost quadrupled.

While the recent changes announced to the CEI significantly increases the threshold at which point Canadian farmers will trigger a capital gains payment, the overall trend in Canadian agriculture has been one of consolidation over the past 40 years making many farms large enough that when they exit the sector, they will be significantly impacted by the higher inclusion rate. 

The cost of land and farm assets continues to rise and those looking to purchase a farm face unprecedented capital costs. “Given the importance and significance of the government’s proposed tax changes, we continue to also express concern with the accelerated pace of implementation and lack of consultation in the lead up to the Budget 2024 announcement.”

This news item prepared for National Newswatch