If you are buying or selling a farming property, there are some potential GST/HST implications to consider to avoid costly mistakes. In this article, we review the GST/HST treatment for several common sales of farmland from the perspective of both buyers and sellers. That said, the income tax consequences of these sale transactions are beyond the scope of this discussion.

To begin, “farmland” is not explicitly defined in the Excise Tax Act (ETA). However, the Canada Revenue Agency (CRA) considers it to generally mean “land that is regularly used by a person for the purpose of gaining or producing income from a farming business carried on by the person. Farmland also includes any portion of vacant land (e.g., a bush area) that may not be used directly in a farming business. In addition, any fixtures on the farmland (e.g., a barn or a corral) form part of the farmland.”

Sale of farmland that includes a home

The sale of a farm consisting of farmland and a residential house is treated as two separate supplies for GST/HST purposes:

1. The portion of the real property that includes the residential home, plus the land that is necessary for the use and enjoyment of the home (usually limited to .5 hectares or 1.25 acres); and
2. The remaining portion of property.

The seller is required to allocate the purchase price for the property to each separate portion. In most cases, the sale of a used residential property is exempt from GST/HST.  However, the sale of the farmland portion is generally taxable. As a result, the value allocated to each component has a direct impact on the tax payable on the sale.

Buyer considerations:

When the buyer is a registrant, the tax is not paid to the seller. Rather, the buyer self‑assesses (i.e. self‑charges) the applicable tax on their own GST/HST return for the reporting period in which the sale is made. In many cases, the buyer can claim an input tax credit (ITC) to offset the self‑assessed tax. Buyers should consult a professional tax advisor to determine if they meet the requirements to claim an ITC. This provision often results in GST/HST being effectively removed from the purchase altogether.

When the buyer is not a registrant, the buyer must pay the applicable tax to the seller for the portion of the purchase price that is taxable.

Seller considerations:

The seller is responsible for the accuracy of the allocation of the purchase price between taxable and exempt components. If it is determined after the sale that the exempt component is overstated, resulting in understatement of tax collected on the taxable portion, the seller is generally unable to collect the shortfall from the buyer. Thus, the seller must remit the correct amount of tax from the sale price, potentially reducing the proceeds of the sale.

It should be noted that the sale of farmland is taxable even if the seller is not registered for GST/HST purposes. In this case, there is a special return the seller must remit.

Transfer of farmland to a relative

Sales and transfer of farmland to a close family member can sometimes be made exempt from GST/HST.

Example 1: When a farmer sells or transfers ownership of farmland to a related individual who, after the transfer, uses the land for their own personal use and enjoyment, that sale or transfer is exempt.

Example 2: The exemption may also apply where there is a change of use and farmland is only used personally, not commercially. This applies when:

• the farmland was used by the individual in a commercial activity that is the business of farming;
• the farmland was not used by the individual in a commercial activity other than the business of farming immediately before ownership of the property is transferred; and
• the recipient of the farmland is acquiring it for his or her own personal use and enjoyment or for that of an individual related to the recipient.

For purposes of this exemption, individuals are considered “related” if they are connected by blood, marriage or adoption.

Additionally, this exception only applies if the farmland is transferred from an individual and does apply not when the farmland is owned by a corporation. The facts for each transfer should be reviewed to determine if an exemption applies.

Buyer considerations:

Any buyer of land for personal use should be aware of whether the purchase is subject to GST/HST. If the land will be used for the purpose of building a new home, a potential new housing rebate will be impacted by whether tax was paid on the land purchase.

Seller considerations:

As discussed above, the seller is responsible for determining whether a sale or transfer of farmland is taxable or exempt. If a seller mistakenly treats the sale or transfer as exempt, the seller will be liable for the tax that should have been included in the purchase price.

Transfer of farmland by partnership or corporation

When farmland is held in a partnership or corporation, it is possible to transfer it to a partner or shareholder exempt from GST/HST. The transfer of farmland from a partnership or corporation is exempt if:

• all or substantially all of the property is used in the commercial activity of farming (“all or substantially all” is interpreted to mean at least 90%);
• the farmland is transferred to an individual who is a member of the partnership, a shareholder or a related person; and
• the farmland is used by the recipient for personal use.

Buyer considerations:

If the recipient acquires the farmland for any purpose other than personal use, the exemption will not apply. For example, the exemption would not apply if the recipient acquires the farmland for the purpose of resale or is used by the recipient in a business.

Seller considerations:

The onus is on the seller to determine whether the recipient is a member of the partnership, a shareholder or related individual. Also, the exemption applies only when farmland is used in the commercial business of farming, not a hobby farm. As always, the seller must determine if the requirements of a particular exemption are satisfied.

Got questions?

Melo can help you navigate any issues that might impact the purchase or sale of farmland. Please contact us today for more information.

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