Passing on the farm: the basics of succession planning

Most farms in Canada are family businesses, and most of them will change hands within a generation. The 2021 Census of Agriculture counted 189,874 farms. The average age of farm operators had risen to 56.0 years, and 60.5 per cent of operators were 55 or older, up from 54.5 per cent in 2016. Yet only 12.0 per cent of farms reported having a written succession plan, according to Statistics Canada's census release. That was up from 8.4 per cent in 2016, a real increase, but it still leaves close to nine farms in ten without a plan on paper.

Some of those farms have an understanding around the kitchen table. Some have nobody lined up to take over. And some will discover, at a funeral or a hospital bedside, that what everyone assumed was never written down. This piece sets out the basic parts of a succession plan, the common ways a farm is transferred, the tax rules in very general terms, and the hardest question of all: what is fair to the children who do not farm. It is general information, not tax, legal or financial advice. Every family's situation needs its own accountant and lawyer.

Three transfers, not one

People talk about "passing on the farm" as if it were a single event. Advisers usually separate it into three transfers that can happen at different times.

The order matters. Many farms move ownership on paper while the parent still makes every decision, or hand over day-to-day work while the parent keeps title for decades. Either can work, but the people involved should know which one they are doing.

The common ways to move ownership

An outright sale

The successor buys the farm, or parts of it, at an agreed price. Parents receive cash they can live on, and the transaction is clear. The difficulty is that a young farmer rarely has the money, and a lender will look hard at whether the farm can carry the debt. Families often bridge the gap with a sale price below market value, payments spread over many years, or a mortgage held by the parents themselves.

A gift

Parents can give some or all of the farm to a child. Gifting avoids the financing problem, but it can leave the parents without retirement income and can create tension with siblings who receive nothing comparable. For tax purposes a gift is not free. Without a special rule, a gift to a family member is generally treated as a sale at fair market value.

A mix of the two

Most real transfers combine sale and gift: land sold at a discount, machinery sold over time, livestock or quota passed down in stages. The mix is where the tax rules come into play.

A family corporation

Many larger farms are incorporated. In that case what changes hands is usually shares rather than land and buildings. Shares can be transferred gradually, for instance by issuing new shares to the successor so that future growth in value accrues to them, a technique accountants call an estate freeze. Corporations add flexibility and also add cost and complexity, and they need their own professional advice.

The tax rules, in outline

Canada's Income Tax Act has special provisions for farm property. In very general terms:

• Intergenerational rollover. Farm property in Canada that has been used principally in farming can be transferred to a child who lives in Canada, either during the parent's lifetime or on death, at a value the family chooses between the parent's cost and fair market value. That can defer the capital gain until the child later sells. Similar rules cover shares of a family farm corporation and interests in a family farm partnership. The details, including who counts as a child and what counts as farming use, are technical.
• The lifetime capital gains exemption. An individual can shelter a set amount of capital gains on qualified farm or fishing property from tax over their lifetime. The limit for farm property has been $1 million. The 2024 federal budget proposed raising it to $1.25 million for dispositions on or after June 25, 2024, and the same budget proposed changes to how larger capital gains are taxed. As this piece was written, those proposals were still making their way through the usual process, so the exact figures and rules that apply to any sale should be confirmed with an accountant.
• Family corporation shares. Rules on selling shares of a family business to a corporation controlled by the next generation were opened up by a private member's bill in 2021 and then tightened by amendments that apply to sales from January 1, 2024.

Families often combine a rollover with the exemption. Parents might transfer land at a value high enough to use some or all of their exemption, so that the child starts with a higher cost base, but low enough that no tax is owed. Whether that works depends on the property's history and the parents' other income. This is exactly where professional advice earns its fee.

Fairness is not the same as equality

The hardest conversations are rarely about tax. They are about the children who do not farm.

Suppose a farm is worth several million dollars, mostly in land, buildings and quota, and earns a modest income. If the parents divide it equally among three children, the one who farms must buy out the other two at prices the farm's income may never support. If the farming child receives the whole farm, the other two may feel, with reason, that they were left out of the family's main asset.

Families find different answers:

• The farming child receives the farm and the other children receive other assets, such as life insurance proceeds, savings or a house in town.
• The farming child receives the farm and pays the siblings something over time, smaller than an equal share but real.
• The farming child receives the farm at a value that reflects their unpaid years of work, which they effectively bought with sweat.
• The land is held jointly and rented to the farming child, which keeps everyone's share but can tie the family together uncomfortably for decades.

None of these is right in general. What matters is that the decision is made while the parents are alive, explained to all the children together, and written into the will.

A worked example: an illustrative 12-year timeline

The family and numbers below are invented and simplified. They show sequence, not a recommended plan.

A couple in their late fifties run a mixed crop and beef farm. One daughter, 30, has worked on the farm since leaving college and wants to take it over. Two sons work in the city.

1. Year 1: a family meeting with all three children. Everyone says what they want. The parents hire an accountant and a lawyer familiar with farm transfers and get a valuation of the land, buildings and equipment.
2. Year 2: the daughter takes over the cattle operation, keeps its records and sets the marketing plan. She starts drawing a salary that reflects her work.
3. Year 3: the farm is incorporated on the accountant's advice. The parents keep the land personally for now and rent it to the company.
4. Years 3 to 6: the daughter buys a growing share of the machinery and livestock from the company over time, paying from her own salary and a farm business line of credit.
5. Year 6: the daughter takes over the crop plan and input purchases. Her father keeps the books and the land.
6. Year 8: the parents transfer one quarter section to the daughter using the rollover rules, at a value worked out with their accountant. The rest of the land stays with them as retirement income.
7. Year 10: wills are updated so that the remaining land goes to the daughter, with life insurance proceeds and a cash payment from the estate divided between the sons.
8. Year 12: the parents move to a house in town. The daughter manages and owns the operation. The parents still own some land and draw rent from it.

The plan was reviewed at every major step, because prices, tax rules and family circumstances changed along the way.

Common questions

When should a family start?

Earlier than they think. Management transfer alone often takes years. Many advisers suggest beginning when the parents are in their fifties, while there is still time to adjust.

Does a farm need a written plan?

A plan in heads is better than none, but a written plan gives the successor and the siblings something to rely on and gives the professionals something to work from. It also survives illness and death.

What about quota?

For supply-managed farms, quota can be the largest single asset and is transferred under the rules of the provincial board. How quota is held and valued is covered in how Canada's dairy quota system works.

What if no child wants the farm?

Then the plan is about a sale, to a neighbour, a new entrant or an investor, and about how to time it for the parents' retirement. Neighbouring farms looking to expand are often the buyers, one of the forces behind the long trend set out in why Canadian farms keep getting larger.

Where the work really starts

The practical first step is not a tax structure. It is a meeting where everyone in the family, farming or not, hears the same thing at the same time. The paperwork follows from what is said there. More on running and transferring farm businesses is collected on the farm business issue page.