Some Canadian farmers say changes to a federal incentive billed as a method to lower the impact from the capital gains inclusion rate increase “doesn’t go far enough” and are calling on Ottawa to return the inclusion rate for farmers to what it was before this year’s change.
On Monday, the Department of Finance provided more details on the Canadian Entrepreneurs’ Incentive (CEI), which when first announced in April stated that it would reduce the capital gains inclusion rate by half — to 33 per cent — up to a $2-million limit by the time it was fully rolled out in 2034.
The new change has advanced that to 2029, with incremental increases of $400,000 starting in 2025.
The incentive also only allowed for founders of a business to be eligible, but that’s now been removed and a requirement of holding 10 per cent or more of shares has been reduced to five per cent.
Under Ottawa’s changes, the inclusion rate for taxable capital gains increased from 50 to 67 per cent for individuals realizing more than $250,000 of those gains annually. However, that same increase will also apply to all such gains made by corporations and many trusts.
“It certainly doesn’t go far enough,” Kyle Larkin, executive director of Grain Growers of Canada, told Global News. “It will benefit some farms across Canada, but most farmers aren’t going to see a benefit from it and they’re going to still see a tax increase.”
With many farms in Canada incorporated, the Grain Growers of Canada say while a farmer’s primary residence does not face the capital gains tax on sales, they’ll still face that 67 per cent rate on all gains realized from the sale of farmland.
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To give perspective, Grain Growers calculates that an Alberta farm of about 2,500 acres purchased for $1,385,000 in 1996 could potentially sell for about $17,250,000 in 2023 for a profit of $15,865,000 before taxes.
“But that money isn’t going directly to the farmers,” Larkin said. “They have debts to pay off, a lot of the equipment is leased a lot … so there’s a lot of debts to be paid off before they actually realize a profit from their sale.”
John Oakey, vice-president of taxation with the Chartered Professional Accountants of Canada, told Global News the changes to the lifetime capital gains exemption — which exempts a maximum of $1.25 million in realized capital gains — are an adjustment to a program put in place to “mitigate the effect” of the capital gains increase.
He said the biggest impact is that more farmers and fishers can apply for the program as the previous requirements included having to have shares in a corporation, something not all farmers may have.
“By opening up the door to farming and fishing property, it better aligns with the criteria used for the capital gains exemption,” he said. “It is broader for them and it should make it more accessible for farming and fishing.”
Oakey added that reducing the phasing-in period to just five years means people will not need to wait until 2034 to access the full $2-million incentive.
“Especially when we’re in a period of time of significant transition between generations of businesses, including farm and fishing property,” he said.
Some organizations are applauding the decision, with the Canadian Federation of Independent Business saying it was pleased with some of the changes, including giving more access to farmers and fishers, as well as adding personal services businesses.
However, it did criticize the decision that not all entrepreneurs have been included, such as restaurant owners or those in the arts.
About 97 per cent of Canada’s farms are owned by families, according to Statistics Canada’s 2016 Census of Agriculture, and Larkin said many want to keep it in the family but the capital gains mean even more stress.
He said young farmers are already facing “millions of dollars” in debt for the transition, but the tax changes will just increase that further.
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