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Do the Shares of your Farm Corporation Qualify for the Rollover and Capital Gains Exemption?

It is often quite a shock to farm couples to realize that if they deceased today, the shares of their farm corporation would not qualify to roll tax free to their children! In addition to this, they may not qualify for the capital gains exemption either. This over sight could cost their estate thousands of dollars in tax that could have been avoided.

The trap that often catches shareholders unaware is the requirement that 90% or more of the assets of the corporation must be "farming assets". I hear you say, "that would never affect me, because farming is all my corporation consists of." Be careful, as there are some hidden traps that can put your corporation offside of these very favorable tax benefits for farmers. Here are some items that are not considered "farm assets.

  • Excess cash or investments over and above what is required to operate your farm.
  • Land that has been rented out.
  • Equipment used more than 50% of the time for custom work or rented out. e.g. sprayer, combine, seed cleaning plant, manure spreader, semi tractor and trailer.

So if the fair market value of any of the above items alone or in combination with another of these items exceeds 10% of the total value of the assets of your corporation, your shares will not be eligible for a tax-free rollover to your children. Furthermore they may also not qualify for the Capital Gains Exemption due to another set of rules quite similar to this one.

What can you do to correct this situation if it exists in your corporation? If the problem is excess cash you can do some of the following to correct this:

  • If you hold a shareholder loan, you can remove these funds tax free.
  • File the election to pay a capital dividend out of your capital dividend account, if you have one this is also a tax free way to get funds out of the corporation and into your hands.
  • Purchase farm assets, this will turn excess cash into a farming asset.
  • Form a holding company to hold the excess cash and investments.

  • If the culprit is your seed cleaning business that is used more than 50% of the time cleaning for other farmers, consider setting up another corporation for the custom seed cleaning business so that your main corporation qualifies for the rollover.

If you suspect that your corporation may not pass the 90% farming asset test, please talk to us about it so we can determine the best way to resolve the problem.