Farm groups criticize capital gains inclusion rate change

Glacier FarmMedia—Canadian national farm organizations have united against proposed budget measures that they say will negatively affect farmers.

Planned changes to the capital gains inclusion rate also drew specific concern and attention from the House of Commons’ agriculture committee.

In a May 27 letter to finance minister Chrystia Freeland, agriculture minister Lawrence MacAulay and national revenue minister Marie-Claude Bibeau, 10 signatories said they are concerned about the capital gains inclusion rate, the Alternative Minimum Tax (AMT) and the Canadian Entrepreneurs’ Incentive (CEI), which were all announced in April.

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The letter said farmers appreciated the proposal to increase the lifetime capital gains exemption (LCGE) to $1.25 million to reflect the appreciation of farmland values and capital demands.

“However, we are concerned with the potential impacts associated with Budget 2024’s proposed increase to the capital gains inclusion rate from one-half to two-thirds for corporations and from one-half to two-thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals on or after June 25, 2024,” said the letter.

The organizations said Bill C-208, which took effect in 2021, recognized the significant costs that section 84.1 of the Income Tax Act placed on intergenerational transfers of farms and small businesses.

“Our concern is that by increasing the capital gains inclusion rate to two-thirds, we are neutralizing the increase to the LCGE threshold, undermining the policy intent of Bill C-208 and jeopardizing the success of genuine intergenerational farm transfers to young farmers across Canada,” they said.

MacAulay appeared at the standing agriculture committee May 30 to discuss the department’s main estimates. Asked about the letter, and whether agricultural stakeholders had been consulted about changes to the inclusion rate, he replied he doesn’t write the budget.

“Did I know what was going in the budget before it went into the budget? No.” he said.

Saskatchewan Conservative MP Warren Steinley appeared incredulous at that, later posting on X that the minister must sit at the kids’ table rather than at cabinet.

However, outgoing deputy minister Stefanie Beck confirmed later that the department sends in its proposals, and discussions happen only around those suggestions.

“I’m saying it would not have been the kind of proposal that we would have made,” she told the committee.

The letter recommends that all Bill C-208-eligible intergenerational farm transfers continue to be under the one-half inclusion rate and that any capital gains eligible for the LCGE be excluded from the calculation of the alternative minimum tax, even if the exemption is not claimed.

The organizations proposed several ways the government could address agriculture’s unique circumstances and avoid unintended consequences of planned personal income tax changes.

These include postponing implementation until January 2025, rather than June 25, 2024, to allow for more consultation and analysis.

They applauded the decision to introduce the CEI, which would reduce the tax rate on capital gains for qualifying disposals but recommended it be available to successive generations and not just first-generation businesses. The organizations noted that farm families commonly transfer shares from a parent to child through donation, which would make the child ineligible for the CEI.

“The tax implications of a proposed increase to the capital gains inclusion rate and the introduction of the CEI are significant and complex, requiring careful consideration,” the letter said.

“As implicated stakeholders we need time to do a more fulsome assessment of these tax changes to ensure there are no unintended consequences.”

The letter notes the AMT requires high tax payments and although they are recoverable against taxes payable in future years, a seller must have sufficient income to pay taxes. Otherwise, the tax becomes permanent.

Retiring farmers often don’t have enough income to recover the funds.

“In these circumstances, AMT essentially undermines the utility of the LCGE, making impacted farm transfers more costly and negatively affecting the financial health of both the retiring party and next generation,” the letter said.

The organizations also said farms use diverse operating structures, such as holding companies, and recommended the CEI not discriminate against those who use different structures.

The 10 signatories are the Canadian Federation of Agriculture, the Canadian Canola Growers Association, the Canadian Cattle Association, Fruit and vegetable Growers of Canada, the National Cattle Feeders’ Association, the Canadian Ornamental Horticulture Alliance, Canadian Hatching Egg Producers, the Canadian Seed Growers’ Association, Grain Growers of Canada and the Canadian Sugar Beet Producers Association.