Andrew McClelland
The Advocate

When Ottawa announced the federal budget last month, few agricultural groups were impressed. Citing a lack of investment in a key sector of the economy, both the Union des producteurs agricoles du Québec and the Canadian Federation of Agriculture spoke of their disappointment in the lack of support the budget offered to agriculture.

Now, many observers are also saying that while the government’s plan to increase the Lifetime Capital Gains Exemption (LCGE) will benefit many producers, it could also introduce a heavier tax burden onto the younger generation of Canadian farmers.

The latest federal budget unveiled in April introduced the government’s intention to increase the LCGE to apply to up to $1.25 million of eligible capital gains, an increase from the current level of $1.016 million , which is indexed to inflation.

“This in and of itself is a positive development,” said the CFA in an official statement, noting that the government’s decision was consistent with the CFA’s budget recommendation “to increase the capital gains exemption threshold above $1 million to be more in line with current market farmland values.”

But the good news stops there, say industry observers. Because those same changes could make it even harder for families to transfer their farms to the next generation.

“This may make it a little bit harder on the incoming generation to generate the cash flow to have funds available to pay out mom and dad,” said Ryan Kehrig, national leader for agricultural tax with accounting firm MNP.

In a podcast hosted by RealAg Radio, Kehrig explained that the increased exemption for capital gains could put younger agricultural producers in a position where they feel obliged to pay more taxes to ensure their farming parents have a comfortable retirement fund.

“Let’s say mom and dad want to have X amount of dollars to fund their retirement, and they plan on selling the farm to the farming kid — to the successor. They’re going to gift anything over and above that number that they want to have here,” Kehrig explained.

“If they want to have, say, $3 million after tax, they’re probably going to have to sell more share equity to their kids at capital gain rates to trigger that $3 million after tax.”

But with a larger equity share being purchased by the successor at capital gain rates, the incoming generation of farmers will feel the pinch.

“So for the farming kid, there’s probably going to be more ‘skimmage’ — taxes being paid to the government — to leave mom and dad in that position.”

Kehrig’s concerns over how Budget 2024 will impact young producers is the same as CFA’s. The national farmers’ federation predicted the increase in the Lifetime Capital Gains Exemption “could play at odds with CFA’s policy objective of creating a more favourable tax environment for young generations of farmers seeking to the enter the sector.”

The federation says that a more detailed analysis of the potential implications for Canadian farms and farm succession planning is required.

But for analysts like Kehrig, the new budget certainly isn’t a cause for celebration for producers who are looking for a break when taking over the family farm.

“There’s a short, immediate impact in terms of succession planning here,” Kehrig said. “And I do see it being a tightening for the younger generation in that regard.”