It can be hard to see the forest from the trees with all the tax implications associated with selling or transferring your woodlot, whether you do it during your lifetime or leave it to your children.
Although it’s always recommended to talk to a tax specialist in matters like these, here are some essential concepts you must be aware of if you own a woodlot.
It’s no surprise that putting your woodlot up for sale will most likely result in a capital gain. But what if you decide to transfer the property to your child, before or after you pass away?
Intergenerational transfers: What are the tax implications?
In general, if you transfer your woodlot to your child during your lifetime, the sale will qualify as fair market value (FMV), regardless of the sale price. This means, even if you gift the property to your child, you will be considered to have sold it at FMV. If you bequeath it, you would also be deemed to have sold at FMV.
There may be a way around this general rule, however. You can transfer the woodlot by rolling it over to your child during your lifetime or upon death as long as the following conditions are met:
- Your child must be a resident of Canada immediately before the transfer.
- The property must have been mainly used for the purposes of running a farming business in which you (the transferor)1 operates the woodlot in accordance with a forest management plan (FMP).
The FMP must have been enforced and applied for more than 50% of the time you owned the woodlot. If not, the woodlot must qualify to be operated as a farming business. This condition is harder to meet as it means being actively engaged in woodlot operations on a regular and continuous basis.
If your woodlot meets these conditions, you’ll be able to transfer it to your child based on the established sale price. The tax implications will then be determined accordingly. Here are some scenarios of how this approach applies to a woodlot with a FMV of $200,000 and a tax cost of $50,000:
Scenario 1 ($) Scenario 2 ($) Scenario 3 ($)
Agreed selling price 0 40,000 120,000
Assumed selling price for tax purposes 50,000 50,000 120,000
Tax cost 50,000 50,000 50,000
Capital gain 0 0 70,000
Tax costs for child 50,000 50,000 120,000
The same principle applies when you pass away. However, your liquidator/executor will be able to elect any proceeds of disposition for the property that are between your tax cost and the FMV.
Capital gains deduction (CGD)
Once you’ve determined the capital gain, you need to check if you can claim the capital gains deduction (CGD) which has a lifetime limit of $1,250,000 for dispositions on or after June 25, 2024. To claim the CGD, your woodlot must meet certain conditions which vary depending on the date you purchased it. For example, the same conditions do not apply to woodlots purchased on or after June 18, 1987.2
Property purchased before this date must meet certain farm usage tests, while property purchased on or after this date must meet additional criteria. That is, the main source of income must be from farming for at least 24 months before the disposition.
The strict rules for the CGD make it difficult for properties purchased on or after June 18, 1987, including woodlots, to qualify for this tax incentive.
What about sales tax?
You also need to consider how sales tax will affect your decision to dispose of your woodlot. This type of property is usually considered to be part of a business. This means you need to account for GST and/or QST whether you sell, donate or pass it on to your children.
Conclusion
Figuring out the tax implications when transferring a woodlot can be especially complex. That’s why you should speak to a tax specialist before you follow through on any plans. Your needs are unique, so make sure you get the right support!
[1] The woodlot can be used by the transferor, their spouse, their child, their parent, a family farm or fishing partnership, or a family farm or fishing corporation.
[2] If you purchased the property prior to June 18, 1987, and claimed the $100,000 CGD limit in 1994, your woodlot is considered to be purchased after June 18, 1987.