Can life insurance cover the tax bill when a farm is transferred?
It can be part of the plan, because a death benefit is cash an estate can use. But first check whether any tax arises: farm property can be rolled to a child at death under the Income Tax Act if its conditions are met, and the lifetime capital gains deduction may apply, so the gap may be smaller than expected.
Life insurance pays cash when the insured person dies, and an estate can use cash to pay tax. Whether that suits a farm transfer depends on how much tax, if any, will arise, which in turn depends on how the farm is passed on. Work out the tax first, then decide whether insurance is the way to fund it. The family farm succession answer covers the wider plan.
What the Act says happens at death
Under Income Tax Act s.70(5), a taxpayer who dies is deemed to have disposed of each capital property immediately before death at its fair market value. This is subject to exceptions in the Act, including the rollover for property passing to a spouse or common-law partner under s.70(6). The CRA says the legal representative must see that returns are filed and balances owing are resolved.
Farm property can roll to a child
Section 70(9) deals with land in Canada or depreciable property in Canada of a prescribed class, used principally in a farming or fishing business carried on in Canada, that passes to a child of the taxpayer as a consequence of death, if its conditions are met. Section 70 also has rules for a share of a family farm or fishing corporation or an interest in a family farm or fishing partnership that passes to a child. Whether a particular farm qualifies is a question for an accountant.
The capital gains deduction
The CRA says the lifetime capital gains deduction can be claimed on certain dispositions, including qualified farm or fishing property. The deduction applies against taxable capital gains realized and is limited to the maximum amount allowable. Ask an accountant whether any of the farm’s property qualifies and how the deduction could reduce tax at death.
Where insurance fits
Insurance is worth considering for tax that remains after those rules, or to give heirs not taking the farm a share. Ask who owns the policy, who is the beneficiary, and whether the proceeds reach the estate in time to pay. A lawyer and an accountant should set that up with the will.
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentRepresent someone who died
- 03Canada Revenue AgencyGovernmentLine 25400 – Capital gains deduction
- 04Canada Revenue AgencyGovernmentClaiming a capital gains reserve
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