Anonymised, illustrative composite. A Manitoba grain farmer held his land and his equipment personally, not through a corporation. Both rolled to his son under the same active-engagement test the parent file uses for shares. Only one of the two came with no strings attached.
At a glance
A Manitoba grain and oilseed farmer died holding his operation personally, not through a corporation. His estate held two kinds of farm property passing to his son: 1,120 acres of land, and the equipment fleet — combines, a grain cart, two tractors and a sprayer — bought and traded over thirty-one years of farming it. The son had worked alongside him for nine years and intended to keep farming the same land with the same equipment.
The family’s estate planning had been built around family farm or fishing corporation rollover to a child, because the same active-engagement test appeared to be doing the same work. It is the same test — but it sits in a different subsection, and the two subsections do not treat the property the same way once the test is passed.
Land in Canada and depreciable property in Canada used in a farming business are not shares. They are governed by s.70(9) and s.70(9.01), not by s.70(9.2) and s.70(9.21) — parallel provisions the Act builds on almost identical language, but not identical mechanics. Nobody on the file had actually opened s.70(9.01) to check whether “parallel” meant “the same.”
The land: adjusted cost base $340,000, fair market value $3,100,000. The equipment: original combined capital cost $920,000, fair market value roughly $480,000 in the used-equipment market, undepreciated capital cost $265,000 after thirty-one years of capital cost allowance claimed against it.
Both rolled to the son with no capital gain and no recapture reported on the terminal return — the land at its $340,000 cost, the equipment at its $265,000 UCC, the default outcome under s.70(9.01) with no election filed. On the face of the T1, the file looked entirely clean.
Subsection (9) sets the same conditions s.70(9.2) sets for shares — active engagement by the taxpayer or a family member, the child resident in Canada, vesting within thirty-six months — applied instead to “land in Canada or depreciable property in Canada of a prescribed class of the taxpayer.” Subsection (9.01) then splits the mechanics by property type. For land, the default deemed proceeds are simply “the adjusted cost base to the taxpayer of the property immediately before the time of the disposition of the property” — a plain figure, exactly the way the share rollover works.
Depreciable property gets a different formula entirely: the default deemed proceeds are “the lesser of…the capital cost to the taxpayer of the property, and…that proportion of the undepreciated capital cost of property of that class to the taxpayer that the capital cost to the taxpayer of the property is of the capital cost to the taxpayer of all property of that class.” On this file, with nothing else left in the class, that reduces to the class’s own UCC: $265,000. So far the two property types look like they reach the same kind of answer — no gain, at a lower number than fair market value.
They stop looking the same at s.70(9.01)(a)(iv), a clause with nothing to do with shares because shares have nothing for it to apply to: “where the property was depreciable property of a prescribed class, paragraphs (5)(c) and (d) apply to the taxpayer and the child in respect of the property.” And s.70(5)(c) does not let the son’s cost figure end the story. Where “the amount that was the capital cost to the taxpayer of the property exceeds the amount determined…to be the cost to the person thereof,” two things happen for the purposes of the CCA and recapture rules specifically: “the capital cost to the person of the property shall be deemed to be the amount that was the capital cost to the taxpayer of the property,” and “the excess shall be deemed to have been allowed to the person in respect of the property…in computing income for taxation years that ended before the person acquired the property.”
Read the unit. The son’s cost for ordinary purposes is $265,000. His capital cost for CCA and recapture purposes is deemed to be his father’s original $920,000 — and the $655,000 gap between the two is deemed to be depreciation the son already claimed, in years before the equipment was his. A share carries no such history. Its adjusted cost base is simply its adjusted cost base, and a gain on its eventual sale is a capital gain, full stop. Depreciable property carries its capital cost forward indefinitely, and that number — not the UCC, not what the son actually paid — is what decides whether a future recovery is a capital gain or fully taxable recapture.
Eighteen months later, before any further capital cost allowance had been claimed, the son sold the oldest of the two combines out of the class for $310,000 to fund a land purchase elsewhere. Because proceeds of $310,000 exceeded the class’s $265,000 UCC, $45,000 was recaptured — and because the class’s capital cost for recapture purposes was deemed to be $920,000, every dollar of that $45,000 fell inside recapture, taxed as ordinary income at the son’s full marginal rate. Had the equipment instead genuinely started a fresh cost basis at $265,000 on the rollover — the assumption the family’s advisor had carried over from the share file — the same $310,000 sale would have produced a $45,000 capital gain instead: half the inclusion, and a different category of income entirely.
Nothing was actually lost here: the accountant caught the mechanics before filing and reported the $45,000 correctly as recapture. Reporting it as a capital gain instead — the reasonable-sounding assumption that a rollover resets cost basis the way it does for shares — would have understated taxable income by $22,500, a discrepancy that surfaces on a later review rather than at filing.
The tell is the word “rollover” itself, used as though it meant one thing across the Act. It does not. A share rollover resets nothing but the number; a depreciable-property rollover resets the number the child pays and leaves the number that decides tax character exactly where the parent left it. Ask, for any depreciable property passing through this rollover, not just what the child’s cost is — ask separately what the child’s capital cost is for recapture purposes, because s.70(5)(c) can make those two figures different for as long as the property is held.
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