Inheriting 160 Acres of Saskatchewan Farmland: Deemed Disposition, the $1M Capital Gains Exemption and What the Estate Actually Owes in 2026

The Case Study: 160 Acres Near Saskatoon, Two Children, One Wants to Farm

Margaret Olsen, 74, dies in February 2026 owning a quarter-section (160 acres) of farmland near Saskatoon. She purchased the land in 1978 for $200 per acre — a total adjusted cost base (ACB) of $32,000. At the time of her death, comparable Saskatchewan farmland in the RM of Corman Park is selling for $4,000 per acre, giving the quarter-section a fair market value (FMV) of $640,000.

Margaret's will divides the farmland equally between her two adult children: James, 48, who has been farming the land for 20 years, and Karen, 45, who lives in Toronto and has no interest in farming. Margaret actively farmed the land herself until 2006, then James took over operations. The land was never cash-rented to a third party — James farmed it continuously as the operator, first alongside his mother and then independently.

The question: what does Margaret's estate actually owe, and how do James and Karen divide the property when one wants to sell and the other wants to keep farming? For a broader overview of how deemed disposition works at death, see our deemed disposition guide.

Step 1: The Deemed Disposition — $608,000 Capital Gain

Under subsection 70(5) of the Income Tax Act, Margaret is deemed to have disposed of the farmland at fair market value immediately before death. The calculation is straightforward:

Without any exemptions, this $608,000 gain would be partially included in Margaret's income on her terminal tax return. At the 2026 inclusion rates — 50% on the first $250,000 and two-thirds on amounts above $250,000 — the taxable amount would be approximately $363,667. At Saskatchewan's combined top marginal rate of roughly 47.5%, that produces approximately $172,700 in income tax. For a general guide to capital gains tax on inherited property, see our inherited property capital gains guide.

Step 2: The $1.25M Lifetime Capital Gains Exemption for Qualified Farm Property

Section 110.6 of the Income Tax Act provides the Lifetime Capital Gains Exemption, which for 2026 shelters approximately $1.25 million of capital gains on qualified farm property — the same indexed amount available for qualified small business corporation shares. Margaret's $608,000 gain is well below the $1.25M threshold, meaning the entire gain can be sheltered if the property qualifies.

Does Margaret's Farm Qualify? The Four-Part Test

For farmland acquired after June 17, 1987, the qualified farm property definition requires:

1. Use in farming: The property must have been used principally in the business of farming on a regular and continuous basis by the taxpayer, their spouse, their parent, or their child.
2. Gross revenue test: In at least two years during the ownership period, the individual's (or family member's) gross revenue from farming the property must have exceeded their income from all other sources.
3. Ownership period: The property must have been owned by the taxpayer, their spouse, or their child for the relevant period.
4. Active involvement: The property cannot have been primarily used by a non-family tenant. Cash-renting to a third-party operator can disqualify the land.

Margaret's farm passes all four tests easily. She purchased the land in 1978, farmed it actively for 28 years, and her son James continued farming operations as a family member. The land was never cash-rented to a non-family operator. The gross revenue test is met across multiple years of active farming.

Step 3: Applying the LCGE — The Estate Owes $0 in Capital Gains Tax

With the LCGE applied on Margaret's terminal return, the tax calculation changes dramatically:

The $608,000 gain is entirely sheltered. The only estate cost directly attributable to the farmland is Saskatchewan's probate fee of approximately $4,480. Margaret's remaining LCGE room — approximately $642,000 — could have sheltered additional qualified farm or business property if she had owned any. For a comparison of probate fees across provinces, see our Saskatchewan probate fees guide.

Alternative: The Intergenerational Farm Rollover Under Section 70(9)

Instead of triggering the deemed disposition and claiming the LCGE, Margaret's executor could elect to use the intergenerational farm rollover under subsection 70(9) of the Income Tax Act. This provision allows farm property to transfer to a child at the deceased's adjusted cost base — $32,000 in this case — rather than fair market value.

The rollover defers the entire $608,000 gain. No tax is payable on Margaret's terminal return. However, the children inherit the property at Margaret's original $32,000 cost base. When they eventually sell or die holding the land, the full $608,000+ gain (plus any additional appreciation) will be realized at that point.

LCGE vs. Section 70(9) Rollover: Which Is Better?

The Executor's Partial Election: A Hybrid Approach

The Income Tax Act allows a partial election under subsection 70(9.01) — the executor can elect to trigger a deemed disposition at any amount between the deceased's ACB ($32,000) and the FMV ($640,000). This is useful when:

• The deceased has some LCGE room but not enough to shelter the full gain (not an issue here — Margaret has $1.25M available)
• The executor wants to step up the cost base partially to benefit a non-farming child while deferring some gain for the farming child
• The property is being split between children with different intentions (exactly Margaret's situation)

In Margaret's case, the best approach is straightforward: use the LCGE to shelter the full $608,000 gain at death. Both children receive the farmland at a stepped-up cost base of $640,000 FMV. This gives Karen maximum flexibility to sell her half without tax consequences, and James inherits at a high cost base that reduces his future exposure.

The Sibling Buyout: James Keeps Farming, Karen Gets Cash

Margaret's will divides the farmland equally. James inherits 80 acres (half the quarter-section) and Karen inherits 80 acres. But James wants to farm the entire 160 acres, and Karen wants cash. The solution is a sibling buyout — James purchases Karen's 80 acres.

Why the Buyout Does Not Trigger a Second Tax Bill

Because the LCGE was claimed on Margaret's terminal return, both children received the farmland at a stepped-up adjusted cost base equal to fair market value at death: $320,000 each (half of $640,000). When James buys Karen's 80 acres at the current FMV of $320,000, Karen's capital gain is:

If the buyout happens shortly after Margaret's death — before the land appreciates significantly — Karen's gain is zero or negligible. If the buyout is delayed by a year or two and the land has appreciated, Karen would realize a small gain on the difference between her sale price and her $320,000 stepped-up cost base.

Funding the Buyout: Vendor Take-Back Mortgage

James may not have $320,000 in cash. A common structure is a vendor take-back (VTB) mortgage: Karen sells her 80 acres to James, and James pays Karen over 5 to 10 years with interest. This avoids the need for bank financing, which can be difficult for farmland purchases. The VTB terms are negotiated between the siblings — a typical structure might be:

• $320,000 principal, 5% interest, amortized over 8 years
• Annual payments of approximately $49,500 (principal and interest)
• The mortgage is registered against the land title, protecting Karen's interest
• James deducts the interest portion as a farm expense if the land is used in his farming business

CRA Filing Deadlines and Executor Responsibilities

Margaret died in February 2026. Her executor — typically one of the children or a professional executor — must meet the following deadlines:

1. Terminal T1 return: Due by April 30, 2027 (the standard filing deadline for a February death). This is the return where the deemed disposition and LCGE deduction are reported. The gain appears on Schedule 3 and the LCGE deduction on Form T657.
2. T3 estate return: If the estate earns income (e.g., rental income from the farmland during administration, interest on estate bank accounts), a T3 trust return is due within 90 days of the estate's tax year-end. The executor chooses the estate's year-end — it does not have to be December 31.
3. Clearance certificate (TX19): Before distributing the farmland to James and Karen, the executor should request a clearance certificate from CRA. This confirms all tax liabilities have been assessed and paid. Distributing assets without a clearance certificate exposes the executor to personal liability for any unpaid tax. Processing typically takes 3 to 6 months after filing.
4. Saskatchewan probate: The will must be probated through the Saskatchewan Court of King's Bench. Probate fees are $7 per $1,000 of estate value. On a $640,000 farm (plus any other estate assets), probate fees are approximately $4,480 for the farmland portion alone.

Saskatchewan-Specific Considerations

Saskatchewan has several features that affect farmland inheritance:

• The Saskatchewan Farm Security Act: This legislation restricts who can own farmland in Saskatchewan. Generally, only Saskatchewan residents, Canadian citizens, and certain corporations can own agricultural land. Karen, who lives in Toronto, can inherit farmland — but if she were a non-Canadian resident, restrictions could apply to her ability to hold the land.
• Farmland values rising faster than inflation: Saskatchewan farmland has appreciated at roughly 8-10% per year over the past decade. A quarter-section worth $640,000 today could be worth $800,000+ within five years. This appreciation increases the urgency of proper estate planning — every year of delay increases the eventual capital gain.
• No provincial land transfer tax: Unlike Ontario (which charges land transfer tax on property transfers), Saskatchewan does not impose a land transfer tax. The sibling buyout from Karen to James does not trigger a provincial land transfer levy, keeping the buyout costs low.
• Mineral rights: In Saskatchewan, the Crown owns most mineral rights — but some pre-1930 homestead patents include surface and mineral rights. If Margaret's land includes mineral rights, they are a separate property for tax purposes and must be valued and reported separately on the terminal return. Mineral rights can have significant value in potash- or oil-producing areas.

What Happens If the Farm Does NOT Qualify for the LCGE?

Not all Saskatchewan farmland qualifies. Common disqualifiers include:

• Cash-renting to a non-family tenant: If Margaret had retired from farming and cash-rented the land to a neighbour (not a family member), the gross revenue test and active-involvement requirement may not be met. The land would fail the qualified farm property definition.
• Speculative holding: Land purchased as a passive investment that was never farmed by the owner or their family does not qualify, even if a tenant farmer was using it.
• Excessive time since active farming: If the owner stopped farming 15 years ago and the land has been rented out since, CRA may argue the property was not used "principally in the business of farming" on a regular and continuous basis during the relevant period.

If the farm does not qualify for the LCGE, the full $608,000 gain is taxable on the terminal return. At Saskatchewan's combined top marginal rate, that is approximately $172,700 in tax — money that must come from the estate before the children receive their inheritance. This is why confirming LCGE eligibility before death — through proper documentation of farming activity, gross revenue records, and lease agreements — is essential. For a broader overview of how inheritance tax law changes affect planning in 2026, see our 2026 inheritance tax changes guide.

The Complete Picture: Margaret's Estate Summary

With proper LCGE planning, James and Karen inherit over 97% of the farmland's value. The sibling buyout — James purchasing Karen's 80 acres at the stepped-up cost base — triggers zero additional capital gain. James ends up farming the full 160 acres with a combined cost base of $640,000. Karen receives $320,000 in cash (via the vendor take-back mortgage) with no tax liability on the sale. For guidance on how the LCGE works in business sale contexts, see our LCGE business sale guide.