Selling Farmland in Ontario? The Farm Capital Gains Exemption Is Bigger Than You Think — and Harder to Earn

The lifetime exemption can shelter over a million dollars of gain. But two backward-looking tests quietly disqualify a lot of people who assumed farmland automatically counts.

I am Arthur Zhao, a real estate broker in the GTA for twelve years. The hardest version of this conversation is the one that happens too late — after closing, in an accountant’s office, when an owner learns the farm exemption they had been counting on was never available to them in the first place.

By that point nothing can be undone. The sale is final, the two tests that decide eligibility were passed or failed years earlier, and the tax bill is simply the tax bill. That is exactly why this is worth understanding long before you list. Ottawa does not test whether your land is a farm — it tests whether you carried on a farming business on it, and for how long. Those are very different questions, and the gap between them is where the tax bill lives. This is general information, not tax or legal advice — but it should tell you which questions to put to your accountant while there is still time to act on the answers.

First, what “qualified farm or fishing property” actually means

The exemption does not attach to land because it grows corn. It attaches to a legal category — qualified farm or fishing property, or QFFP — defined in the Income Tax Act.

For an individual, the property Ottawa cares about is real property that was used in the course of carrying on a farming or fishing business in Canada by you or certain close family members. The phrase “used in carrying on a farming business” is not decoration — section 110.6(1.3) spends most of its length defining exactly when land is deemed to meet it. Miss that definition and the size of the exemption is irrelevant, because you never reach it.

How big the break really is — and what $625,000 is not

According to the CRA (Line 25400, 2025 tax year), the lifetime capital gains exemption for dispositions of qualifying property is $1,250,000 for 2025. The CRA states this figure under “proposed changes,” and the current consolidated Income Tax Act formula in s.110.6(2) already carries the matching numbers — so you can treat the two together, while knowing the CRA still labels it proposed.

Here is the part almost everyone misreads. The CRA also says the maximum capital gains deduction is $625,000. That $625,000 is not the amount of gain you shelter — it is the deduction you claim against taxable income. Only 50% of a capital gain is taxable, and $625,000 is exactly 50% of $1,250,000. So the gain sheltered is up to $1.25M; the deduction on your return is up to $625K. Confusing the two is how people either over-promise themselves a break or under-count what they actually have. The LCGE is indexed to inflation using Statistics Canada CPI data, so the number moves year to year.

Same fifty acres, two owners, two very different tax bills

Test one: the 24-month ownership rule

Section 110.6(1.3)(a)(i) sets the first gate. For the property to count as used in a farming or fishing business, it must have been owned — for at least the 24 months immediately before the sale — by one of a defined group: you, or your spouse or common-law partner, child, or parent; a qualifying family farm or fishing partnership; or, in trust situations, the individual the trust got the property from (or that person’s close family).

The practical trap: this is a look-back. If you bought the land eighteen months ago and an offer lands, you cannot fix the clock. And the 24 months is only the ownership half — meeting it does nothing on its own if the second test fails.

Test two: the use-and-gross-revenue test that actually catches people

Section 110.6(1.3)(a)(ii) is where “I own farmland” quietly stops being enough. For individually-owned property, two things generally have to be true across the required period.

First, the land must have been used principally in a farming or fishing business carried on in Canada in which you — or your spouse, common-law partner, child, or parent — were actively engaged on a regular and continuous basis. Second, in at least two years while the property was owned by someone in that group, that person’s gross revenue from the farming business exceeded their income from all other sources for that period.

Read those two conditions and the “rented to a neighbour” problem writes itself: if a tenant farms your land, you are not the one actively engaged in the farming business, and your income from the land is rent, not farming revenue. Note also that different, generally more forgiving rules apply to property acquired before June 18, 1987, and separate rules apply when the land is held through a corporation or partnership — which is exactly why the final call belongs to a tax professional reading your specific facts against the statute.

Why “I bought land and let it appreciate” is the classic miss

The single most common disqualifier I see in this corridor is the pure land play: buy a parcel outside the growth boundary, hold it, wait for values or a re-zoning, sell.

Nothing wrong with the strategy — but it is an investment in land, not the carrying on of a farming business. There is no farmer actively engaged, no farming gross revenue exceeding other income, often nothing but a field and a fence. On paper it is farmland; against s.110.6(1.3) it frequently is not QFFP. The same goes for a hobby plot, a woodlot held for the view, or land a builder is quietly assembling. If the plan was appreciation rather than operation, assume the exemption is a question, not a given.

The paperwork: T657, T936, and line 25400

If you do qualify, the deduction is claimed, not automatic. You calculate it on Form T657 (Calculation of the Capital Gains Deduction) and report it on line 25400 of your return.

One more form catches people: if you had investment income or expenses in any year from 1988 through 2025, you may also need Form T936 to figure your cumulative net investment loss (CNIL), which can grind down the deduction you actually get. This is not a box you tick the night before closing — it is a calculation your accountant should run well ahead of a sale, because it can change the after-tax number materially.

The planning window is measured in years, not days

Here is the thread running through both tests: they are retrospective. The 24-month ownership clock and the two-year use-and-income test both look back over your history with the land. Nothing you sign in the week before closing can retroactively make you a farmer for the prior two years.

That is the real reason this belongs in a conversation years before you sell, not in the conditional period of an accepted offer. If you are years out and want the exemption on the table, the moves — who owns it, who operates it, where the revenue actually comes from — have to be made and documented while the clock is still running. Once the offer is in, the structure is whatever it already was.