Family farm corporations
What if your farm is owned by a corporation? This is not that uncommon. As we noted above, the $1 million lifetime capital gains exemption on qualifying farm property is only available to individuals and not corporations.
All is not lost, however. Shares of family farm corporations can also qualify for this exemption. Therefore, if your farming business is owned through a corporation, it’s important that you consider structuring the sale of your farm as a sale of shares of the company and not as a sale of the farming property that is owned by the company. On the sale of shares, you may be able to claim your capital gains exemption as long as “all or substantially all” of the assets in the corporation are used in the farming business. Note that if this test is not met, it may be possible to remove the redundant assets from the corporation prior to a sale to ensure that the shares are qualifying property. And with careful planning, you may also be able to utilize the capital gain exemptions of your spouse and children as previously discussed.
Keep in mind that the purchaser of your farm will likely prefer to purchase your farming property directly from the company, rather than purchasing the shares of your family farm corporation. This is due to the fact that the amount that they pay for your shares will be reflected in the tax cost of their shares, which will only be of benefit to them when they dispose of them. However, if they buy the assets directly, the amount they pay will be reflected in the tax cost of the individual assets they have purchased which they may be able to write-off for tax purposes as they run the farming business. Therefore, the purchaser may ask for a price discount if you insist on selling them shares.
Note that these difficulties can often be overcome if the main asset of the farm is non-depreciable land. Through careful tax planning, the purchaser can usually purchase shares and then reorganize their affairs to transfer the amount that they paid for the shares to the tax cost of the underlying land held in the corporation.
If your farming business is owned through a family farm corporation, talk to your BDO advisor before making any decisions to sell your farming business.
Farm partnerships and retirement
If you are a partner (perhaps with your spouse) in a farm partnership, you should always seek tax advice from your BDO advisor before you sell your farming assets. Through careful planning, it may make sense to transfer certain assets such as farm livestock inventory to a corporation before liquidation, allowing you access to reduced corporate tax rates applicable to active businesses conducted in privately held companies controlled by Canadian residents. It may be possible to improve on this plan by transferring your interests in the family farm partnership to the corporation and take advantage of the capital gains exemption for qualifying farm property on any capital gains that are triggered. In certain cases it can also be advantageous to “wind-up” the partnership on a tax-deferred basis so each partner owns an undivided interest in the actual farm assets prior to their sale.
This type of tax planning is sophisticated and requires careful tax planning advice. Talk to your BDO advisor to determine how to best wind-up a farming business carried on through a partnership.
As you approach retirement and take steps to wind-up your farming business, it may be possible to reward key employees of your business that will be retiring as well, including family members. This involves the use of retiring allowances.
A retiring allowance can be paid to employees of your farming business in recognition of long-term service. If your farming business is incorporated, it may also be possible to pay you, the principal owner, a retiring allowance as well on your retirement. The amount paid, as long as it is reasonable, will be a deduction against farming income for tax purposes, which could be particularly useful as you wind-up farming operations and the income arising on the sale of inventory and capital assets has to be reported for tax purposes.
The retiring allowance will be employment income to the individual who receives it. However there is an added benefit. The recipient can transfer a retiring allowance to their RRSP, within certain limits, for years of service prior to 1996.
If it is transferred to their RRSP, the amount will not be taxable until the amounts are withdrawn from their RRSP, which could be several years in the future.
It’s important to emphasize that the amount of the retiring allowance must be reasonable in the circumstances, considering the length of time the individual has been employed in the business, as well as the amount they have been paid and the services they have performed while they were employed. However, when it can be used, a retiring allowance can be a very effective tool to get an income tax deduction now and to boost the amount of funds available in an employee’s RRSP in their retirement.
This is only a brief discussion of some long-term tax planning opportunities that may be available to you. Talk to your BDO advisor to discuss your own unique situation.
As a farmer, you have many unique tax issues that you need to consider. It’s important that you take the time to consider both short and long term planning issues that will help to minimize the tax that you and your family have to pay.
BDO Canada LLP is proud of our long association with Canadian farmers. If you have any questions about your tax situation or any items discussed in this bulletin, talk to your BDO advisor today.
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The information in this publication is current as of September 1, 2019.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.