AVONMORE -- The subject of careful financial planning, and avoidance of potential pitfalls, was the subject of a conference on succession planning recently, with presentations from Collins Barrow, Horner & Pietersma and O'Farrell Financial Services, at the North Stormont Community Centre.
Besides the real property of the farm, there are bank accounts, loans, machinery, quota, livestock, side businesses, and often family partners. The ownership may be set up personally, be a partnership, be a corporation -- or more than one, or may be a combination, and upon a sale or upon one owner's death, transferring property may trigger capital gains tax.
In the seminar, which was presented by Hugh O'Neill of O'Farrell Financial Services, Kathy Byvelds of Collins Barrow, Eric Pietersma of Horner & Pietersma law firm, and Keeley Patterson of O'Farrell Financial, panelists described situations where extensive taxes could be owed needlessly.
A handout authored by B. Jason Heinmiller from Collins Barrow, Yorkton, said "Most people have heard there's no tax on the sale of farmland in Canada, but it's more complicated than that."
A capital gains deduction is allowed for individuals residing in Canada throughout the year and disposing of qualified farm property. The deduction can be claimed against the profit on the sale of the land. But only individual Canadians get deductions, and only on qualified property.
Land bought after June 17, 1987 must have been owned by an individual or family members for a minimum of two years. It has to be used principally in farming and the gross revenue from agriculture must be the highest income of the year (gross revenue test).
If the property was farmed by a corporation or partnership for a minimum of two years and the individual or family members were active in the operation, it might also qualify. Land bought before that date must have been principally a farming business in the year of sale. Land used for a separate business, such an elevator operation, usually does not qualify.
Sounds simple enough, but of course it's not. Descendants may need to meet the gross revenue test and if the seller is not a farmer that complicates the situation further. Direct lineage (not through marriage) may disallow the deduction, and other items, like the breaking up of a family, should also be considered.
Land acquired by inheritance may be treated differently, and land bought below fair market value to a family member less than three years before being sold triggers a tax for the original sellers, and reporting a capital gain might result in a clawback of Old Age Security payments (just what Grandma and Grandpa want to hear).
However, Byvelds explained that the 2015 federal budget increased the lifetime capital gains exemption to $1-million, so it is a good time to consider tax planning. She and other panelists got into some specifics such as operating a farm business through a family-owned corporation but holding land personally.
Transferring land to the corporation and triggering a capital gain may be offset by the lifetime exemption. There is also alternative minimum tax which can result when deductions are used to offset income, and some persons may be able to use the capital gains reserve to spread the gain over taxable income for five years or less.
Partnerships are common on farms and incorporating a partnership may result in tax deferral if the right forms are filed with Canada Revenue Agency, but there are rules to those options which must be closely followed.
Panelists often mentioned the value of using promissory notes as payment, for various reasons, of discussing plans with the next generation of farmers and with non-farming offspring, and of seeking professional advice.
Considering all the options, tips and potential pitfalls of tax planning, both now and in the future, talking to professionals about the many options may save the farm later on down the road.