Producers who buy land often ask me whether they should purchase it personally or in a company.
Professionals used to advise farmers to own their land personally, which made good sense. Owning land personally provides great flexibility when it comes to estate and succession planning and allows producers to use special tax rules such as the capital gains exemption.
However, the current price of land means the cash flow needed to finance land purchases is a lot more than in the past.
Knowing this, it might make more sense to own land in a corporation.
The main reason is tax deferral.
Income earned in a corporation from farming operations is generally taxed at a lower rate than similar income taxed in personal hands.
Principle payments on debt are not deductible for income tax purposes. This means the payments for this debt are made with after tax dollars.
Therefore, if land is bought and financed personally at a personal tax rate of 30 percent, only 70 percent of the net earnings from operations could be used to pay down debt.
Let’s compare this to a corporation. With earnings of less than $500,000, a corporate farm would likely be paying tax from 10.5 percent in Manitoba to 13.5 percent in Alberta. Therefore, the owners have at least 86.5 percent of their net earnings to service the debt compared to the 70 percent if they owned the land personally.
You can see the cash flow savings that can be realized by financing land in a corporation.
However, there are issues that might not make this the best strategy.
It is more difficult and costly to get the land out of the corporation than it is to put it into the corporation. This may become a problem if you want to to split up land be-tween farming children in the future.
Furthermore, land in a corporation does not qualify for the $1 million lifetime capital gains exemption.
Selling it out of the corporation could result in more tax, but there are strategies to avoid this, such as selling the shares of the corporation rather than the land itself.
An additional disadvantage for corporate owned land is that it does not have the same protection from potential creditors as does personally owned land.
If the land is held personally and the operations in your company faced a lawsuit, the land has an extra layer of protection than does land owned directly by the corporation.
Further to this point, it may not make sense to own your personal home but have the corporation own the land it sits on.
The principle residence exemption can be used on a house and a portion of the land that is owned personally. This allows you to shelter any capital gain you have on your home from tax. You will not get this exemption if it is owned in the corporation.
There are many factors to consider and a wide variety of options to make the best plan for your situation. It is important to consult with a professional when deciding how to structure your land ownership.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com