Tax rules for selling quota change in January

Changes to federal tax legislation directed at business will also affect agricultural operations starting Jan. 1.

Supply-managed farms that may buy and sell quota stand to see significant increases in their tax rates in the new year.

What are the options for someone who owns quota in the dairy, turkey, eggs and meat poultry sectors?

Changes to taxation on the sale of quota may have serious implications if producers in these sectors are considering succession planning or a sale in the next three to five years. They might need to act quickly.

The government is also considering possible increases in the inclusion rate for capital gains.

However, unlike the possible inclusion rate increase, the quota taxation change is not just a possibility. It is about to be passed by the majority Liberal government and will take effect for transactions on or after Jan. 1.

No exclusions were included in the legislation related to agriculture or quota systems, so agricultural business will be paying the larger tax bill for sales occurring in the new year.

Gains on the sale of quota realized in a corporation are now taxed at the same rate as standard business income to a maximum of 27 percent. The new legislation could set rates on the capital gains portion as high as 51 percent.

The table on this page illustrates how the corporate tax will change and the total impact that change will have on the revenue from a $2 million gain.

Even when dividends are paid to shareholders, and the 31 percent refundable tax amount is available, the bottom line is still a significant increase in the total tax burden from 2017 on.

One way to avoid this is to plan and trigger a sale. You might even consider a transfer of quota without the money changing hands immediately. If you are completing a succession plan, you may want to complete it in such a manner that you trigger the tax to be charged now instead of next year.

The sooner you meet with your tax adviser, the more time everyone will have to crunch the numbers and look at various options.

You don’t want to leave it until the last minute because some options may no longer be available.

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