Tax breaks come with rules

Taxes are an important element of estate planning. When it comes to taxes farmers do get some breaks, from both federal and provincial governments, says David Metzger, senior principal at KPMG in Abbotsford, B.C.

However, he adds that producers must be aware of certain rules regarding eligibility for those breaks.

Some taxes vary between provinces. Others are federally established. Rollover rules and capital gains exemptions can help to ease the taxation burden.

“The key is making sure your farm qualifies for those benefits.”

Renting out property could cause you to lose those benefits.

“For income tax purposes … rules are generally a little more forgiving but still, look at the life of ownership, and how long you’ve owned it. There could be a window there that would close eventually if you’re not paying attention to it.”

If, for example, you have owned a parcel of land for 15 years, during which time you farmed it for five years and rented it to a person outside the family for 10 years, that property may not be eligible for the rollover, but it may be eligible for the capital gains deduction.

The Canada Customs and Revenue Agency takes the view that the rollover rules do not apply to the principal residence located on the farm.

However, the gain on the sale of the residence will often be exempt from tax under the general principal residence rules or will be taxed at a nominal amount because of the special rules applying to farmers’ residences.

The rollover rules do not apply to livestock. They also do not apply to feed inventories, supplies and depreciable property written off on the straight-line method.

Metzger offered some observations on the softer side of estate planning from his focus-on-tax perspective.

“Sometimes what we see is that the parents haven’t really involved whoever’s taking over the farm with the financial side of things. They’re familiar with the day-to-day (procedures) but not so much the business side, in terms of dealing with the bank, the buyers, things like that.”

“A big thing with farms is that with succession and estate planning, often times you have large families, but only one farm. So, when it comes time to divide the wealth, it’s pretty hard to do it equally because if you do, the farm would not be able to survive. A balance must be found so as not to hamstring the farm while being fair to non-farming children.”

Parents must be paid out. And parents must tell the children how much they will need. Payout can be spread over years but if it takes too long, there may be nothing left for non-farming children. Sometimes this is not communicated to non-farming children.

“We always tell parents that they must tell the farming kids what they will require to live out the rest of their lives. And parents, once they see that the kids are ready to take over, even if they’re not sure how much to transfer, they can start the process, and do a little bit each year.”

What happens if one member of the founding/senior couple dies and the one left remarries?

This can happen at any age, says Metzger.

“This is one of the reasons why people with a 35-year-old child must start transitioning the farm, even at five percent a year.

But, realistically, the remaining partner would most likely desire to leave most of the accumulated wealth and property to the descendants and probably get a prenuptial agreement to that effect.

Another way to handle this would be to have funds or shares put into a spousal trust. This is an issue the founding/senior couple should discuss fully with their lawyer. (More information on this can be found in another story in this section.)

Summing up, Metzger advises families to always get professional advice. Talk to your accountant. Talk to your lawyer. Make sure you make your advisers aware of what you’re thinking. They can’t know what you don’t tell them. No one can.

“It’s good to have a plan, but make sure you write it down.”

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