One proposed rule favours farmers selling their land to neighbours or strangers rather than their children
The last thing Andrew Peden needs to think about during a busy harvest season is tax planning.
But the Minburn, Alta., grower finds himself preoccupied with worry about proposed federal tax changes that he thinks could mess up his farm and his son’s ability to come home one day and take over the operation.
“It’s going to have some huge implications with trying to pass my farm down to my son,” said Peden.
“He wants to come back and take over.”
The situation is also scary for him and his wife, who don’t know how the changes could affect farm income or how they have to run their operation.
“The tax bill could be humongous. Everything we have is tied up in this farm,” said Peden.
Indeed, most farmers have most or all of their savings invested in their farms.
Any income for themselves and the rest of their family comes is earned from the farm, and until now, family farms in Western Canada have been encouraged to incorporate or organize itself to allow for fair treatment of spouses and children and for retirement and succession.
Now a massive series of tax revisions has been proposed. It’s been announced at the height of the growing season and only allows for public responses until Oct. 2, when many farmers will still be bringing in the harvest.
Tax, accounting and succession experts say the proposed rules could have a major impact on farm families; undermining the ability of some family farms to survive and encouraging farm families to get out of the business.
The changes to incorporated farms include:
- rules to make it more difficult and risky for full-time farmers to share farm income with spouses and children;
- regulations that could make it dangerous to use farm earnings to help pay for children’s post-secondary education;
- rules that discourage farms from renting out their land or saving cash within a farm company;
- changes that could make it risky to divide ownership of a family farm’s land base among a number of children, while allowing the land block to remain intact;
- rules that encourage farmers to sell their land to neighbours or strangers rather than their own children.
The proposed changes are part of a package of changes that would be the biggest revision to the tax code since the early 1970s and are designed to close loopholes that enable some people to dodge taxes.
Some of the implications for farmers do not appear to be coming from a direct attempt to address problems with farmers, but rather are designed to get at corporate tax shelters that have been accused of being abused by high income earners.
It’s a frustrating situation for Elaine Froese, a succession and family relations coach, who has spent years extolling the virtues of careful forward planning. Now she worries farmers will be put off by the changes and the uncertainty itself and complicate the huge intergenerational transfer of farms coming to the Prairies.
Nobody wants to think the succession plan they have in the box might be … in question,” said Froese.
Ron Bonnett, the president of the Canadian Federation of Agriculture, said his organization is working with business groups to address the dangers of the proposed changes.
“The effects on farmers could be severe,” he said.
Presently, farmers are able to income split by designating different portions of a farm’s income to family members how they choose.
Under the proposed rules, each person receiving dividends from the farm would have to justify their portion based on labour contributed, capital invested, risk assumed and other factors.
If a family member was found to have claimed an “unreasonable” share of income from the farm, their excess drawings would be taxed at the personal highest rate, rather than as a dividend.
Farm taxation specialist Ron Friesen of MNP in Saskatoon said farm families cannot afford to take any of these proposed changes lightly. They are scheduled to be implemented in 2018, the costs and penalties could be severe, and they could disrupt farm management as well as retirement and succession planning, he said.
Farm spouses need to begin recording all their contributions to the farm in case the taxman decides they aren’t contributing as much as they are trying to take.
“It’s very important to start documenting everything that you do,” said Friesen.
“What’s her work worth? How are you ever going to determine (that)?”
Many aspects of farm family financial management would be affected by these changes. For instance, many farms fund their children’s university education by paying their children dividends from the family farm. After 2018, they won’t be able to do that without putting risk on those children that the Canadian Revenue Agency might deem them to be abusing the system and hit them with a big tax bill for the money they receive from the farm.
“It makes it much more difficult to meet the reasonableness tests for somebody between the ages of 18 and 24,” said Friesen.
Altogether, the changes to income splitting will bring much uncertainty and risk for farmers and any family members drawing money from the family farm.
“It’s all grey,” said Friesen.
“We’re going to have a whole ream of litigation, CRA audits, and it’s going to take years before anybody has any solid guidance.”
Passing land on to children could also become risky because if the children are considered to be non-farmers, they could be hit with a big bill as if they had received money, even if the land is not touched and a family member is still farming it.
Farmers also cannot transfer their personally owned land into a farm corporation they control, or into one owned by a family member, without exposing them to a risk that the CRA will consider the purchase ineligible for the capital gains tax exemption many farmers use when retiring and establishing a retirement fund.
The rules as stated appear to make it preferable for a farmer to sell land to a neighbour than to keep it in the family.
Farm succession and retirement planning expert Merle Good was shocked by that proposed change and thinks it is unreasonable to impose on farm families.
“They should make (inside family land transfers) exempt if the land stays in the family,” said Good.
“That maintains the family unit.”
He sees the fundamental problem with the changes coming from the application of an approach designed for small corporations like doctors’ practices and other low-capital professional businesses to a capital-intensive, multi-person, multigenerational industry like farming.
“They have not looked at how these rules affect a resource industry,” said Good. “You can’t have the same rules apply to an income industry as you apply to a resource-based industry.”
The proposed tax changes have brought a deluge of outrage from farm tax planners, accountants, succession planners and others who advise farmers on farm structure and planning.
They have also brought howls of outrage from farm groups.
National media outlets have taken notice and the feedback is starting to reach the ears of politicians.
But the changes are open for discussion only until Oct. 2, so farm-focused professionals and farmer representatives are urging farmers to talk to tax-planning professionals immediately.
And they urge farmers to let the government know about how its proposed changes could hurt the family farm.
“What a horrible time of year to do this,” exclaimed Froese, wondering how many hard-working farm families will be able to take time off during harvest to meet with accountants and planners, and respond to the government.