Proposed federal changes to the taxation of corporations fail to take into account that farms are not like other businesses and will result in larger, more vulnerable farms and increased risk for Canadian taxpayers.
The proposed rules have been criticized by many different business sectors, but they would be particularly detrimental to primary agriculture.
About 27 percent of farms operate as incorporated businesses, producing more than 65 percent of agricultural receipts.
Even the largest of these are still small companies and with rare exceptions are family-run operations. They are not like larger, multi-shareholder manufacturing or service operations. And none of the so-called farm corporations have much in common with publicly traded or larger private companies when it comes to ownership and dividend structures.
The new rules, as proposed, seek to create new or improved tax streams for government. However, they fail to take into account that farms are different from other businesses. As well, some confusion may exist in bureaucratic circles about the term “corporate farm”.
Red barn syndrome is responsible for many misconceptions about agriculture. Many non-farmers think that either diverse, non-farming shareholders are invested in incorporated farms, or that large, millionaire farmers, without dirt under their fingernails and with profit-driven motivations prevent true red barn farmers from enjoying their livelihoods.
Neither stereotype has a basis in fact and our government should know better.
The creation of new tax rules that would undermine multi-generational family farms shouldn’t have happened in the first place.
It certainly should not have gone ahead with only a limited review and comment period coinciding with harvest. That illustrates a lack of awareness about the demands of farming by the Canada Revenue Agency.
Primary agricultural production in Canada is almost never the target of outside investors or public companies. No business model with operationally divorced investors, unless they are high-wealth folks taking the very long view of agriculture, would be able to raise money for it; it’s too vulnerable to the outside forces that plague farming.
The industry is on the downward slope of the biggest commodity price bubble in recent memory. From the outside, looking in, someone might conclude that farming, especially grains and oilseeds, might be taking advantage of Canadian corporate taxation strategies, and thus may be ripe for the picking.
Unlike other corporate entities, farms are unique in their ability to ask shareholders for the previous years’ dividends and equity back when times get tough.
Farms run on very low return on investment. They are capital-asset-dependent family businesses where gains in equity are not tied entirely to added productivity or operational returns. Assets gained are nearly always land, and without it most of these businesses cannot withstand the cyclical nature of agriculture.
Among other things, the ability to more thoroughly tax those asset gains when they pass from one generation to the next is being targeted in the proposed CRA rules changes.
If all of the capital gains are taxed during the transitions between farm generations, much of the capital will have to be sold to accommodate the payments.
The result will be fewer, larger farms that are more prone to failure due to lower levels of capitalization and higher debt-to-asset ratios. That’s not likely the intention of the government policy.
At the very least, the federal government needs to review the consequences of the new rules and extend the consultation period.
Bruce Dyck, Barb Glen, Brian MacLeod, D’Arce McMillan and Michael Raine collaborate in the writing of Western Producer editorials.