Farmers aren’t facing the radical restrictions on income splitting with which white collar professionals are coping.
However, it’s far from business as usual for the family farm, and farmers need to realize that they had better make sure their operations comply with Canada Revenue Agency expectations, say tax experts.
“Definitely this round of drafting of the legislation has helped clear up some of the items that were very nebulous,” said farm accountancy specialist Ron Friesen of MNP in Saskatoon.
“But it’s not like farms are excluded (from many business tax provisions), and you can just do your own planning. You still have some restrictions.”
True to his word, federal Finance Minister Bill Morneau announced Dec. 13 how the CRA would treat “income sprinkling,” as well as reiterating his government’s decision to withdraw the capital gains tax exemption restrictions that were in the original reform proposal.
Farmers will still be able to split income between family members, so long as those members can prove that they are and/or have been deeply involved in the work of the farm.
Farm family members who work an average of 20 hours or more per week during the farming seasons should be exempted from the restrictions on receiving dividends, leaving it up to the farm corporation directors (usually the parents who own the farm) to divide the farm’s income as they see fit.
The previous proposals would probably have required dividends to be paid out more strictly based on hours worked and investment in the farm business — something that would have seen many farms paying a substantially higher level of taxation.
Friesen cautioned that farmers who are paying for their children’s post-secondary education through dividends will need to be careful to ensure that the children qualify to receive the money at their generally lower income tax brackets. That involves looking at the hours they have been working on the farm, as well as dealing with how the CRA will interpret work over previous years to children attending universities and colleges.
Farmers with non-participating children who are attending post-secondary education might need to quickly do a last dividend payment to children before the end of 2017 in order to dodge the risk of losing their exemption.
The amended proposals allow children who have a certain level of direct, non-trust-based, ownership of farm assets to collect dividends at their own marginal rate, but because most farm tax and structure advisers caution against giving direct farm ownership stakes to children too early, this might be a tricky provision to use.
While the government is pressing ahead with the small business tax changes, the Senate’s finance committee has called on it to step back and do a general overhaul of the tax system.
It argued in a report released on the same day as Marceau’s announcement that piecemeal changes won’t fix the tax code nor make it any more transparent or friendly toward citizens.
Farm groups were generally relieved to see Morneau’s amendments to his original proposals. Both Grain Growers of Canada and the Canadian Federation of Agriculture praised the preservation of income splitting as a legitimate tool in recognizing the unique role family members play in farms.
Marilyn Braun-Pollon, vice-president for agri-business for Canadian Federation of Independent Business, said her organization is relieved that some of the worst provisions for farmers and fishers have been removed from Morneau’s regulations.
But she echoed the Senate committee’s call for these proposals to be put on hold so the government can instead spend time on an overall tax system overhaul.
“We’re urging the government to slow down . . . and get it right,” said Braun-Pollon. “Why the rush?”
The provisions will apply from Jan. 1, 2018, so farmers need to make sure they are in compliance.