There are lots of reasons to incorporate a farm, but some of them are bad reasons.
Lance Stockbrugger, a Saskatchewan chartered accountant and farmer, said during an interview at CropConnect in February that farmers shouldn’t incorporate just because they think it will let them dodge or defer taxes.
That goes for all farm finance: do things for the right reasons.
“Corporations are only deferrals,” Stockbrugger said.
“Realize that you’ve got to pay taxes as you’re going. You’re never going to be able to avoid them. You’re only going to be able to defer them.”
There are many good reasons to incorporate a farm. Complicated ownership arrangements can often be made better through incorporating, and certain succession issues can be dealt with inside a corporate structure.
Taxes can also be successfully handled within a corporation.
However, if people are simply incorporating because they assume it’s better,or temporarily allows some of their earnings to be taxed at a lower rate, they need to think twice.
It’s hard to dismantle a corporation once it’s created, so going corporate is a big decision. As well, rolling farmland into a farm corporation brings many risks and potentially large costs, Stockbrugger said.
Land can be moved into a farm corporation, but getting it out is a nightmare.
Farmers need to think very carefully before changing their farm’s ownership structure and know why they are doing it, as well as what all the implications will be.
He applies the same thinking to farm spending.
For example, many farmers buy fertilizer and other inputs months before they need them just to reduce taxable income.
However, that can expose farmers to their suppliers going bankrupt before supplying the inputs. That can and has happened.
“We have no idea what the financial strength or health of these companies are,” said Stockbrugger.
“You’re taking a lot of risk with that.”
As well, there’s a cost to that sort of a short-term tax dodge, as there is with deferring grain payments into a new financial year.
“Whether you’re buying inputs or deferring grain, you’re giving interest-free loans with zero security,” said Stockbrugger.
Buying fertilizer in the fall can be done for many valid reasons, including the tendency of fall prices to be lower than spring prices, for ensuring the farm has it on hand for seeding and to guarantee that they are likely to be one of the farmers who gets theirs even if the supplier runs short.
However, to do it just to avoid a lower present-year tax bill doesn’t make sense.