As a farmer, you do not have a funded pension plan waiting for you upon retirement.
It’s likely that you will rely on the value and potential future earnings of your largest asset, your land. If your plan involves passing the farm to the next generation, this can add complications. It is unlikely you can sell your land at fair value to your children and subsequently have them run a viable operation.
What options can you use to completely pass the farm along to the next generation, while also funding your retirement?
One option is to freeze the value of your farm corporation (you keep the value you built) and pass future growth to your farming child or children. This option is only applicable if your farm is in a corporation.
Operations of the farm would fund your retirement by buying back your frozen shares, resulting in a dividend in which you would be required to pay personal tax.
There are many potential benefits:
- Your children are rewarded for their future efforts in operations as owners, versus as employees.
- Operations can continue as in the past (the same equipment can be used in operations, for example).
- This provides flexibility in the percentage of growth offered to each child or even the ability to continue to participate in future growth yourself.
- Upon death, any shares outstanding can roll over to your surviving spouse or children on a tax-deferred basis and/or utilizing the capital gains exemption (assuming it continues as a qualified farm corporation).
Items to consider
- It can be difficult to determine the optimal control and management. Although you can keep voting control of the farm, family dynamics can make it difficult.
- If there are non-farming children within the family, what assets do they receive in your estate? If shares of the farm corporation pass to non-farming children, this can be strenuous on operations and cause conflict.
- What if the farming child later goes through a divorce? The value in the farm may be at risk.
- A second option is to allow your farming children to have their own separate operations and fund your retirement by providing the land through cash rent, crop share or even setting up a joint venture.
Benefits to this arrangement:
- Keeps operations and any increases in land value separate.
- You retain 100 percent control of your farmland while the next generation can have control of their operations and decisions.
- Your child is the main operator of the farm, so rollover rules and/or the capital gain exemption can still be used on land and/or shares in the family farm corporation.
Items to consider
- Rent payments to a corporation are viewed as passive income and taxed at a higher rate. Tax planning may be available to avoid this.
- You may want a long-term lease on land for estate planning so farmland is secured for your farming child in your estate.
- Your child has to administratively set up separate operations (i.e. banking, insurance).
- You must consider how equipment that you own is factored into this arrangement.
- If your farm is incorporated, you are still left with the process of passing the shares to your children at a later date.
Whether your retirement plan involves passing down your farm to a second generation or ceasing operations completely, it is imperative that planning starts early. Ensure you talk to a professional to discuss all options available.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.