To start, I need to declare one of my affiliations. It’s the reason why I’m acquainted with this particular tax issue.
I serve as executive director of the Inland Terminal Association of Canada (ITAC), which involves five grain terminal companies in Saskatchewan and Alberta that have significant farmer ownership. The tax issue affects several of those terminals and more specifically, the farmers who hold shares in them.
Many other farmer-owned entities across the country are similarly affected, particularly food processing companies. Even if I didn’t work on contract for ITAC, and even if I didn’t have a few shares in a terminal, I would consider this outrageously unfair.
Here’s the situation. Federal tax changes announced back in 2016 are now in force concerning the small-business tax deduction. Incorporated small businesses pay a much lower rate of tax on their first $500,000 of annual income. With the change, an incorporated farm selling more than 10 per cent of its production to a business in which it holds shares is not eligible for the small-business deduction on those sales.
It doesn’t matter if the shares are owned personally, or through your farming corporation. Even worse, the provision also applies to relatives. If your brother-in-law has shares in a feedlot and your farm corporation sells grain to that feedlot, you’re also technically caught by this provision, even if you don’t own any shares.
When asked, finance department officials couldn’t explain how you’re supposed to know about the investments of your relatives, much less why you should face repercussions because of them.
Losing the small-business deduction is a big deal. When your tax rate goes from 12.5 percent to 27 percent, it can mean extra tax in the tens of thousands of dollars. The tax change will push a farmer to sell to a competing grain company, feedlot or processing company.
The policy is apparently meant to stop double dipping – the ability to use the small business deduction more than once. However, many grain companies, feedlots and processors have capital assets that exceed $15 million and are therefore not eligible for the small-business deduction. There’s no way double dipping can occur in these cases.
Cooperatives, including dairy co-ops, quickly received an exemption from the tax provision, but that hasn’t been extended to farmer-owned corporations. The logical step would be to expand the exemption. Unfortunately, common sense isn’t always that common in Ottawa.
Accounting professionals say affected businesses may be able to restructure to get around the problem and some are doing just that. Right now they are Canadian Controlled Private Corporations. They can restructure to become a public company that isn’t publicly traded.
One disadvantage to that, say the professionals, is that shareholders would no longer be able to use their lifetime capital gains exemption upon the sale of their shares.
The Canadian Federation of Agriculture is concerned and has been pressing the issue in Ottawa. The Canadian Produce Marketing Association and the Canadian Horticultural Council are advocating an exemption for agricultural affiliated corporations whose operating structure is similar to cooperatives.
Why should farmers be penalized for investing in a company further along the value chain? Especially if that company is not eligible for the small business tax deduction and there’s no way to double dip on the deduction, what is the tax provision accomplishing?
By any objective measure, this tax change is misguided and counterproductive.