Retiring from farming may sound like a term rarely heard but it does happen, often in many ways.
Whether it’s transitioning the farm to the next generation, selling the assets of the farm slowly over time or getting out all at once, there are many things to consider from a tax perspective — all of which have different tax implications. Here are some of the considerations:
Cash method inventory adjustments
Because farms may file their taxes on a cash basis, there is often tax planning opportunities to defer taxes, such as deferring the receipt of grain cheques, pre-buying inputs for the next year or purchasing livestock to reduce a farm’s taxable income.
Many farms often use the optional (OIA) and mandatory inventory adjustment (MIA) provisions of the Income Tax Act. These adjustments help even out the peaks and troughs of taxable farm income to better use tax brackets and to assist in the cash flow timing of tax payments.
If you are considering retiring from farming by selling off assets (including grains and cattle inventory), you should be using the OIA and MIA adjustments ahead of time to help even out the potential tax burden.
In the years before the sale, you can voluntarily add income to these adjustments, which become deductions in future years. This will help offset the income effect of that final grain, cattle or equipment sale, especially considering that there will be no input or replacement costs incurred that year.
Because all tax brackets are not equal, these adjustments will help even out farm income over the years, helping you avoid paying taxes in the higher brackets.
Many farmers consider their retirement savings as their farm and their farmland, leaving many with large unused Registered Retirement Savings Plan carry forward contribution limits. If you are under 71 years of age and that final income inclusion from the sale of farm assets is imminent, talk to a financial planner about making an RRSP contribution in the year of sale.
This RRSP contribution becomes a deduction against your farm income and helps defer the taxes on sale and gets you back into a more advantageous tax bracket. In the future, you can withdraw your RRSPs and pay tax on the income at lower tax brackets, leaving permanent tax savings.
You should also consider a spousal RRSP contribution to help split the taxable income upon withdrawal of the RRSP in the future. As a couple, this will help reduce your overall tax bill and keep more money in your pocket. The rules on the withdrawal of a spousal RRSP are important to be aware of because any withdrawals made within three years of the original contribution are attributed back to the spouse that made the contribution in the first place, mitigating any tax savings originally sought.
Old Age Security recovery tax
If you are a farmer collecting Old Age Security, you should be mindful of the OAS recovery tax (claw back) rules. If your net income before adjustments is greater than $75,910 in 2018 you will have to repay 15 percent of the excess of this amount to the maximum of the total amount of OAS received. If you have oil lease income, off-farm income, capital gains or other sources of income, the additional income effect from the sale of farm assets can often put you in a scenario where you have OAS claw back in your personal tax filings. Using RRSP contributions, splitting the sale over two or more calendar years and effective use of inventory adjustments are ways to mitigate the claw back.
Transitioning or selling the farm usually happens only once in a farmer’s lifetime, and effective tax planning is integral to ensuring you get the most from retirement. It’s important to speak to professionals and seek the advice of a good accountant, lawyer and financial planner to ensure your retirement needs are taken care of and you benefit from all your hard work.
Joe Renooy, CPA, CA, is an agriculture and business adviser in MNP’s Grande Prairie, Alta., office. Contact him at 780-831–1700 or firstname.lastname@example.org.