Are you approaching retirement? Many farmers consider cash renting their land for more guaranteed returns and simplicity.
However, there are major tax issues you need to consider because it could end up costing significant tax dollars.
The following are issues to consider for cash renting out personal and corporate farmland.
Personally owned land
Cash rent from personal land will be taxed based on your personal income level. Compared to active farming income, you will no longer need to pay into the Canada Pension Plan.
However, estate tax planning should be your largest concern when considering whether to charge cash rent on your farm land.
Cash rent puts you at risk of falling offside from the family farm roll-over rules. This would result in you paying tax on the fair value of the land in your estate versus allowing it to roll tax-free to your children. The rule of thumb is if you cash rent out the land for more years than you actively farmed it, you will likely fall offside.
To put it in perspective, land worth $1 million not qualifying for the rollover would cost your estate $237,000 to $252,000 in tax at the top bracket in the prairie provinces.
You should also consider your lifetime capital gains exemption. You are not likely to fall offside of these rules if you have met them in the past. However, reviewing the rules with a tax professional is important.
Cash rented land is passive income in a corporation. This means you will pay tax at 50.7 percent on this corporate income in the prairie provinces. You get 30.7 percent of this refunded by paying dividends to yourself from your farm corporation.
From an estate perspective, you need to consider if this will put you offside of the family farm roll-over rules for the shares you own in your farm corporation. The rules for a farm corporation are more complex. However, if you cash rent out your corporate farm land for more years than you farmed it, you may fall offside.
This is also the case for using the lifetime capital gains exemption on the shares you own in your family farm corporation. It is not the case, as it for personally owned land, that once you meet these rules you will not fall offside.
Another item to consider is the effect cash renting farmland will have on the small business limit for your corporate income going forward. New rules have been implemented that will result in a reduction to your small business deduction for any cash rent received exceeding $50,000 in your associated corporate group.
Whether you personally or corporately own your land, it is never too early to start planning for the future of your farm. Ensure you talk to a professional to discuss your retirement and estate plan.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.