There are many options on how to structure your farm with family. A one-size-fits-all solution does not exist and there are many advantages and disadvantages of each potential structure.
This article takes a deeper look into using a single family farm corporation for the succession of your operation.
Darren and Marilyn are each 55 years old and all of their farming operations and assets (including land) are in one corporation (Farm Co.). Their three children are Steve (30 years old, farmer), Darlene (28 years old, farmer) and Sam (25 years old, non-farmer). Steve and Darlene have worked as employees on the farm in the past. They all feel it is now time for them to enter ownership.
To bring the kids into ownership, the family implements a share freeze in which Darren and Marilyn get $10 million of frozen value preferred shares in Farm Co. They then each subscribe for common shares through which Darren, Marilyn, Steve and Darlene participate in future growth of the farm over the $10 million value going forward (at percentages of their choice). Note that Sam, the non-farmer, has not been included in ownership.
Things to consider
From an operating standpoint, some of the advantages of this structure are as follows:
- It is simple. Everyone can easily understand this structure with a single entity.
- Less complexity tends to mean lower professional fees.
- With the farm operating as one entity, everyone’s motivations should be more aligned. For example, during harvest Darlene and Steve should be motivated to harvest the same land first, that which turns the most profit, versus wanting to harvest their own land first, which is typical in an equipment-share arrangement.
- The family should enter a unanimous shareholders agreement (USA) to deal with future issues that may arise, such as someone deciding to leave the farm, death or divorce. This would deal with the terms of the payout that would be required, such as timelines and amounts.
- This can keep the legacy of the farm going into the future by tying the assets together in the company so it is more difficult to divide. Note that this may also be a disadvantage, depending on your goals and the family dynamics.
- Darren and Marilyn may be able to gift some preferred shares in Farm Co. on a tax-free rollover to Steve and Darlene for past contributions.
From an operating standpoint, here are some of the disadvantages of this structure:
- Everyone is tied together for major decisions, which may cause issues. One common example is the next generation wanting to continue to grow and take additional debt, while Darren and Marilyn may want to ensure they are protected for retirement.
- This structure will only allow for the use of one small business deduction for the farm (paying corporate tax at a much lower rate on the first $500,000 of income).
- Expenses that could be viewed as more personal in nature, such as one sibling using much more fuel than the other, can lead to issues when operating through one entity.
Darren and Marilyn must also consider how this affects their estate plan. If they wish for Sam to receive value in their estate, they may need to have a structured payout from Farm Co. over time to redeem shares from Sam after their death. This does ensure the land stays with the farm, but could put a cash-flow strain on operations, depending on payment terms.
As you can see, even in a simple structure, there are a lot of moving parts. Ensure you speak with a professional when determining your succession and estate plans.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.