There are many reasons for in-corporating a farm, from gaining lower tax rates to restructuring how the farm is run.
However, the benefits can be re-duced if the corporation is deemed to be “associated” with another corporation.
Recognizing when your corporation would be considered associated and the impact it has on your business may change the way you structure your operation.
There are several conditions that can deem one corporation to be associated with another, but the one that tends to affect farms the most is when family members have cross ownership.
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The family relationship and the percentage of cross ownership that is held may affect whether two corporations are deemed associated.
Neither the nature of the business or the size of the operations affect whether the two corporations would be deemed associated.
For example, if one of your children owns an engineering company, it could still be deemed associated to your farming company even if your child has never worked a day on the farm but owns some shares in it.
If the two corporations are deemed to be associated, consider the following:
The benefits of incorporating can add up quickly in Western Canada, where a corporation’s first $425,000 to $500,000 of taxable income is taxed at 11 to 14 percent.
What many people fail to realize is that this small business deduction (SBD) limit is shared between two corporations when they are deemed to be associated.
This could require both companies to pay higher tax rates on all income above the shared SBD limit. As a result, additional taxes plus interest on unpaid amounts could be owed.
An associated corporation can also be deemed to have a reduced SBD limit because it has to combine its taxable capital.
This reduction will usually start to occur when a company reaches a certain size (taxable capital of $10 million) and is no longer considered a “small business.”
A similar treatment applies to associated companies. A corporation may not be large enough to be affected on its own, but the government will look at the associated group as a whole and reduce the SBD limit available to each corporation within that group.
Association may also play a factor in reducing the tax credits that are available.
Certain credits, such as the scientific research and development credit, can be reduced, depending on the size of the operation.
When two corporations are deemed to be associated, those credits take into consideration the size of the associated group of companies rather than just the corporation that makes the application.
Those credits could be reduced if your farm is associated with other corporations.
A corporation that is no longer able to claim the SBD limit may be required to pay all balances within two months instead of the normal three months for small business.
Also, the frequency in which the corporation is required to make installments may be increased. This in turn could create cash flow concerns for the company as well as impose additional interest costs if payments are late.
I have not described all the scenarios that cause corporations to be associated. There may be ways to eliminate being associated, such as filing an election not to be associated.
Be sure to speak to a tax professional to determine if your family corporations are associated and whether your current business structure is right for you.
