You’re incorporating. Should the land be transferred to the company?
Here are some considerations in making that decision, according to Saskatoon lawyer Al Haubrich from the Robertson Stromberg firm, who has a particular interest in estate planning and intergenerational farm transfers.
No capital gains exemption – Capital gains on the land would be taxable when the company sells the land and the company has no capital gains exemption.
Rolling over to a child – Rollover rules allow farmland and shares to be transferred in certain circumstances to your children without triggering tax. In some instances, a child who lives in the city may be able to roll over shares but if the child owned the actual land, the rollover to his or her children will not be available.
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Estate planning – A farming company is often created so the farm can continue after the principal owner’s death. However, once the land is in the company, it is not possible to divide the land among children. The farmer only has company shares and shareholder loans (for assets transferred to the company) which can be willed, gifted or sold.
Most farmers have insufficient non-farm assets to equalize the property being left in the will to the farming children and the non-farming children.
There are three options to consider in trying to equalize treatment, Haubrich said. First, buy insurance on your life with the non-farming children being the beneficiaries. Second, leave some land to the non-farming children subject to first leasing it to the farming company.
Finally, the non-farming children can be left non-controlling shares that can only be redeemed over a period of time. But this latter course of “common ownership of the farming company with non-farming children is not desirable,” Haubrich said.
Before farmland is put into the company, a farmer’s estate plan should be established so the full implications of such a transfer can be considered. If your farming child gets the farm and then dies, the farm may go to the son-in-law or daughter-in-law and there would be no benefits to the non-farming children.
Keeping the farm intact – If you have more than one child who wants to farm, giving them shares in the company may force them to get along since if they don’t, the farming unit won’t survive.
Mortgaged land – The company should own the mortgaged land because it has more after-tax dollars to make principal payments.
The home quarter – If the home quarter is put in the company, the farmer gives up the capital gains exemption available on one’s principal residence. In addition, if the company owns the principal residence, then the individual residing in the residence incurs a taxable benefit. Putting the home quarter in the company also may make it easier for creditors to seize.
Therefore, the home quarter with principal residence is often kept out of the company. However, because the home quarter contains the other farm buildings, agreements are often necessary regarding the home and these buildings.
Remain a farmer – Sometimes a farmer may want to maintain ownership of some farmland to retain farmer status, such as for the purpose of retaining farm plates in those provinces where such are available.
Next week: Haubrich shares some thoughts on leaving the farm.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
