I mentioned in my last column how the average tax-paying family in Canada pays more in taxes to all levels of government than it spends on shelter, food and clothing.
As a result, it is probably in all our best interests to find strategies to keep more money in our pocket.
One way to do that is to invest off the farm.
Although re-investing in your farm business might seem prudent, many financial experts suggest that putting all your eggs in one basket is risky.
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By the time you retire, at least 40 percent of your investment portfolio should be in non-farm assets. This reduces risk by having investments that operate on economic cycles other than farming and agriculture and may save money at tax time.
For example, you can shelter your money from a higher tax rate by making contributions to your Registered Retirement Savings Plan in years that you enjoy high farm income.
If you supplement your income in years that your farm income is down by making withdrawals from your RRSP, those withdrawals will be taxed but quite possibly at a lower tax rate than would have been applied in your high income years.
Economic downturn possible
Depending on the sale of your farming business as the sole source of your retirement funding can be a risky investment strategy.
Changes in the economy, exchange rates, government programs and the weather could either delay your plans or severely undermine the value of your farm assets.
Off-farm investments can add to your retirement income while giving you flexibility to lower the farm transfer price to your children or delay some of their loan payments while they get established in the business.
Off-farm investments such as life, disability, critical illness and long-term care insurance can also provide tax-free cash for your spouse and children if you should die prematurely, suffer an injury or become ill.
Life insurance is frequently used to divide an estate after death in a way that is fair to all children or to pay down taxes that would otherwise deplete the estate.
Any way you look at it, however, off-farm investing requires a comprehensive approach that involves the specialty skills of tax and financial advisers.
There are benefits to having both registered and non-registered investment portfolios and a balanced investment strategy designed to provide income and capital appreciation while avoiding excessive risk.
As shown by the recent decline in the stock market, virtually any investment can go through a period of volatility. Having the right blend of farm and off-farm assets can provide you with a more comfortable and secure retirement income.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
