Q: I would like to know more about farm incorporation. I know that I
will need the services of a lawyer and an accountant to set up my
company.
What is involved in incorporating? What happens when the corporation is
no longer needed? Does a shareholder cash in his shares? What happens
if there are several shareholders and one wants to get out? Can you
recommend a good, easy-to-read book dealing with farm incorporation?
A: A company is formed by filing incorporation documents with the
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provincial corporate registry. The process is not complicated, but
first you need to consider why you should incorporate.
There are two principal reasons for incorporating. First, it can be a
family planning tool to give children or a spouse an interest in the
farm operation. Second, there can be tax advantages. While tax regimes
vary from province to province, generally a small company will pay a
lower tax rate. Further, incorporation allows income to be divided
between the company and its shareholders.
As an estate planning tool, family members can be given shares in the
company. A company can have different types of shares. Those can
include voting shares that have control and non-voting ones. It can
also include fixed value shares and shares that increase in value with
the company.
For example, if your daughter wants to get involved in the farm, you
can set up a structure where you retain the majority of voting shares,
but which allows your daughter to increase her share and eventually
obtain control. Another scenario: under something called an “estate
freeze” a father can be given fixed value or preferred shares and the
daughter common growth shares. This means any increase in value of the
farming corporation will be reflected in the daughter’s shares.
In preparing to meet with advisers, you should have a list of assets
comprising the farm and their approximate worth. Decisions will have to
be made on which assets will be transferred to the company. Will all
the land, machinery, cattle, grain on hand be transferred? In many
cases assets can be rolled over without immediate tax consequences. If
the company acquires your assets, you will have to decide how the
company will pay for them. Will you be issued shares, a shareholder’s
loan or a combination of the two?
How will you receive income? The company can pay you a salary, or pay
dividends or some combination of the two. Alternatively, the company
can pay off the shareholder’s loan. You may be able to draw this tax
free.
What happens when the company is no longer needed? First, a company
can be dissolved. The process is set out in the Business Corporations
Act, which is called the Companies Act in some provinces. Usually, it
will require a special resolution of shareholders. Creditors would have
to be dealt with. Assuming there are assets left after debts are paid,
the remainder would be distributed among shareholders. A corporation
can also be dissolved by the Director of Companies for failing to file
its annual return. A court can order a company dissolved as well.
Instead of dissolving the company, you could transfer your shares to
your children. In either event, there will probably be tax consequences
and there will be many legal issues to deal with.
I am not aware of any single book that deals with farm incorporation.
However, check with your local department of agriculture. Two useful
websites are www.farmcentre.com, run by Agriculture Canada, and
www.agri
success.com, run by a consortium including accounting firms, the
Canadian Farm Business
Management Council and others.
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.
