Q: Two brothers incorporated a farming operation in 1960 as equal shareholders with ownership of the land in the company. Now, both brothers want to go their own way. One wants to continue farming, the other wants to sell out. Both brothers get along well, and just want to know how to accomplish this easily.
A: I sought the advice of Saskatoon lawyer Allan Haubrich of Robertson Stromberg on splitting up this family farm corporation. Haubrich, who has a particular interest in intergenerational farm transfers, replied as follows:
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Dividing up a family farm corporation can be done without incurring considerable income taxes. Because of income tax, GST and capital gains consequences, it is specialized work, requiring the combined expertise of an accountant and lawyer.
An example of how a family farming corporation can be divided is as follows:
- One of the brothers creates a new corporation.
- That brother transfers his shares in the existing corporation to the new corporation under the rollover provisions of the Income Tax Act.
- The existing corporation would transfer half of its farming assets under the rollover provision of the Income Tax Act to the new corporation.
The steps continue in precise chronological order usually structured by an accountant to avoid triggering tax.
In the end, each of the brothers has a corporation that owns half of the farm assets. It is not necessary that each corporation receive a half-interest in each farming asset.
For example, if the original corporation owns 20 quarters of land, after the division each corporation could end up owning different quarters of farmland. What is important is that each company end up with half the farming assets.
Such a division should not be done at the last minute. At least a 24 month waiting period is required before the retiring brother could sell off his corporation, otherwise, the Canada Customs and Revenue Agency could be owed considerable tax dollars. As a result, plan on dividing up a corporation several years in advance of retirement.
There are other reasons to divide a corporation besides one of the brothers wanting to retire including:
- Each of the brothers may have children in the business and it is time to separate the operations of the children from their uncle.
- Your estate plan may be to pass the shares of your own corporation to your family without them becoming co-owners of a corporation with their uncle.
- The brothers want to be independent of each other.
- Splitting off a corporation could also give each farming corporation the advantage of the small business deduction. Small business corporations are taxed at a lower rate on their taxable incomes up to $225,000. That is increasing to $300,000.
- More flexibility may be required and this can be accomplished by dividing up the existing corporation into two entities.
Other agreements need to be drawn up if there will be an ongoing business relationship between the two corporations.
Each division of a family farming company must be looked at on a case-by-case basis. Before any division, professional advice should be obtained.
Clarification
In the article of Nov. 13, about when to incorporate the farm, I indicated that a farmer could no longer defer sales of inventory such as cattle or grain. I should have said that for cash flow reasons many farmers do not want to defer sales and, as a result, choose to incorporate.
Farmers who choose to defer sales can continue to do so. You should consult your accountant about the tax consequences of deferring sales of inventory.
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.
