Before the growing season each year, producers spend countless hours preparing their crop plan, repairing equipment and ensuring that they have all of the inputs on hand that they need to give their crops the best shot at success.
Achieving tax efficiency and a smooth transition of a farming business, whether that means selling the farm or passing it on to the next generation, requires a similar level of care and attention.
There are three aspects that every farm operation should review on a periodic basis:
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Operational structure
Canada’s income tax system taxes profits earned by individuals and corporations at different tax rates.
Corporate tax rates on business income are generally lower than personal tax rates. However, amounts paid by a corporation to an individual in the form of wages and dividends are subject to personal tax.
If your farm business generates more income than is needed to fund your personal consumption, earning this income in a corporation to be taxed at lower corporate rates will provide you with more after-tax dollars to reinvest in your business.
However, if you have realized start-up losses and have off-farm personal income, it may make sense to delay incorporation until the business is profitable.
For larger farming operations that are already carrying on their activities through a corporation, the first $500,000 of annual taxable income is taxed at lower rates (nine percent in Manitoba, 10 per cent in Saskatchewan and 11 per cent in Alberta and British Columbia in 2025) than the general corporate rate applicable to business income (27 per cent in Manitoba, Saskatchewan and British Columbia and 23 per cent in Alberta in 2025).
Where multiple stakeholders (family members, neighbours, employees) co-operate in carrying on farming activities, it may be possible to establish contractual relationships that permit each stakeholder to access the lower corporate tax rate in their own corporation.
Note that the capital base and passive investment income of related corporations may affect the availability of low corporate tax rates.
Various approaches are available to make farming businesses more tax efficient. A qualified tax practitioner can recommend options that will best position you to meet your goals while minimizing your income tax liability.
Preparing for the next chapter
Farm business owners have unique tools available to reduce tax payable when they sell their farm or transition it to the next generation:
- The lifetime capital gains exemption, which permits individuals resident in Canada to realize capital gains of up to $1.25 million in respect of qualifying farm property without being subject to regular income tax.
- The farm “rollover” rules that permit a transfer of qualifying farm property to a Canadian-resident child or grandchild on a tax deferred basis.
These rules may still be available even if active farming operations have ceased and farmland is leased to a third party.
While they are powerful, meeting the technical requirements requires advanced planning.
New companies may need to be established so that non-farming assets can be removed from the farming corporation.
Farmland ownership histories (including use by parents and grandparents) may be needed to determine how long a particular asset will continue to qualify for favourable tax treatment.
If you are considering a significant transition in your farming business in the next five years, talk to your professional advisers now so they can thoroughly consider the options that may be available to you in the future.
Estate planning documents
If a farmer experiences an unexpected death or mental incapacity, the first legal question that will be asked is whether the individual had a valid will or power of attorney in place.
Without these documents, a court order must be obtained before any significant decisions can be made.
Where an individual dies intestate, or without a valid will, a court application is needed to appoint an administrator for the estate, and the distribution of estate assets will be dictated by the provincial legislative scheme.
If a person becomes incapacitated without previously signing a power of attorney, an application to court will be necessary to appoint a guardian and/or co-decision maker.
If no suitable family member can be found, the Public Guardian and Trustee (a government office) may need to step in.
Many individuals have signed estate planning documents at some point in their lives. However, these documents may no longer reflect their wishes or may not sufficiently address the complexities that arise when passing business assets to an individual’s heirs, some of whom may be active in the business and others who may not be.
If estate planning documents are outdated, a significant risk of estate litigation arises.
Updating your estate planning documents can be a daunting task because it requires tough decisions about who to entrust to manage your affairs and how to divide your assets among your heirs.
Working with an estate planning adviser who specializes in farm succession planning can provide comfort that the legacy you are leaving behind will be a blessing to the next generation and not a curse.
Aaron Haight is an associate with MLT Aikins LLP. This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation. If you have a topic or question you would like us to address in future issues, please email kkriel@mltaikins.com.
