Farmers will soon be facing a billion-dollar question.
One of the most popular farm programs in recent history is coming to an end, forcing producers to decide what to do with the $4 billion sitting in their Net Income Stabilization Accounts.
“Producers are going to have until March 31, 2009, to drain their existing NISA accounts,” said program spokesperson Ellen Funk.
Most farmers won’t want to touch their money until after Dec. 31, 2003, so they can collect their three percent government interest bonus. Keeping their accounts open until the end of the year also makes it easier to access the second instalment of federal transition aid.
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But in 2004, producers will start winding down their NISA balances.
NISA is to be replaced by the Canadian Agricultural Income Stabilization Program.
Farmers will have the option of taking their cash out of NISA in one lump sum or spreading the withdrawals over the next five years.
NISA is made up of two funds. Fund 1 is made up of producer deposits. Fund 2 contains government contributions and interest.
Program administrators will record Fund 2 balances as of March 31, 2004. Producers have to reduce that total by 20 percent a year until nothing is left in the account by March 31, 2009. Farmers can take out 40 percent one year and zero the next, as long as the balance drops according to the 20 percent per year schedule.
Money taken out of Fund 2 is taxable income, so producers should develop a strategy in conjunction with their accountants on when they should make a withdrawal and how much to take out.
Government records show there is a little over $2 billion in Fund 2.
Steve Funk, director of farm income stabilization programs at the accounting firm Meyers Norris Penny, said NISA withdrawal strategies will vary depending on each farm’s particular needs.
But generally, producers will want to take advantage of the five-year transition period to spread out their tax payments. Under the old NISA rules farmers would have been paying the entire tax load in the first couple of years of the wind-down.
“The government has been generous with them in that respect,” said Funk, no relation to Ellen Funk.
There are a couple of other guiding principles. Farmers who are taxed as individuals should probably consider making a NISA withdrawal if they are under the limit of the lowest tax bracket, which is $31,000.
“If they’ve got income below that amount, why not top it up with some NISA?”
Corporate farms should do the same if they are below the government’s small business threshold.
Another thing farmers should consider is rolling some of their Fund 1 money into the government’s new income program.
“In terms of priority that would be near the top of the list,” said Funk.
CAISP gives farmers income stabilization and disaster assistance protection. The government will allow farmers to transfer all or a portion of Fund 1 NISA money into the new accounts.
Program administrators haven’t decided how they are going to deal with transfers that exceed the maximum deposit limits established for CAISP.
Funk’s associate, Terry Betker, director of agricultural services at Meyers Norris Penny, said in addition to making a CAISP deposit, farmers should consider using their NISA withdrawals to establish their own personal safety net.
He worries that producers may use the cash windfall to buy new toys.
“You know what’s going to happen. It will be just like when people got their (equity) out of Sask Wheat Pool – how many pick-up trucks were bought or how many new tractors were bought? Boy, we’ve got to be wary of that.”
He doesn’t even think it’s a good idea to pay bank debt with NISA funds. If people pay down their debt and then find themselves in the middle of another farming disaster down the road, they will have to go back to the bank to arrange more financing.
“When you go back and try to restructure, when you’re in a crisis, is really tricky,” said Betker.
