As year-end approaches, most farmers are taking a look at their tax plans with a view to minimizing payments.
It’s important to look at decisions that affect both annual tax bills and long-term retirement and succession plans, said BDO Canada tax partner Shawn Friesen from the company’s office in Portage la Prairie, Man.
No one wants to pay more taxes than necessary, he said, and farm operations and structures can be complex.
Meeting with tax advisers to examine short and long-term plans is critical.
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Typically, farmers examine their situations at this time of year because they have time to make purchases that can reduce their tax bills for the year. Operating on a cash basis of taxation, rather than the accrual system most other businesses use, gives them flexibility and income deferral options.
“They’re always looking at, ‘where am I sitting for tax? I’ve got to go out and buy something,’ ” he said.
“And it’s usually something like seed or fertilizer.”
Friesen said farmers should take note of new rules the federal government announced Nov. 21 with regard to purchase of large assets like a tractor or a combine.
Accelerated capital cost allowances apply to purchases made after Nov. 20.
“The amount you can write off in the first year is a little bit higher than they had in previous years, so if somebody needed to save some money and they were going to go buy something, that could be an option,” Friesen said.
“It’s not going to save you dollar-for-dollar, but at least you get to write off a little bit more than you would otherwise.”
The changes means equipment once eligible for a 20 percent write-off in the first year is now eligible for 30 percent.
The Canadian Federation of Agriculture had recommended that Canada move to 100 percent first-year deductibility for farm equipment to put them on par with American farmers.
However, the organization said a larger write-off will allow farmers some ability to reinvest in their operations.
Friesen said anyone facing a high tax bill could consider incorporation to defer taxes.
Corporate tax rates that are lower than personal tax rates can help with expansion plans because there is more capital to reinvest.
“Incorporating is usually a longer-term focus,” he said.
“It can work really well as kind of a pension plan, too. At the end, if you move your assets into a corporation and sell them from there, then you can take an annuity every year from your corporation and call it your pension.”
He said farmers who incorporate should make sure their land and shares qualify for tax purposes. There are different rules that can affect succession plans and estate plans.
“There’s a lot of good farming rules out there to transition assets to the next generation on a tax-deferred basis, but it has to qualify,” he said.
“For instance, you can’t have rented it out for more years than you farmed it.”
Knowing the land history is also important. Friesen said someone might have land that has been in the family for 100 years.
“But they also might have bought it from their brother, and that can break the chain in various ways,” he said.
“Having a history of the land, who owned it, who farmed it and what time period is very beneficial.”
Like many farmers and farm organizations, Friesen is concerned about the rule that essentially prevents true succession of a farm corporation from parent to child.
“If I had a corporation, I could sell to you and I could claim my capital gains exemption and it would be a beneficial transaction for me,” he said.
But if a child uses a corporation to buy a parent out, the parent doesn’t get the exemption.
“I get dividend rates, which is a lot higher tax rate, from potentially zero to a 45 percent tax rate. In some ways it’s easier for me to sell to an outside party.”
Careful tax planning and use of spousal and intergenerational rollover rules can help facilitate such a transfer and maximize capital gains exemptions.
These provisions are complicated and should be discussed with a tax adviser.
