Incorporating the farm has many benefits, but producers must decide what to do with the corporation when they retire.
In many cases, the only assets left in a corporation are cash and investments when farmers retire and dispose of their farming assets.
Should they dissolve the corporation or keep it and run it as an investment corporation?
Knowing the advantages and disadvantages with each option can help make the right decision.
Advantages
When assets are transferred to your personal hands from a corporation, there is a deemed disposition at fair market value of the assets transferred.
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The transfer can result in additional corporate and personal tax, depending on the original cost of the assets that are being transferred. Keeping the assets in a corporation can defer these taxes, which means you can keep the money that would have been paid in taxes to invest and earn even more money.
The Old Age Security benefit can play a significant role in one’s retirement plan.
However, many people don’t realize that the benefit will start to be clawed back if their taxable income exceeds $71,500.
Using an investment corporation instead of holding investments personally makes additional planning opportunities available to keep personal income levels low enough to maintain a full OAS benefit while still benefitting from the returns that large investments can yield.
Significant personal tax bills can result when one spouse holds all of the investments and reports all of the income.
An investment corporation allows both spouses to be shareholders and split the income between them. This can result in significant personal tax savings, depending on the income level.
Disadvantages
Unlike a farm corporation, an investment corporation typically earns most of its income through passive investments that in turn are taxed at a higher corporate tax rate.
This higher tax cost, combined with the additional costs to file a corporate tax return, are costs that would otherwise not be incurred if the assets were held personally.
Unlike many farming corporations, the shares of an investment corporation cannot pass tax free to the next generation nor can they be sold to use the lifetime capital gains exemption.
As a result, the shares are deemed to be disposed of at fair market value when the shareholder dies. This could be a significant growth in value, depending on the value of the assets in the corporation, which in turn could result in a large capital gain being taxed on the shareholder’s final tax return.
The decision to keep or dissolve a corporation after you retire is not an easy one. Not every situation is the same and there are many variables to consider.
Consult a tax adviser to discuss your situation and the variables that could affect your decision.
