Big changes may impact your balance sheet

Has your farm corporation undergone any special tax planning arrangements in the past? Potentially, an estate freeze or rolling in assets from frozen redeemable shares?

If so, your farm corporation might be impacted by recent accounting changes to how preferred shares (commonly referred to as “frozen shares”) are reported in your financial statements.

Recently, the Accounting Standards Board amended various reporting standards. For farm corporations that are impacted by these amendments, it likely means significant changes to the farm’s balance sheet — changes that could be a surprise to your lender(s).

Even though your farm is the same today as it was yesterday, this accounting change may drastically impact the farm’s financial statement presentation, causing significant increases to your liabilities and significant decreases to your equity reported.

Generally, your farm will be impacted if it has a loan agreement that requires the farm’s financial statements to be reviewed or audited annually by an independent Chartered Professional Accountant (CPA).

Specifically, operations that will likely be impacted are those that have their financial statements reviewed or audited in accordance with “Accounting Standards for Private Enterprises”, and have undergone a tax planning arrangement where “frozen shares” were issued.

To illustrate a common example, imagine Mom and Dad are ready to retire and want to transfer the farm to their children. To facilitate the transfer and safeguard the parents’ retirement plan, a commonly used, tax efficient, technique is to “freeze” the farm’s value.

In this arrangement, the parents transfer their common shares (growth shares) to the farm corporation in exchange for frozen shares equal in value. The next generation can then subscribe for the new growth shares of the farm going forward. It is the new preferred shares that are likely impacted.

Historically, these types of arrangements kept the balance sheet virtually unchanged. The preferred shares were recorded at a nominal amount as equity, despite having a high redemption value.

Impacted operations with fiscal years beginning on or after Jan. 1, 2020, may be required to disclose some or all of the preferred shares’ redemption value as a financial liability.

As stated earlier, because loan agreements commonly require that the farm maintains certain financial metrics, such as debt-to-equity ratios, these changes may unintentionally result in your farm violating debt covenants or other agreements as they are currently worded.

If you think your operations may be affected by this accounting change, you should consult with your trusted adviser.

Colin Miller is a Chartered Professional Accountant and Partner in KPMG’s Tax practice in Lethbridge. He can be reached at (403) 380 – 5700 or by email at He would like to thank Riley Honess and Joseph Opper of KPMG for their assistance with writing this article.

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