Managing corporate farm operations requires many decisions regarding cash flow and financial management. What to grow, how to grow it, and when to harvest are key drivers of success.
During winter, your thoughts may turn to another consideration. How will you pay yourself or your family?
Generally, if your farm is a corporation, you have two main options — pay yourself a wage/salary or declare dividends.
Choosing to pay a salary can offer a few key benefits to the recipient. Wages qualify for the Canada Pension Plan (CPP), and will allow the accumulation of Registered Retirement Savings Plan (RRSP) contribution room for the individual. Key questions you should ask include:
- Do I want to invest up to $5,496 in CPP per year?
- Do I want to use RRSPs to have more diversity in investments, or would I rather invest in the farm?
A salary paid to a family member must be considered reasonable, attributed to duties performed within the daily operations, and deposited into the individual’s bank account.
Furthermore, salary can require additional accounting processes and remittances to the government. Failing to adhere to various deadlines can leave the farm exposed to interest and penalties.
In terms of the farm itself, salary compensation is deducted against income for tax purposes. A dividend by comparison, is declared on after-tax income and is not a tax deduction to the farming business. However, keep in mind, that our tax system follows the concept of integration, any cash you receive personally should have similar amounts of total tax paid, whether it is received as a wage or dividend.
For simplicity, you may prefer to take a dividend annually. Since dividends represent a distribution of previously taxed funds, they are taxed at a lower personal tax rate. Since there are no remittances associated with dividends, they remain simple and less of an administrative burden (although they could result in quarterly personal instalments).
When considering dividends as an option, you now must also consider tax on split income (TOSI). TOSI targets dividends distributed to family members and lays out a few key limitations. You will want to look at the bright line tests for a dividend to family members. This includes whether the family member owns more than 10 percent of the shares or is working more than 20 hours per week on the farm.
There is not a one-plan-fits-all solution for you and your farm. Additionally, you are not forced to choose one option over the other. You may decide to select a blend of salary and dividends, which is perfectly acceptable. Regardless of your decision, it is important to know the advantages and disadvantages of your decision because it will directly affect your personal and farm finances.
Colin Miller would like to thank Riley Honess and Travis Dow of KPMG for their assistance with writing this article.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.