More than 25 per cent of all farming operations are incorporated, according to the 2021 Agriculture Census, and of those corporations, 87 per cent are labelled as family corporations.
Statistics Canada defines a family corporation as an incorporated business operation in which an individual or members of a family own the majority of the corporation’s shares.
Many family farms are deciding to incorporate, and it may be the right decision for your family’s operation as well. The primary benefit sought after through incorporation is tax savings, but there are many other benefits as it relates to estate planning and personal liability.
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That said, incorporation may not be right for all operations, so it is best to always speak with tax and legal advisers before making the decision to incorporate.
Circumstances where incorporation can provide significant benefit include:
• Having a substantial farm income.
• Having a large-enough off-farm income to cover your personal expenses.
• If you are planning to sell the farm and all it’s assets.
• If you are planning a transfer to the next generation.
A corporation’s income is taxed at significantly lower rates than personal income.
In Saskatchewan, generally the first $500,000 of income for a corporation qualifies under the small business tax deduction and is taxed at a rate of 10 per cent (until July 1, 2025, when it will increase to 11 per cent) and at 27 per cent for all amounts above $500,000, while the highest personal income tax bracket calls for a rate of 47.5 per cent.
If your farm is becoming more profitable and you no longer require all of your yearly income to cover personal expenses, this lower tax rate will allow you to save for future growth of the business or pay off debts held by the corporation.
If you have a significant off-farm income that can cover a large part of your personal expenses, like many new farmers do, incorporation will also allow you to invest more income earned by the farming business back into growing the herd, buying more ground or new equipment or repaying debt, while paying significantly less to the government. In this case, you can also protect farm income from being applied to your higher, personal income tax bracket based on your off-farm income.
If you are planning on winding down farming operations for retirement, incorporation may save you a significant tax bill on the year of your auction. A previous article from our firm covered this topic and can be found here.
Incorporation can also prove advantageous when it comes to planning your estate and transferring the farm to your children.
As a sole proprietor, upon death, all of your assets must be transferred to your children or other beneficiaries. When transferring inventory and inputs such as livestock, feed or crops on hand, the Canada Revenue Agency deems the assets sold at fair market value and the transferor must foot the tax bill.
However, if those inputs and inventory are held by the farming corporation, the corporation survives past your death and its shares can be sold or transferred to your children for anywhere between $0 and fair market value, thereby delaying the tax on those assets until they are actually sold.
When rolling your sole proprietorship or partnership into a corporation, there may be an opportunity to crystallize your lifetime capital gains exemptions of $1,250,000 and obtain access to that amount of money without any tax. Our firm recently wrote an article on this process, which can be found here.
Corporations are their own separate entity from their shareholders, and this can come with liability protection. They can work as a shield, in most cases, to protect personally held assets should something happen to your business.
In certain situations, directors of a corporation can be pursued for the actions of a corporation, so it is important to keep that in mind when agreeing to act as a director. Additionally, if a corporation’s debt has been personally guaranteed by a shareholder, that shareholder remains liable for the debt.
While incorporation provides numerous advantages as described above, it may not be the best option for all family farming operations.
If a large portion of your farm’s income is used to cover personal expenses and you have no significant off-farm income, the cost and complexity of incorporation may not be sufficiently beneficial.
There are upfront costs to incorporate, as well as annual accounting and administrative fees to carry on business as an incorporated farm.
Every farming operation is unique and so it is always best to speak to a tax or legal adviser to better understand if incorporation is the right step for you.
Blake Barnes is a summer student with Stevenson Hood Thornton Beaubier LLP in Saskatoon. He can be contacted at office@shtb-law.com. This article is provided for general informational purposes only and does not constitute legal or other professional advice.
