Every business owner has tax obligations, but annual tax requirements can be daunting for farmers, who often face volatility in their income from year to year.
“It is not unusual on the farm to have a good income and a hefty tax bill one year and substantially less farm income the following year, with no avenue to recapture the income tax paid in the previous year,” says Merle Good, a tax strategy specialist with Alberta Agriculture.
The Canada Revenue Agency had a “five year block average” provision in place for many years, allowing taxpayers to average a high income year over the previous four years, thereby reducing tax liability in the current year. This provision has since been repealed.
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One remaining option to help farmers manage their tax obligations is to create a family farm corporation.
“In the current economic climate, where input costs, commodity prices and farm incomes are especially volatile, the flat 14 percent corporate tax rate has become very attractive to many farm families,” says Good.
The small business corporate income tax rate in Alberta for 2011 is 14 percent for up to $500,000 of taxable income, whereas the 2011 tax rate for an unincorporated business is 39 per cent on taxable income earned after $128,000.
Even the middle tax brackets are high: income between $40,000 and $80,000 is taxed at 32 percent.
Using a corporation this year can be tax effective. Under current income tax rules, farmers can transfer their grain and livestock inventory to their corporation in exchange for shares under Section 85 of the Income Tax Act.
This is not a sale and thus no income is reported by the producer. Any farm sales and income received after the date of incorporation will be reported by the company and not the farmer in 2011.
“Under a corporate ‘family farm’ structure, many business decisions can go beyond simple income tax management and be based on considerations about overall profitability,” said Good.
“With many farmers still requiring some off-farm income, a corporate structure can also be beneficial as no farm income would be reported on the personal tax return.
“Restructuring a farm business as a corporation certainly manages some income tax issues, but is also an excellent mechanism within which to start dealing with succession planning for family farms.… Addressing an income tax concern can become a catalyst to start your succession planning discussion with the next generation.”
Alberta Agriculture has provided a tax advice column as part of its Agri- News service.
