In Canada, the average age of farmers has steadily increased over the last 20 years.
A recent study by the Royal Bank of Canada, Boston Consulting Group and researchers from the University of Guelph found 40 percent of farm operations are expected to see these farmers retire in the next 10 years. The study also showed that around 66 percent of Canadian producers don’t have a succession plan in place.
Retirement represents the fulfillment of lifelong dreams, the ability to “hang up the hat,” and embrace the leisure and freedom of a flexible schedule.
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To ensure these retirement goals are realized, a plan must be in place. Below are a few options to consider.
Transfer as a gift
Transferring the farm as a gift of qualified farm property is simple and cost effective. If certain criteria are met, you will have no immediate tax consequences. However, you need to keep in mind that when transferring the assets as a gift, you immediately give up your rights concerning any future gains in the farm values and income. If you are considering a gift, you will want to make sure that you are financially prepared for retirement before proceeding.
An alternative to gifting — selling the assets and receiving proceeds of disposition — can ensure capital is in your hands for your retirement.
If qualified farm property (land and equipment) is being sold to your children, any price can be applied between the adjusted cost base and fair market value. This can allow you to fix the amount of equity you want to receive back from the assets.
If you elect at a value higher than the adjusted cost base, you are creating a capital gain, and potentially taxable income. However, you may be able to use any remaining capital gains exemption to reduce this tax exposure on any qualified land, family corporation shares or partnership interest.
When selling assets, as opposed to getting the cash up front, you can receive a promissory note that allows you to get payments over time. This can simulate a pension fund. An added benefit is that the note does not need to be fully repaid if issued to your child, and if desired, you can forgive the note in your will without negative tax implications to your estate or child.
Estate freeze
For corporate farms, an estate freeze is normally structured by exchanging the value in the farm that exists in your common shares into redeemable, fixed value preferred shares. Your family or new investors can then join the family farm by purchasing new common shares.
This would allow individuals to buy into the farm and profit from the future growth while your preferred shares can be redeemed over time.
For example, if your corporate farm is worth $10 million, this value would be reflected in the value of your common shares. The freeze would transfer the current value from the common shares into redeemable preferred shares that you can redeem later. This would result in new members being able to buy common shares in the farm at a nominal amount, making it possible for them to be included in the organization as common shareholders. Any future growth above the $10 million would then be attributed to everyone who now owns common shares. You would still have $10 million of value in your preferred shares that you could use over your remaining lifetime to fund your retirement.
This is not an exhaustive list of all the possible succession plans available. There have also been some recent legislative changes, giving farm families more options in this area.
Regardless of your plans, it may be worth having a discussion with your trusted adviser.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. He would like to thank Karrie Geremia and Keanu Funa of KPMG for their assistance with writing this article.
