Some are projecting the Canadian government’s debt to potentially reach $1 trillion by this time next year. I do not have a crystal ball but it is a safe bet that the government will need to recover some of this spending.
One of the easiest ways for the government to collect more money is by raising personal and corporate tax rates. Other areas of taxation the government could consider include increasing the capital gains inclusion rate (now at 50 percent but has been up to 75 percent in the past), imposing a higher sales tax, taxing inter-generational transfers, taxing gifts or even imposing an estate tax.
From a tax perspective, these are all worrisome — especially with the high net worth many farms have at today’s land values. We do not know for certain what changes will come or what they will look like but it may be worth considering as you make decisions going forward.
You would not completely change your farm structure in anticipation of potential changes, but there are some important planning points you may consider:
- Tax rate increases — if you are expecting tax rates to increase, it may make sense to take more personal or corporate income now. On the farming side, this would mean deferring less grain sales or pushing income up by using the optional inventory adjustment. No one likes to pre-pay tax, but if the tax rates increase, this could result in tax savings.
If you farm in a corporation, consider increasing your personal income (through additional wages or dividends) and pay the personal tax now and leave the cash in the corporation. This will give you a tax paid shareholder loan account at this time. You can then decrease your personal taxable income in the future (and still maintain your cash draws) if tax rates increase.
- Land sales (capital gains) — if you are seriously contemplating or in the process of selling land, whether to a neighbour or within your farm organizational structure, you may want to consider having this completed sooner rather than later. If the government increases the capital gains inclusion rate or adjusts the rules surrounding the lifetime capital gains exemption, this could have serious tax implications to any contemplated transactions.
- Inter-generational transfers — The rules surrounding these transactions are currently beneficial to farmers whether the transitions occur during life time or on death.
Depending on the stage of your succession plan, you may consider beginning the process to transfer some of the ownership in the farm to the next generation sooner.
This would be beneficial if the government was to adjust the property transfer rules, introduce a tax on gifting or introduce an estate tax.
Before you make any drastic changes, it is always important to ensure they make sense from a business point of view for your farm. As the old saying goes “do not let the tax tail wag the dog.”
The above are items for you to consider as you move forward. Ensure you talk to your advisers and discuss how potential changes in the future could impact your plans.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.