What keeps you up at night? Up and down commodity prices? Weather? Finding (or keeping) rental land?
For accountants Ryan Stevenson and Dean Gallimore, it’s the thought of farmers getting whacked with a tax bill they could easily avoid.
“One of the best things about farming is that farming companies can transfer from one generation to the next without incurring tax liability,” Stevenson, who works for KPMG in Lethbridge, told FarmTech attendees.
“With farms you can actually roll that farming company down to the next generation. As long as you stay onside with the rules, it can go on from generation to generation. It’s a really great tax tool that you have available to you.”
Farm companies can also sell shares of their company and use their capital gains exemption on it, Stevenson said, adding more farmers are using this option, especially with corporately held land.
But if you’re not careful, you can easily run afoul of Revenue Canada tax rules, which require that at least 90 per cent of a company’s assets be deemed farm assets in order to qualify for this tax break. Holdings such as investment accounts or other enterprises that do not pertain to farming are “bad assets” in this regard, said Stevenson.
“That could leave you with a significant tax bill,” he said, “If you tried to sell the shares, those assets would be no good, and you could lose your exemption on the sale.”
Farmers should be closely monitoring non-farm assets in a farm corporation or family farm partnership to ensure they “don’t fall offside.”
It’s certainly something you want to watch out for,” said Stevenson. “If you fall offside at the wrong time for one day and someone passes away, you can get hit with a significant tax bill.”
Regularly go over your balance sheet, talk to your accountant, and remember that it can get tricky when it comes to things such as the value of an asset, said Gallimore, who has specialized in farm taxes over his three-decade-plus career.
The 90 per cent rule is based on fair market value of the assets in the company.
“It’s not a net calculation,” he said. “The test is based on the value of the asset not the net of the debt.”
Another potential pitfall is farm partnerships.
“Oftentimes we see individuals farming in a farm partnership with no formal agreement in place that outlines the terms of the partnership,” said Stevenson.
That’s fine in the sense that a formal partnership agreement is not required by law, but it “can become a problem if someone dies at a bad time,” he said.
If, for example, income is constantly deferred until February every year and the partner passes in March, then upon the partner’s death, all the income needs to be reported for the current year. Most farmers have very little expenses early in the year, so the surviving partner could be stuck with a significant tax bill.
“One of the easiest ways to avoid that situation from happening is to have a formal agreement in place saying the partnership continues after death,” he said.
The document doesn’t need to be lengthy or complicated, Gallimore added.
“A one-page document saying ‘This partnership does not dissolve on the death of a partner.’ That would avoid this significant risk.”
The cash basis rule
Individuals can have a similar problem.
“As individuals, we have a December 31 year-end,” said Gallimore. “So most individual farmers load up on expenses in the fall — pre-buying fertilizer, buying cattle to put in the feedlot, and deferring most of their cheques until January.”
But again, if the farmer dies early in the year, there are no expenses to offset all that deferred income.
“If (a farmer) passes, what have you got? You’ve got income,” said Gallimore, adding the tax hit could be as high as 48 per cent in Alberta.
Farmers in this situation should think about offsetting their income, he said. For example, if the farmer had a large sum of money in the bank account and used it to purchase cattle, those animals could go to a beneficiary without tax implications.
“With a little bit of proper planning, it is possible to avoid a tax situation,” said Gallimore.
But he cautioned against taking a do-it-yourself approach to tax planning.
Tax laws are very complex and new federal rules are making it more so, he said, so get advice from a qualified professional who knows the relevant details of your personal circumstances.
And then act on that advice, he said.
“Those are some of the things that keep me up at night, as I know of a few clients who would fall directly into these situations.”