Proposed changes to the federal income tax act could have far-reaching consequences for Canadian farmers.
“The proposals that came out in July are so wide reaching and so complicated that they could significantly impact all farms across Canada,” said Allan Sawiak, a taxation partner at accounting firm Kingston Ross Pasnak in Edmonton.
“This will affect any tax planning for farmers on an annual basis all the way until their deaths. It will always have to be at the back of their minds now.”
The federal government’s proposed changes are to income-avoidance measures such as income splitting, paying dividends to family members, and lifetime capital gains deductions. The proposed moves sparked an outcry, particularly from physicians, but the changes should concern farmers, too, said Sawiak.
“My main concern is that they’re going to go through with these changes no matter what and the farmers are going to be caught off guard, and it will be too late at that point in time,” said Sawiak.
Farm business management expert Merle Good agrees.
“In my view, this is the biggest tax reform package since 1971,” said Good. “These changes that they’re bringing in are primarily going to restrict our ability to convert farmers’ wealth into retirement income and their flexibility in transferring the farm to the next generation.
“All producers should take a very careful look at these proposals and make sure that Revenue Canada realizes that its huge steps maybe have unintended consequences to the farm industry.”
‘Tax traps’ feared
Under the new tax proposals, using a child’s capital gains deductions will come with various restrictions, said Sawiak.
Children under the age of 18 who receive a capital gain will not be able to use their deduction on any property, and capital gains allocated from a family trust will no longer be eligible for a deduction. Children will also “not be able to use their capital gains deductions on the appreciated value of eligible farm property that built up before their 18th birthday,” Sawiak said in a report on the federal tax proposals.
As well, a “reasonableness test” will be applied to capital gains that were realized through farm partnership interests or shares.
If enacted, the changes will create “tax traps,” Sawiak said in an interview.
“These rules are going to be very difficult and costly to follow. There are significant requirements for them to follow within the rules as they’re written.
“At the end of the day, we’re looking at tax rules that are getting very complex. The red tape is growing to unbelievable proportions.”
Estate planning threat
The proposal also includes “a very broad anti-avoidance provision intended to prevent transactions that ‘convert’ a dividend from a corporation to another form of income taxable at a lower tax rate,” said Sawiak’s report. “These proposals are broad enough that they could apply to common situations like selling farm assets to a corporation.”
That provision is the most concerning to Good.
“If I want to sell land to the company so I can create a retirement pension, under these new rules, I may not be able to do that,” he said.
“If a farmer cannot sell land to his company to get cash out of his corporation to retire or create an income stream for non-farm children, I’ll bet that is going to affect 90 per cent of the clients I work with on retirement and estate planning who have companies.”
Good is urging producers and farm groups to “get really involved in this.”
“History shows we have to be active and not just sit back as an industry,” he said, adding that in 1971, producer feedback helped change the rules around farm property rollovers.
Sawiak echoes that plea.
“We do have a very narrow window for the Canadian public to get back to their MPs on these changes,” he said of the Oct. 2 deadline for public comment.
“There’s really not a lot of discussion time in considering these proposals, and farmers will need to get on it before harvest begins, before they’re too busy to concern themselves with anything but their farms.”
Ottawa has included a provision for a ‘special election’ that would allow individuals to use their capital gains deductions under the current tax rules until Dec. 31, 2018. But farmers will need to move quickly this fall to make the most of that special election.
“That will be the last time they can use the capital gains deduction under the old rules, and if they hear about these rules in 2018, it might be too late to fully take advantage of that election,” said Sawiak.
“There actually have to be changes done before the end of this year to get ready for that election. That might mean restructuring their farm or the way they do things on their farm from a tax perspective to get things ready.”
The government has also proposed income splitting restrictions around ‘income sprinkling,’ which transfers money from individuals in a high tax bracket to family members in a lower one. That proposal has angered physicians and other business people who have incorporated and use dividends to split income with spouses and even children.
That’s not something that would typically affect farmers, said Good.
“I’m not too concerned about the income sprinkling one at all,” he said. “In most cases, farmers use their income to expand and grow their businesses.”
Sawiak’s report is available on the Canadian Association of Farm Advisors’ website at www.cafanet.ca.