Proposed federal tax changes aimed at ‘income sprinkling’ and other tax reduction measures used by corporations — including those owned by farmers — have ignited a storm of controversy.
But there are “a lot of other tax strategies” that farmers can use, say financial planning experts.
In July, federal finance officials announced proposed changes to the Income Tax Act that, if passed, will change the regulations around lifetime capital gains deductions, income splitting, and incorporating farms, among other things.
Critics — including a growing number of farm groups — have decried the changes as well as the 75-day public consultation process, which ends Oct. 2 while most farmers are busy with harvest or fall work.
Both Finance Minister Bill Morneau and Prime Minister Justin Trudeau have vowed to push ahead, saying the changes are about levelling the playing field for all taxpayers. But although the two politicians say the target is high-income earners, federal finance officials are also concerned about farm corporations.
“The government doesn’t like it when farmers are using their farming corporation as a pension plan as a way to defer taxation — it doesn’t see that as what it was designed for,” said Jean-Pierre Laporte, CEO of Integris Pension Management Corporation in Toronto.
“The government realized it’s losing a lot of tax revenue because that’s exactly how a lot of farmers have structured their affairs.”
That’s made the government keen on closing “what it perceived to be a loophole” and if the proposed changes go ahead, farmers will be affected, he said.
“Most of the time, farmers operate through a private corporation, and the tax changes are designed to impact how those private corporations are taxed in an adverse fashion,” said Laporte.
“Almost all of the farmers who have businesses that are incorporated will be impacted by these changes.”
But these changes are also “a good wake-up call” for producers, said financial planner David Derwin.
“This type of planning is all extremely important, but it’s not necessarily urgent,” said Derwin, an investment adviser at PI Financial. “Regardless of what happens, this process is going to be a good way to get people to think about what they should do for retirement planning.”
And in some cases, these changes will be the push producers need to “ask what else is out there” when it comes to their retirement planning.
“They can’t necessarily do what they did in the past going forward,” said Derwin. “There have been a lot of other tax strategies that have been made available for farmers that an RRSP or pension plan wasn’t necessarily the best tool to look at.
“There have been some opportunities that have been overlooked, but this is the time to look at the bigger picture and say, ‘How do these other tools fill a lot of those gaps?’”
Personal pension plans
And one of the most valuable — and underutilized — tools is a personal pension plan.
“If the idea is to shelter as much corporate tax as possible, there’s really no better way than a personal pension plan,” said Laporte.
A personal pension plan is a registered plan with fewer limitations and greater benefits than RRSPs or their company and government counterparts, he said. Those benefits include larger tax-deductible contributions, credit protection, tax-free intergenerational transfers, and tax-deductible corporate funding, said Laporte.
“Personal pension plans offer seven additional tax deductions at a corporate level that don’t exist when farmers use an RRSP to save for their retirement,” he said.
“The personal pension plan is a tool that addresses a lot of those issues with the potential tax changes,” Derwin added. “It addresses so many things — diversification, generating income, protecting your assets, transitioning from one generation to the next.
“There are some tax benefits, but even over and above that, these other things make them so flexible in longer-term planning.”
Despite the added benefits of personal pension plans, most farmers don’t currently use them, said Laporte.
Most people view pensions as something only available from the public sector and larger private sector companies, so the rules can seem overly complicated for small businesses such as farms.
“The path of least resistance means keeping it simple,” said Laporte. “A lot of farmers prefer the simplicity of just paying dividends to family members with no fuss, rather than going through the bother of setting up a pension plan.
“Now, though, they won’t have a choice. They’ll need to at least look at the pension solution if they want to avoid paying all this extra tax.”
It’s too soon to say whether the federal Liberal government will persevere or back down in the face of the growing backlash from farmers, doctors, and other small-business owners.
But ultimately, “the trend is toward more taxation,” said Derwin.
“Whether these tax changes happen this year or down the road, these pension plans are a good investment and a good planning tool in and of themselves,” he said.
“Even if the government doesn’t make dramatic changes, I think it’s a smart planning tool to look at.”