“I was very, very offended by all of this,” said Kurt Oelschlagel, of BDO Canada, who was part of a panel on the government changes at the CAFA event, held Thursday in Guelph and online.

Many of the slides in his presentation were made redundant, as Finance Minister Bill Morneau backtracked Thursday on yet another part of the changes.

The Liberal government’s proposed changes to small business corporations were initially aimed at high-income earners who have created personal corporations to manage their incomes to pay taxes at the lower corporate tax rate.

However, when accountants started examining the potential changes, they were much further reaching and complex than expected. They included changes to capital gains tax, tests that determine whether dividends distributed are to people who have contributed to the business and punitive tax rates on savings made within a corporation.

This week, Morneau has backtracked on two of those proposals, including capital gains. The government will now allow up to $50,000 per year to be saved in passive investments in corporations. He says that means that only five per cent of small business corporations will be affected by the higher passive investment return taxation levels.

At the Thursday event, the organizers played Morneau’s latest backtrack on the policy live, as he stood at an Erinsville, Ont. farm and talked about delaying the implementation of the capital gains changes.

That means most of the day’s presenters had to change their presentations after that announcement and the announcement on passive investment earlier in the week.

Justin To, director of policy and budget director for the minister of finance, was slated to speak to the meeting, but he backed out, citing the announcements by the government of changes to the tax proposals and especially the fact Morneau was making an announcement the same day.

“We live in a representative democracy and it looks like politics is coming into play,” said Stephen Sweeney, a Waterloo, Ont.-based partner at Miller Thomson LLP, a law firm that works with agriculture clients.

Sweeney said it will take 10 years to sort out all the implications of such significant tax changes and instead he suggested that time be taken to do thorough and well-thought-out tax reform, adding that the modern version of the Income Tax Act came into force in 1972.

“More complexity in the tax system means more creativity for tax advisors,” he says. “I’m not sure if it is good that tax advisors prosper by uncertainly felt by ordinary Canadians.”

Farmers were warned their accounting bills would rise due to the increased complexity and on-and-off changes.

One of the significant changes made by the government is in how it will measure who has meaningfully contributed to the business and therefore deserves remuneration in the form of dividends.

John Mill, a Guelph lawyer who works with farmers and farm advisors on tax reorganization, told the meeting that “family members who meaningfully contribute will not be impacted,” but that there will be little legal flexibility if family members are paid without contributing.

If there hasn’t been a meaningful contribution, then the money will be added to “split income” and taxed at a higher level.

He has concerns about how the amount that’s reasonable to be paid for work will be decided. Would it be possible for the revenue ministry to find someone who would do the work at minimum wage? Then anything above the hours worked at minimum wage rate could be taxed at a much higher rate.

The test for “reasonableness” will take in functions like assets contributed, risks assumed and prior compensation. Documenting hours could become necessary, which is a challenge when farmers live at their work and are on call all the time.

“The CRA is missing the point that farmers grow up in the family business. We train farmers in the family business and on family farms.

“Eight hundred million dollars per year (the total of the revenue increase of the new policy) is idiotic with the enormous societal cost of these idiotic policies,” Mill said.

The question has arisen relating to the payment of children of farmers who farm under a corporate structure.

Sweeney said the new “reasonableness” test will likely drive businesses from paying them through income sprinkling and to making them actual salaried employees of the farm.

Scott Ross, director of business risk management and farm policy with the Canadian Federation of Agriculture, said moving family members to employees, if they deserve to be paid, is one of the main goals of the government.

They want to drive activity away from dividend sprinkling and back to salaries, he says.
There was relief at the meeting that some of the most problematic provisions of the Liberal proposals were off the table, but also anger at the time wasted.

“How much non-billable time have we spent on this since it came out?” asked Oeschlagel, adding that many meetings were held with clients to prepare them for potential quick changes to their business organizations by the end of the year.

There remain a lot of unknowns — which will still mean a lot of work ahead for accountants, advisors and incorporated farms.

— John Greig is a field editor for Glacier FarmMedia based at Ailsa Craig, Ont. Follow him at @jgreig on Twitter.

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Finance Minister Bill Morneau on Thursday announced the federal government “will not be moving forward with measures that would limit access to the LCGE (lifetime capital gains exemption),” nor with “measures relating to the conversion of income into capital gains.”

Morneau’s announcement follows a related move Wednesday, in which the ministry announced plans for a new $50,000 threshold on passive investment income in a given tax year.

Both announcements marked a step back from proposals the government made this summer to limit the use of Canadian corporate income tax rates by “high-income individuals” as a way to gain a “personal tax advantage.”

During its consultations on those proposals, the government said Thursday, it heard from “many farmers and fishers,” among other business owners, that the measures “could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of businesses.”

The federal LCGE today offers a tax exemption for capital gains realized by an individual on the disposition of qualified small business shares, up to a lifetime limit of $835,716 in 2017, indexed to inflation.

Specifically for disposition of qualified farm or fishing property, the lifetime limit in respect of capital gains is $1 million, meaning a farmer can claim an LCGE of up to $1 million on disposition of eligible property, including on transfer of such property to a child.

The LCGE is applied on an individual basis, thus the amount can be doubled to $2 million if both a farmer and his or her spouse qualify for the exemption. Farmers, like other Canadians, are also entitled to a separate tax exemption from any gain on his or her principal residence.

On passive income, the government this summer had proposed measures by which savings held as passive investments within corporations would be “taxed in a manner that is equivalent to savings held directly by individuals” such as by salaried employees.

Groups such as the Canadian Federation of Agriculture (CFA) protested against that proposal, describing passive investments as “vital” for farmers in helping to manage year-over-year risks due to weather or market-related volatility.

Of the planned new $50,000 threshold, the government said Thursday, Canadian-controlled private corporations (CCPCs) that had taxable passive income above that threshold in 2015 represented just three per cent of the CCPC population, but earned more than 88 per cent of total taxable passive income.

Thus, the government said, the “vast majority of businesses will not be affected by the tax changes.” Corporations will see no tax increase on passive investment income below the $50,000 threshold.

Morneau also pledged Monday that measures proposed this summer relating to “income sprinkling” will be simplified, “with the aim of providing greater certainty for family members who contribute to a family business, including a family farm.”

The government also announced Monday it plans to cut the federal small business tax rate to 10 per cent effective Jan. 1, 2018, and to nine per cent in 2019.

“Farmers are pleased to see that Minister Morneau listened to concerns from CFA and other groups and, as a result, decided against plans to limit the lifetime capital gains exemption and options to convert income to capital gains,” CFA president Ron Bonnett said in a separate release Thursday.

“Both measures would have led to enormous complexity and added costs for intergenerational farm transfers and could’ve even encouraged farmers to sell their businesses to non-family members,” said Bonnett, a cattle producer from Bruce Mines, Ont.

Morneau’s other announcements earlier this week “also appear to be steps in the right direction,” the CFA said, adding it plans to study the final proposals once the related legislation is tabled in Parliament.

“We want to see farm and fishery families succeed,” Morneau said in the government’s release Thursday. “As we move forward with creating a fairer tax system for the middle class, we will work to protect family farms and fisheries, and the ability of all family-run business owners to pass down the results of their hard work to the next generation.” — AGCanada.com Network

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The federal finance department tabled a series of proposals July 18, opening them for public comment until Oct. 2 for a proposed effective date of Jan. 1, 2018.

The proposals call for an overhaul of the private corporation tax system. According to the federal finance department, the proposals are meant to “ensure that high-income individuals cannot use strategies involving private corporations to gain unfair tax advantages.”

The proposals speak to measures such as income splitting, dividend payments to family members, and lifetime capital gains deductions.

The government noted the number of Canadian-controlled private corporations (CCPCs) has increased “substantially,” from 1.2 million in 2001 to 1.8 million in 2014, with an “increasing proportion of self-employed individuals” now choosing to incorporate.

CCPCs, the finance department said, now also account for more than twice the share of taxable active business income (relative to gross domestic product) that they did in the early 2000s.

But the proposals, according to the Ontario Federation of Agriculture, also stand to affect an estimated 25 per cent of Canadian farms that operate as private corporations.

The comment period alone is a point of contention for groups including the Canadian Federation of Agriculture, which recently said a “75-day consultation in the middle of the harvest season is not enough to allow a comprehensive review.”

Given the consultation timeline, “there has been nowhere near enough time to understand the implications of the proposals,” Todd Lewis, president of the Agricultural Producers Association of Saskatchewan, said in a separate statement. “The changes are very technical in nature, and we need more time to fully understand their potential impacts.”

As for the proposals, they represent “transformative changes that would bring about major uncertainty for farms that are incorporated, especially for multi-generational family farms,” CFA president Ron Bonnett said in a release Thursday.

“The government must recognize that small business owners face unique risks and costs — especially in agriculture where farmers must plan for a wide range of factors that can affect their operations from year to year.”

‘Higher costs, fewer options’

Business groups including the Canadian Federation of Independent Business, Canadian Bar Association, Canadian Medical Association and others on Thursday announced a joint campaign as the Coalition for Small Business Tax Fairness, to oppose the tax proposals.

“If implemented, the proposals will restrict small business owners from sharing income with family members; limit certain forms of saving in the business, making the firm more vulnerable in bad economic times and less able to innovate and grow; and change capital gains rules which could make it more difficult for business owners to transfer their business to the next generation,” the coalition said Thursday.

Agricultural and related groups signing on so far for the joint campaign include the CFA plus the Canadian Pork Council, Canadian Cattlemen’s Association, Grain Growers of Canada, Canadian Horticultural Council, Grain Farmers of Ontario, Western Canadian Wheat Growers Association, Canadian Association of Farm Advisors, Agricultural Manufacturers of Canada and Canadian Veterinary Medical Association.

“If these changes are implemented as proposed, farmers will face higher costs with fewer options to manage business risks, and the complexity of the proposals could lead to other unintended consequences,” the CFA said Thursday.

“The proposed changes to the tax code will dramatically limit the ability of (farm) families to invest in their businesses, encourage the next generation to remain on the farm, and engage in succession and retirement planning,” Grain Growers of Canada president Jeff Nielsen, an incorporated grain farmer, said in the coalition’s release.

In a recent separate statement, Ontario Federation of Agriculture president Mark Wales said that under the proposals, any farmer who has incorporated his or her business needs to review his or her succession and tax plans with an advisor, “to ensure they make sense under the proposed changes.

“The tax implications of not being in compliance with the new rules could be severe,” he said, noting the changes could also “penalize farmers who choose to transfer their incorporated farm business to the next generation.

“It is completely unacceptable that legislative changes would make it easier and lower the tax bill for a farmer to sell their farm business share to a stranger, rather than their own child or grandchild.”

“In my view, this is the biggest tax reform package since 1971,” farm business management expert Merle Good told Alberta Farmer’s Jennifer Blair recently. “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.”

“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,” Allan Sawiak of accounting firm Kingston Ross Pasnak in Edmonton said in the same article. — AGCanada.com Network

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“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.”

Special election

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.

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The North Dakota Farmers Union and other groups that collected signatures to put the referendum on the ballot say family farmers cannot compete with large agricultural firms with no ties to the communities where they operate.

Corporate and foreign control of U.S. farmland has been a hot-button issue in several major agricultural states in recent years as a multi-year commodities boom that began in 2007 has attracted non-farm investors.

State laws prohibiting corporations and foreign entities from owning U.S. farmland complicated a $4.7 billion acquisition in 2013 of U.S. pork producer Smithfield Foods by China’s Shuanghui International (all figures US$). The deal ultimately closed.

This February, a U.S. district judge issued an injunction barring Nebraska officials from enforcing the state’s ban on farmland ownership by corporations.

The North Dakota groups are campaigning for a “No” vote on the referendum, rejecting Senate Bill 2351, which was signed into law in March 2015 by Republican Governor Jack Dalrymple.

The referendum is the only measure on the state’s primary ballot, which is dominated by a Republican fight for the governor’s office.

Supporters of the bill want a “Yes” vote to approve the law.

They argue that dairy and pork operations are on the decline in the state and cannot survive without corporations that can finance expensive equipment and compete regionally, according to the Yes for Dairies + Pork Producers website.

North Dakota, with about 740,000 residents, has a heavily agricultural economy, producing grains and oilseeds.

It is one of nine states that have laws limiting corporate farming, according to the National Agricultural Law Center. The North Dakota law, which dates to the Great Depression, says farming or ranching companies must have no more than 15 shareholders or members who must belong to the same family, to a distance of first cousins.

Senate Bill 2351, which was supported by Governor Dalrymple, would exempt dairy and swine production from the corporate farming prohibition.

UPDATE, June 15, 2016: Unofficial results posted on the North Dakota state government website Tuesday night put the final vote count from the statewide ballot measure at 98,677 votes for “No” and 31,679 votes for “Yes.”

— Reporting for Reuters by Fiona Ortiz and Karl Plume in Chicago.

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In Canada, 98 per cent of farms are family farms and of the 200,000 farms in the nation, very few are corporate in design. If they are, it is to take an advantage that allows for better taxation and extensive intergenerational participation. From an environmentalist perspective, corporations are seen as companies that continually pollute, keep secret their activities while safeguarding themselves behind barriers. I have seen this “on-guard” structure employed worldwide from heavy metal fabricating to food processing. As the transparency of the world unfolds, we learn that there are no easy answers and always space for improvement.

As a consumer, our participation is measured through GDP or the amount we spend on goods and services produced. To produce something or to sell a service requires a consumer to buy it. Do we need all that we can buy? No, but our buying supports the manufacture of it and that is a measure of the financial spine of a nation.

• More with Brenda Schoepp: The secret of success can be found in a simple breakfast spread

Agri-food manufacturing is a top player in Canada, bigger than auto manufacturing in terms of GDP and employment. Interestingly, 80 per cent of all agri-food manufacturing is done by small- and medium-size enterprises, but it is the huge corporates that seem to attract attention. Although we once saw them as stand-alone giants, impermeable and stoic in response, we know now that they are very vulnerable to consumer backlash and can be hailed out like any other food enterprise.

When Kellogg announced closing its plant in Ontario due to high costs, most felt it was more like the outcome of unresponsiveness to consumer demands. After 80 years in Canada the cereal manufacturer failed to respond to demand for less sugar in breakfast cereal and the cost was bitter for the company and the 500 workers employed there. This year, Hershey announced it will make candy without high fructose and gluten. This will put it in the enviable position of producing good-for-you candy, the first step in a food journey we have talked about in this column before, such as nutrient add-ons to chocolate and other favourite snacks.

These shifts in response to consumer preferences do not occur overnight. The CEO and the board have to determine if it is a fad or a forever shift and then have the whole team working toward a favourable outcome.

A&W based its production and marketing on extensive consumer engagement and the entire company went in one direction. More than one board has replaced a CEO or chair because of a disconnect or disrespect to the client (think Lululemon) and this is an indication that corporations now recognize they must be as transparent as packaging film in this day and age.

Corporations also exercise extensive political power. In the past they have made an effort to appear apolitical but now that has changed and they are making statements in favour of the consumer — and their shareholders.

Discriminatory legislation, such as we experienced in Canada with changes to the Temporary Foreign Workers Program prompted many companies to openly criticize government. In the U.S. the openly discriminative state legislation that allowed businesses to refuse service on the basis of religion, sexual orientation and gender garnered swift investment retraction by corporations and massive opposition.

The message is clear: Corporations are transparent and answer to investors, a board and their customer. They are no longer afraid to create the backlash required to right the regulatory wrongs. And the mistakes they have made in the past — by refusing to label food with GMO product, for example, — will quickly become their personal nightmare. That is why those companies on the leading edge go to solutions early in the game and market accordingly.

At a deeper level, all people were born “persons” and this most certainly is well established in North American law. To retreat to exclusion is to go back 500 years. If we really care about what we eat and what we wear as a society then the inclusion of human rights and environment will be part of corporate discloser.

Once seen as the foe of the farmer and the people, corporations are now starting to use their power to protect those who produce the raw product they need. The days of getting it all for nothing and the enslavement of nations is slowly vaporizing as consumers through technology now have a window to the corporate world. Although corporations seem large and unapproachable, every person has a strong vote with their purchasing dollar. That’s about as sensitive a place that consumers can hit and corporations are sure to respond. As they step out of the protective door of the political closet and onto the interactive global stage, corporations can be strong advocates for farmers and their communities.

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