How Will Aging Farmers Fund Their Retirement?

How Will Aging Farmers Fund Their Retirement?

The aging of the Canadian population is common knowledge as the boomer generation begins to enter the senior years, says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm community.

By July 1, 2012, the median age of the Canadian population was 40 years. Half of the population was older than 40 years and half was younger. In the past 20 years, between 1992 and 2012, the median age in Canada has increased by 6.4 years.

As of July 1, 2012, the number of seniors aged 65 or older was estimated at 5,186,800 out of a total population of 34,880,491. They represented 14.9% of the total population, up from 11.6% in 1992. The number of seniors is approaching the number of children. Between 1992 and 2012, the number of seniors increased 57.6%, while the number of children fell 3.6%. As a result, on July 1, 2012, children outnumbered seniors by 476,300, compared with close to 2.6 million on the same date in 1992.

What is even more remarkable is the aging of the farm population. For the first time, operators in the age group 55 and over represented the largest share of total operators. They accounted for 48.3% compared to 40.7% in 2006, up from 32.1% in 1991.

One impact of this is that tens of billions of dollars of farm assets will be transferred to fund the retirement years of the aging farm generation. But are there other ways to fund that retirement than depending solely on the sale of land?

Other than the basic methods of accumulating retirement funds, there are some additional strategies you can employ. If the farm is incorporated and the owner has T4 income he or she can fund retirement income out of the corporation using an Individual Pension Plan (IPP).

There are also insurance-based solutions, particularly if there is an existing need for insurance. Components of the insurance policy can be tax deductible to the corporation while providing you with a vehicle to tax shelter savings to fund future retirement. Insurance-funded solutions could also be used as collateral for a loan to avoid any tax implications on withdrawal from the corporation or simply withdrawn from the policy directly.

If a full or partial sale of the farm is contemplated you could use the proceeds to purchase a life annuity to pay a fixed annual amount. Life annuity payments receive preferential tax treatment since they’re taxed at a prescribed rate.

Insured life annuities are essentially the same as above, however, they provide a maximum guaranteed income while preserving the value passed to the estate on a tax exempt basis. The principal is protected, though insurance and premiums are generally paid from the income generated by the life annuity. You may want to shop around as very attractive rates of return can still be achieved using this strategy.

There could be a large amount of land changing hands in the near future from the aging farmers, and these farmers will have options for what to do with the funds from the sale.

Grant Diamond is a tax specialist with FBC, a firm dedicated to providing farmers and small business owners with expert tax services and advice for over 60 years. FBC has branches in BC, AB, SK, MB, ON and NS to serve its 50,000 Members. FBC also provides financial & estate planning. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, email fbc @ fbc.ca or call toll-free 1-800-265-1002.

Accurate as of April 8, 2015

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