As you get closer to the date you might consider retiring from your farm operation, it is always better to start planning your exit strategy as soon as possible. This will give you a few options to withdraw funds from the business over a number of years and thereby hopefully reduce your tax burden says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm community.
For instance, if you are thinking about retiring and selling off your shares or assets next year you could be taxed at a higher rate than if you divide the sale over two years by straddling the sale over December this year and January next year. That is because you gain a benefit from the way our tax rates are structured in Canada.
We have what is called a progressive tax rate system. Federally, we are taxed on the first $43,953 ($44,701 – 2015) income at 15%. When we exceed that amount the tax rises to 22%. So, if you took twice the above amount, $87,906 ($89,402 – 2015), from the sale of your property in one year you would be taxed at a higher amount than if you took $43,953 for 2014 ($44,701 -2015).
Another technique involves the transfer of cattle to the child or children who will be responsible for the ongoing operation of the farm. Selling or transferring assets to children must be done at fair market value (FMV). Mr. Diamond cautions that doing so can create a financial burden on the children and a financial hit for you selling the inventory all at once.
An alternative would be to lease the cattle to your children. In effect, you are financing the cattle on their behalf and benefitting from an income stream through the lease.
There is a downside to this tactic, however. Since ownership of the cattle is not transferred and the title to the cattle is still with the parents, there is no mandatory inventory adjustment (MIA) for tax purposes so tax losses cannot be maximized.
If you opt for the lease arrangement, detailed documentation needs to be in place to support this non-arm’s-length relationship since these transactions can be scrutinized by CRA in regard to ownership of property, legal agreements, lease payments and bank account transfers.
Using this lease provision may also create difficulties for the children in obtaining loans from financial institutions since the children do not own the cattle. The banks may request that the parents get involved in the financing of the children’s loan potentially through personal guarantees or liens against the cattle.
Gifting some of your assets during your lifetime is another option open to you. If you are confident that you will have enough to live on during your retirement after you have gifted a modest or significant portion of your estate, then it may be a good strategy for reducing the probate fees and taxes that might be attached to your estate. That is because you have reduced the overall size of your estate that will be subject to such fees and taxes. More importantly, it may also help reduce family infighting about who gets what after your death.
In any case, developing a sound strategy for your farm succession and retirement well in advance of your departure date, including the preparation of a detailed legal will and testament, can certainly help ease your exit from the business.
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 December 3, 2014