Incorporating the farm: Here’s what to expect

Making the jump from a sole proprietorship farming operation to a corporation brings with it several advantages, along with some additional management responsibilities.

Tax changes

One advantage of incorporating is the ability to defer taxes.

Todd Kirkpatrick is a partner with PSM LLP in Lloydminster, Alta. He says tax deferral creates options.

“Maybe you want to delay a capital gain on some land, maybe you own some farm assets personally and by rolling into the company, you’ve got an opportunity then to lay a tax bill later on,” Kirkpatrick says.

Katya Loree, a manager with Catalyst in Calgary, says farmers will have to do a separate corporate tax return.

“There may be some tax election forms that we need to complete to make sure that moving things like inventory and equipment doesn’t trigger a taxable event for the previous farm operation,” Loree says.

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New banking

With the change comes more responsibility on the banking side, according to Loree, including getting another bank account and setting up credit cards.  

“All of the long-term debt and credit cards would need to be put into the corporate name, so there would be some discussions with the bank to make sure that could all be set-up.”

Liability shift

Kirkpatrick is quick to point out incorporating is about limiting risk.

“It tells the world that your only liability risk is the money you have invested in the company. So, if I started a farming corporation and I invested $10,000 into it, and then there was major oops that wasn’t insurable, I wouldn’t have any more risk than my initial investment.”

Who to tell?

It’s important to spread the word once all details are settled with the accountant and lawyer.

Both Kirkpatrick and Loree say farmers should notify their banker, insurer and retailers they regularly deal with about the change.

Kirkpatrick says the considerations when making the change from a sole proprietorship to incorporation should centre around tax.

If a farmer is thinking about making the jump, he says, they need to ensure tax savings of incorporating outweigh those of sole proprietorship.

Bottom line

Deciding to incorporate the farm can be a big decision but learning about different tax rules and how incorporation limits risk can be positive developments for a farm operation, experts say.

Article by: Craig Lester