Navigating tax rules during transition

Transitioning the family farm to the next generation can be challenging on many levels, and experts say being aware of Canada's farm tax rules can help ease at least that part of the succession process.

Familiarity with Canada's tax rules and working with tax experts can help you plan for tax changes to the business during transition.

It's important, they say, to focus on the big picture of the transfer rather than on the desired end result.

Shawn Deyell is a Guelph, Ont.-based tax partner with RLB Chartered Professional Accountants. He recommends farmers familiarize themselves with possible tax changes to their business during the transition process, since knowledge will empower farmers to avoid any possible pitfalls.

Common issues

Common tax issues arise when Canadian farmers try to pay dividends from one family corporation to another.

Splitting a corporation between siblings, Deyell says, activates the tax. However, if the farm is split ahead of transitioning to more than one other family member - in essence, the ability to purchase the farm in separate plots rather than dividing it post-transfer - the business, and taxes, are laid out differently.

Deyell says capital gains exceptions can also apply in family farm sales, but the exemption is negated if the receiving party starts selling farm property within three years of the initial transfer. Sometimes, though, circumstances arise where selling parts of the farm is a necessity.

In cases where these external pressure factors are at play, those selling can make a case for further exception with the Canada Revenue Agency. However, Deyell says there is no guarantee such petitions will succeed.

Deyell adds farm owners can find themselves in a “double-taxation” situation if, after buying shares of the farm, they sell farm assets. However, if owners sell in the same manner they made the initial purchase, the double taxation doesn't happen.

Business deductions in the form of “unreasonable” employee wages can also bring issues.

“If you have someone who does $20,000 worth of work but pay him $100,000, that extra $80,000 is considered unreasonable... The person receiving it still gets taxed the full amount too,” Deyell says. 

“Everything depends on the characteristics of the succession plan,” Deyell says.

Process-centric approach

Matt Venne, also a tax partner at RLB, agrees with Deyell regarding the importance of focusing on succession plan characteristics. He adds it’s important for farm families to recognize the complexity of the tax system in relation to farming and farm exemptions.

“Too often [families] look at the conclusion rather than working through the process,” Venne says.

“Producers assume because they have farm exemption available for their transfer or succession, that there are no tax implications. Other things like alternative minimum tax can be triggered... This stuff is really complicated. That’s why it’s so important to get professional advice."

Bottom line

Canada's complex tax system means it's critical farmers are familiar with the rules and seek expert advice - especially when transitioning to the next generation. The farm business setup and method of transition could mean additional taxes.

Article by: Matt McIntosh