Starting a farm with sound advice
The following is Part 1 of a fictional case study created by BDO Canada.
It was a big day for Jeremy – and it was a long time coming. He quit his job. He was now officially a full-time farmer.
It was a great feeling, but scary at the same time. There would be no more safety net in the form of a weekly paycheque. He knew he was making the right decision, but he suddenly had some anxiety about aspects of his farm enterprise.
Jeremy had always wanted to farm, but he came from an urban background. After getting a diploma in agricultural business, he worked a number of jobs for crop protection companies, an equipment dealership and most recently, as a farm manager. At the same time, he was able to rent some acres and equipment from the farmer he worked for.
When his parents passed away within a couple of years of each other, Jeremy inherited their house in a super-heated housing market in a major urban center. He sold the house and bought land, but cash flow was always an issue and he needed a job to keep everything moving forward.
A turning point came when a former boss suggested he look into an opportunity to custom-bale hay and straw for some of the mid-sized operations in his area. He started with an old baler and rented tractor, but within three years he had purchased two newer balers and a couple of tractors to power them. He had more work than he could handle so it was time to make the leap. His plan was to grow value-added crops and use the custom baling enterprise to keep growing the land base.
Jeremy had always relied on mentors and neighbours to help him on his journey. But when it came to questions about how to structure his business, land ownership options and tax planning, the free advice he was getting at the coffee shop seemed priced about right.
Jeremy had always relied on mentors and neighbours to help him. But when it came to questions about how to structure his business, land ownership and tax planning, the free advice he was getting seemed priced about right.
With the warm fuzzy feelings after quitting his job subsiding, Jeremy made a list of the questions that kept bubbling up. He wasn’t dealing with succession – he was initiating a business, and although he had been farming part-time for a number of years, he knew he needed help to start his full-time farming venture off on the right foot.
The first priority was to meet with his accountant, Alex, a local professional with a wealth of experience in agriculture.
Should he incorporate the business?
Jeremy expected gross revenues this year of about $300,000 from farming and the custom work, similar to the prior year. However, last year, after expenses, he had only reported about $35,000 of taxable income. This puzzled Jeremy, but Alex explained that because he could depreciate his equipment, he had been able to report a sizable deduction last year. Given his plans for additional expansion, Jeremy and Alex estimated taxable income of about $50,000 for the next few years.
At that level of income and with no other personal income, Alex thought there’d be insufficient tax savings to offset the legal and accounting fees to set up and maintain a corporation. He could always incorporate in the future if his income increased. At that time, they would decide if it made sense to transfer all the assets into the corporation, or only the equipment.
What about future capital gains?
Jeremy knew there were capital gains exemptions available for farm property. Alex provided some insights. An individual (not a corporation) may claim up to $1 million of exemption from gains on the sale of qualified farm property. Although Jeremy didn’t intend to sell any farm property in the future, he was glad to have a better understanding of how the exemption worked.
There was a benefit to not putting land into a corporation, because gains that accrue on it after it was in a corporation would not be sheltered with this exemption. Unlike many of his peers who operated farms that had been in the family for generations, Jeremy now knew that if he ever quit farming and started renting his land out, or if the custom work business became much more substantial, he would have to consult with Alex to keep his farm aligned with the rules concerning capital gains.
How would he pay personal expenses?
This was not on Jeremy’s list, but Alex wanted to discuss the logistics of keeping business and personal expenses separate. Rather than running all his personal expenses through a single account, he should transfer a set amount regularly to a personal account and then pay personal expenses like groceries and entertainment from that. Jeremy liked this idea as it would help him budget his personal expenses.
After meeting with Alex, Jeremy knew he was just getting started on accounting and business management decisions. He needed to learn more about avoiding issues when hiring and firing employees, and managing payroll. He also needed to choose an accounting software program, develop a plan for RRSPs and think about what kind of insurance coverage he needed at this stage of his career.
Watch for the January edition of AgriSuccess to read more about Jeremy’s journey to establish a successful farm business.
From an AgriSuccess article (November 2018).