3 factors to consider before incorporating your farm
Are you thinking about making your farm a corporation? Lance Stockbrugger, a chartered accountant who also farms with his siblings in Saskatchewan, says the move has pros and cons.
Here are three business factors to consider when determining whether going corporate is the right move for you.
1. Think long-term
Incorporating your farm can complicate the future more than it can simplify it.
Take a big picture look at your operation, and consider the impact of incorporation down the road and into transition.
Think about what incorporation will mean to the farm business when it comes time to sell, transition or rent the land – and work those answers into the decision-making process now. And, he adds, while it’s easy to put land into a corporation, it’s a hard and a long process to get it out, so taking the extra steps now to consider the big picture is a smart and cautious move.
2. Consider capital gains exemption
Corporations don’t have a capital gains exemption. “So, if you own that land personally and the value goes up, as long as the capital gains exemption is available to individual taxpayers, you will likely pay significantly less tax than if the corporation were to own that land and sell it.”
If land is owned by the corporation and it appreciates in value, the corporation is going to pay tax on the appreciation, which could have been reduced or eliminated possibly, if you had owned the land personally.
If renting out land is considered, Stockbrugger states: “If you’re going to simply rent it out on a cash basis in the future, you’re looking at inactive income in a corporation which is taxed at approximately 50%.” Personally however, your tax rates on land rent will be your marginal tax rate that is indexed to your income level, which can potentially be much less than the 50% paid by corporations.
3. Analyze the impact on transition
There are multiple areas to consider with incorporated versus unincorporated land in the transition process, Stockbrugger says.
If you’re the landowner of an unincorporated farm, when it comes time to transition, you can give pieces of land individually to the next generation without any tax implications.
Stockbrugger says owners of unincorporated farms have special rules available to them, not available to many other industries. Farmers can buy at the adjusted cost base but need to pass that information along because that now becomes the adjusted cost base for the next generation when they want to sell it.
On the other hand, the whole corporation must go to the individuals involved in the transition before the farm can be passed on.
Land title navigation
If you want a piece of land to go to a specific child, put their name on the title. Avoid having all the kids on each piece of land for probate or estate purposes.
Stockbrugger says all the names on all the pieces of land can cause complications if there are divorces, bankruptcies or if someone wants to borrow against that piece of land. For example, if one of your children wants to borrow against a piece of land, everyone who has their name on that piece of land must sign off on the loan.
3 factors to consider when thinking of incorporating
- Don’t just look at whether incorporating the farm right now makes sense. How is incorporation going to impact all your future decisions on the farm? It can complicate the future more than it can simplify it.
- Understand the tax implications of selling, renting and transitioning incorporated and unincorporated land.
- What is the future of the farm and how will incorporating and the eventual winddown of the corporation effect your retirement and possible transition? Understand your exit options from a corporation before incorporating to make sure it fits your needs.