Corporate farm landlords breathe easier
Farmers who fund retirement by renting out land they own inside a farm corporation are breathing a lot easier now than they were a year ago. Only moderate changes are being made to the small business tax structure. Retiring farmers are particularly relieved, because initial proposals were to tax rental income from land held inside farm corporations at up to 71 per cent. The final legislation provides a $50,000 threshold for passive investment income (things like land rent and other investment income), reducing the impact.
“If the initial changes had been adopted as first proposed, they would have had a very, very significant impact,” says Kelvin Shultz with Wheatland Accounting in Fillmore, Sask. “All passive investment income would have been taxed at the highest rate. Since they were going to eliminate the Refundable Dividend Tax on Hand (RDTOH) refund also, farmers would have been paying the higher tax rate even if they had paid it as a dividend to themselves.”
Landlords have always potentially had to pay a higher tax rate on income earned from renting out land owned by a farm corporation than for land that is privately held. Rental income from privately owned land is treated like any other income. How much tax is paid depends entirely on tax bracket. Tax on corporate passive investment income (which includes land rent) varies from province to province. In Saskatchewan, for example, it’s taxed at 51 per cent. However, the rate can be reduced to just 20 per cent if it’s paid to shareholders as dividends.
Basically, the regulations are trying to encourage individuals not to store extra funds inside a corporation.
Things stay pretty much the same under the new rules as long as you don’t exceed $50,000, Shultz says. If you do, the new regulations start to grind away the small business deduction. Every dollar over $50,000 of passive income the company earns will reduce the small business deduction by five dollars. It would be totally eliminated once the corporation reaches $150,000.
“The new changes do split the RDTOH into eligible and non-eligible,” Shultz says. “But that gets really complicated. Suffice to say that thanks to the $50,000 passive income threshold, the new rules won’t have a big impact on the majority of farmers.”