The pros and cons of farm incorporation
In the 2016 Census of Agriculture, the number of incorporated farms increased from 20 to 25%.
Based on your experience, should more farms consider incorporation?
Kim Gerencser, Certified Financial Planner
Growing Farm Profits Inc., Regina, Sask.
Yes! Incorporating your business should be far more than just a tax planning decision. It should bring with it a mindset toward elevated management practices and an expectation of profit.
Farming has sometimes been slower than other industries to adopt professional management practices. Producers often concentrate on operations rather than management.
Consider any “large” company: the executives and senior managers will implement the execution of the company’s vision, monitor progress and performance of employees and the corporation alike, and adjust when required.
None of this is done as an exercise in keeping people busy; there is an expectation of growth and profit. As the President or CEO of your farm corporation, you have the very same responsibilities and obligations: growth and profit.
If farms were managed with more of a corporate mindset, there would be a heavier reliance on timely and accurate financial information, more authority granted to key people, and more time spent in the office chair rather than the tractor seat.
Maurice Doyon, Economist, Laval University, Que.
My dad incorporated his dairy farm in the early ’80s, and it was one of the biggest management mistakes he made. For some reason, farm corporations were being promoted in Quebec at that time, but it didn’t make sense for many of the producers.
A farm corporation is good if you reach a reasonable size and can leave a certain amount of money in the corporation. However, if you’re taking most or all the returns out as drawings or as dividends, the tax saving is pretty much eliminated. Meanwhile, every year your tax return is more expensive to prepare.
Another factor to consider is the lifetime capital gains exemption when the farm is sold.
It’s not as easy to access in a corporate structure.
As farm size and complexity increase, there can be good reasons to incorporate. Certainly, different classes of shares can offer a lot of flexibility when transferring a farm to the next generation, but incorporation can take place closer to the time of transfer if that’s a desirable vehicle.
Terry Betker, Management Consultant
Backswath Management, Winnipeg, Man.
Deciding whether to incorporate should be a business-driven decision. There are pros and cons to incorporating. My experience is that the pros significantly outweigh the cons in three situations:
- where ownership will be passed on to the next generation
- where the business is or will be increasing in size and complexity
- where there is increased risk to third party liability associated with business activity
Certainly, the income tax savings in a corporate business structure can be substantial. Paying less tax is high on the priority list for most farm families. There is more “after tax” money to invest in the business to acquire assets and pay down debt.
One of the benefits of incorporating is the management discipline associated with having to submit income statements and balance sheets to Canada Revenue Agency. Incorporated farm businesses must file these statements at the same year-end date each year. The annual information filed becomes base information that can be analyzed and used to support investment and financing decisions.
For the reasons above, I think farms should consider incorporation.
Good management is discussing options with your partner/specialist/accountant based on your current business operation and environment.