All posts in Farm

TAX ALERT  |  September 15, 2021

Farmers and ranchers across Western Canada are grappling with especially brutal drought conditions this year, due to low precipitation and scorching temperatures throughout much of the spring and summer. With crop and feed yields a fraction of what an average year would bring, as well as skyrocketing hay prices, livestock producers are facing significant uncertainty about how they will manage to feed their herds in the months to come. For some, selling a significant percentage of their herd may be the only way forward.

The Livestock Tax Deferral (LTD) provision allows eligible livestock producers some reprieve from the tax burden arising from income earned on the sale of their herd. This provision permits those in prescribed drought and flood regions who sell part of their breeding herd due to drought, flooding or excessive moisture to defer a portion of the income arising from a sale of their breeding herd. Income can be deferred if the breeding herd has been reduced by at least 15%. Where the reduction in the breeding herd is at least 15% but less than 30%, 30% of the income from net sales can be deferred. Similarly, where the reduction in the breeding herd is 30% or more, 90% of income from net sales can be deferred. The income from net sales can be deferred to the earliest of:

• The first taxation year in which the region is no longer prescribed by the government;
• The first taxation year at the end of which the taxpayer is a non-resident and not carrying on business through a fixed place of business; and
• The taxation year in which the taxpayer dies.

While the LTD provision is not new, the list of prescribed drought and flood regions is updated annually. Given the unfavourable conditions across much of the country, the 2021 list of prescribed regions has been extended to include additional impacted regions.

TAX ALERT  |  August 30, 2021

This article was originally published on July 31, 2017 and has been updated.

Replacement property tax rules permit farmers to defer capital gains tax until the subsequent disposition date of the newly purchased property. The election provides farmers with the opportunity to not incur a tax liability immediately at the time of the sale transaction. Replacement property may occur for a number of reasons, including succession planning, farmers exchanging portions of land with neighbouring farms for proximity purposes, and as a result of a government expropriation which necessitates the purchase of replacement land to continue farming operations.

In general, replacement property rules allow for the purchase of farmland to replace a portion of farmland sold at a previous time, providing the land in question is used either in the same or similar business as previous acres sold. However, farmers who are considering taking advantage of this election are best served by getting a clear idea of what is and is not allowed under replacement property rules.

Replacement property myths

One of the most persistent myths about replacement property dictates that, in order to qualify for the replacement property election, all the money from the sale must be spent. This is not the case. Farmers can maintain eligibility for the election once certain requirements are in place, which permits part of the capital gain to be deferred. This is the case even when the farmer does not reinvest all proceeds from the sale into his or her new property.

Eligibility requirements for land

Complexities often arise when farmers want to purchase property that differs significantly from the one they sold. Replacement property rules require that the new piece of land must replace the previous piece of land in a similar operation. For example, if a farmer employed property for feed production, sold it and then used those proceeds to purchase a piece of land that is an RV storage park, this transaction would be ineligible because the replacement land is being used for a separate business use.

Passing farmland to the next generation

Many farming families desire to bequeath their farmland to their children or grandchildren, which may include those that wish to continue on the farm, and those that do not. In cases like these, portions of land that are held as personal assets as opposed to assets of the farming corporation may work against succession plans from a tax perspective. To ensure the smoothest transition, consider reorganizing the farmland between that which is held personally and that which forms part of the farm corporation without triggering some or all of the capital gain. This strategy permits families’ objectives to be better realized in transitioning to farm versus non-farm children or grandchildren and facilitates more strategic planning for the future of your farm.

Timing is everything

The timing of the sale can also create additional complexities where replacement property is concerned. Farmers are only allowed 12 months following the fiscal year of the disposition to purchase and utilize the new land, in the case of a voluntary sale. If farmers do not know that they must buy and begin utilizing the replacement property in the same or similar operation within a given time, or if they are unable to locate a suitable new piece of land within those 12 months, this can trigger a significant tax bill that might otherwise never have happened. It is also important to remember that property acquired to replace disposed land can actually be obtained before the sale, in certain cases.

In cases where the transaction stems from an involuntary disposition of property, you have an additional 12 months to purchase and utilize your new land and you will still be eligible for the election. As an example, if a municipality chooses to expropriate and start to build houses on land that you are currently using for farm operations – essentially obliging you to sell and depriving you of the farmland required for your operations – then these rules would apply.

An advisor can provide you with guidance on your particular case.

INSIGHT ARTICLE  |  August 30, 2021

This article was originally published on January 2, 2018 and has been updated.

Over the last few years, many Canadian farmers have benefited from AgriStability and AgriInvest, two federal government programs designed to help farmers manage their business risk. With AgriStability, the program compares sales from the current year with an average of three of the five previous years. The highest and lowest performing years no longer factor into the equation. So, if a rough year hits and farm sales dip below 30 per cent of the average, additional federal funding becomes available.

The AgriInvest program provides matching contributions. Farmers can allocate a percentage of their earnings into a fund, which the government matches, essentially creating a rainy day fund during prime earning years. These funds can be accessed at a later date to cover needed supplies or equipment, or to provide extra cash during lean years.

Both programs continue to offer economic value to farmers; however, in 2018, a few changes occurred, as outlined below. These changes remain critical to this day.

AgriStability

The program employs the lower of two numbers to arrive at the reference margin. The first, known as the production margin, includes admissible revenue such as grain and cattle and deducts eligible expenses and direct costs such as fertilizer and crop insurance.

To arrive at the second number, the program looks at the lower number of production margin and eligible expenses, focusing only on the expense part. As an example, farmers who buy their feed would have higher expenses than farmers who grow their own.

As of 2018, this second number reduces the reference margin by a maximum of 30 per cent. Even so, the farmer is still guaranteed no less than 70 per cent of the original reference margin. With these changes, provincial governments also now have the option to permit farmers to enroll in the program later, following a government judgment. Often, this occurs during a significant disaster event such as early snow or flooding, where the province can better determine the situation than the federal government. Examples include wet weather that interfers with harvests in certain areas of the country. That said, farmers who join the program on the heels of a productivity decline will see a 20 per cent benefit reduction so it still is best to get in early.

AgriInvest

Previously, producers could bank one per cent on up to $1.5 million of allowable sales – i.e., the contribution margin. This included livestock and grain, with relevant expenses deducted. As an example, a sheep producer who nets $500,000 from the proceeds of the sale of his or her herd, spends $250,000 on feed and spends another $100,000 purchasing new animals in a year, has a contribution margin of $150,000. This particular producer would be eligible to contribute one per cent of that amount – $1,500 – which the government would, in turn, match.

While the basic AgriInvest rules remain unchanged, 2018 saw a 33 per cent reduction in the maximum allowable contribution – down to one per cent of $1 million. This does certainly limit AgriInvest’s benefits; however, the program still provides access to free money for farmers. As a general rule, whenever the government is inclined to match a contribution you make, it’s in your best interest to take full advantage.

Which one do I choose?

Producers are free to join both programs. Independent of the stage of your operation, you benefit from AgriInvest. Contrary to belief, AgriInvest requires very little accounting; it is worth looking into. Conversely, AgriStability requires payment of an entrance fee and other up-front costs, as well as higher related accounting costs. Reach out to an advisor for an informed perspective prior to deciding which program is right for you.

INSIGHT ARTICLE  |  August 30, 2021

This article was originally published on November 1, 2018 and has been updated.

A farm partnership is a potentially beneficial tax structure that can be used effectively for tax planning purposes. While corporations can also be partners, this article concentrates on partnerships between individuals. There needs to be a business carried on by two or more people, related or non-related, with the shared goal of making a profit before a partnership can exist.

How to set up a partnership

Begin with a partnership agreement, which defines all partners, specifies governance and operations, outlines how profits are to be disbursed and provides details regarding a partner’s death or departure from the partnership. Oftentimes taxpayers, especially spouses, file income tax returns as a partnership yet they do not have an official partnership agreement. The agreement is an important document as it takes care of matters that may arise during the partnership. It also helps provide validation should the Canada Revenue Agency (CRA) question information on the return.

Before beginning operations and transferring assets, register the partnership for GST/HST.

Pay close attention before adding a new partner, if you previously have been farming alone for many years. You will need to transfer your individual farming assets to the partnership by using an election under the Income Tax Act to benefit from a tax deferral. Without this step, the CRA may view that you have sold your farming assets at fair market value, which will lead to a significant tax bill.

Farm partnership incorporation

Typically, where the capital gains deduction is concerned, we may think of its utility when farmland is sold or when shares in a farm corporation are sold. A beneficial tax planning opportunity also exists where farm partnerships are concerned. Partners can sell their partnership interest to a corporation and employ their capital gains deduction, assuming the partnership interest is eligible. This strategy assists farmers in transferring assets such as farm equipment or inventory at fair market value while recouping a tax-free promissory note from the corporation.

As an example, consider farmers Mr. and Mrs. Cattleman have a farm partnership. The following outlines their assets and liabilities at fair market value:

Both Mr. and Mrs. Cattleman have a partnership interest worth $1,000,000, as well as their entire capital gains deduction in the amount of $1,000,000. When Mr. and Mrs. Cattleman sell their partnership interests to the corporation, they can offset the capital gain from this sale with their deductions and recover promissory notes from the corporation in the amount of $1,000,000 each. With the corporation as the sole partner, the partnership effectively ends and so long as the corporation perpetuates the farming business, all assets and liabilities will roll out on a tax-free basis. This allows them to sell their cattle, feed and grain at a reduced corporate tax rate and remove the after-tax dollars without paying any more tax.

How farm partnerships are taxed

Farm partnerships, where there is an individual as a partner, need to have a year-end of December 31 for income tax purposes and net income is determined at the partnership level. Income is then distributed between the partners on a method of allocation outlined in the partnership agreement. Capital cost allowance and adjustments to inventory (both optional and mandatory) are claimed at the partnership level before the income is disbursed.

As an example, in the farm partnership of Mr. and Mrs. Cattleman, they divide the income 60/40. Here are their revenue and expenses:

Bear in mind that the CRA may question the allocation. Be sure that the split is reasonable and reflective of how much capital has been invested and how much work has been performed. When you are calculating your partnership income, consider the following expenses:

• Salaries: Partners salaries are not deductible as expenses. Rather, these are viewed as a distribution of the partnership equity;
• Property taxes and mortgage interest: In the case of land owned by one or more partner, these amounts should not be expensed, assuming the partners intend to keep the land out of their partnership;
• Partners may claim expenses against their partnership income, once it has been allocated; these expenses may include individual ones that only one partner incurred.

As mentioned above in regards to the land costs, an effective strategy is for the partnership to rent land from one of the individual partners. If you choose this route, be sure to record income from the rental on a Statement of Real Estate Rentals. The statement needs to be reported on the partner’s personal income tax return. Both property taxes and interest can be deducted against income from rent. If the individual is registered, he or she will also need to charge and remit GST/HST.

How farm partnership interest is treated

For income tax purposes, ownership of an interest in a partnership is viewed as capital property. In cases where the partnership involves family members, the Income Tax Act permits some favourable treatment, as follows:

• Power to sell the partnership interest;
• Ability to shelter a capital gain with the capital gains deduction; or
• Ability to defer tax by applying the farm rollover rules and transferring the partnership interest to a child or grandchild.

As an example, Farmer Bushel and his son Kernel are in a farm partnership. Farmer Bushel decides he wants to retire from farming while Kernel wants to keep the farm going. Ms. Jane Deere, whom is Kernel’s spouse, is also deeply involved in the day-to-day operations of the farm. Under this section of the Income Tax Act, a daughter-in-law is viewed as a child; therefore, Farmer Bushel can reallocate his partnership interest to Jane with the accompanying taxes deferred and the farm partnership continuing to run with Jane and Kernel comprising the partnership.

Qualifying land for the capital gains deduction through a farm partnership

In certain cases, farmland may not be eligible for the capital gains deduction. As an example, perhaps the owner shows gross income from another source, which surpasses his or her income from farming. An effective way to qualify this land is to create a family farm partnership. Where the only source of income is farming income, the family farm partnership can work the land for two years, which in turn allows it to be eligible for the deduction, assuming that all other necessary qualification criteria have been met.

TAX ALERT  |  August 30, 2021

This article was orginally published on November 1, 2018 and has been updated.

Leasing farm assets has become more and more common in recent years, whether it is a key piece of machinery or a grain bin. Many tax reasons may incent the decision to lease; however, it is imperative to understand relevant tax and non-tax information before making a final decision. This article focuses on the leasing of farm buildings and equipment as opposed to leasing land.

What is a lease?

Asset leasing can be done for a number of reasons. These include the following:

• decreasing or deferring tax;
• simplifying the process of obtaining the equipment;
• as a financing tool;
• keeping assets up to date;
• maintaining consistent cash flow.

A lease allows a lessee to use a property owner’s equipment or asset for a specified period, during which the lessee pays rent as part of a written agreement between the two parties. Essentially two types of leases exist: operating leases and capital leases. The lease type does not have an impact on tax treatment payments; however, it can have an impact on financial statements, which we will examine later in the article.

How are leases treated for tax purposes?

Lease payments are generally fully deductible for tax purposes. This differs from the purchase of equipment where the tax-deductible portion becomes the capital cost allowance (CCA) plus interest if you have financed the purchase. In the year of acquisition, CCA is also limited to 50 per cent of the normal rate.

Consider the following example:

On June 15, Farmer Canola decides it is time for a new combine for the upcoming fall harvest, which he can purchase or lease. The combine costs $300,000 and Farmer Canola will finance 100 per cent of that amount over the five years at a rate of 5 per cent with payments commencing July 1. Therefore, his monthly payments are $5,650. As a class 10 asset, the combine has a CCA rate of 30 per cent. In the year of purchase, therefore, Farmer Canola will only get 15 per cent CCA deduction.

In the first taxation year for Farmer Canola, he can apply these deductions:

If Farmer Canola decides to lease the combine at the same payment amount, here is his tax deduction:

However, if Farmer Canola decided at the end of the previous year to purchase or lease commencing January 1, the result would be significantly different: Strictly speaking from a tax perspective in the first year the lease would be less desirable than the purchase.

Changing the length of the lease term, therefore, affects the decision significantly. In general, buying an asset at the end or near the end of the first year offers a quicker a tax write-off.

As well, as you can see in the above example, both tax and cash flow will change depending upon the time of year and other parameters.

What about pre-paying lease payments?

For cash base farmers, expenses paid in the current year can be deducted, as long as they are not connected to a previous taxation year from two or more years following the payment year. This provision comes in handy for a farmer looking to trade in a piece of equipment, as he can replace that equipment with one that has been leased.

How are leased assets treated under accounting rules?

In general, when it comes to leases and accounting, things are not as straightforward.

Certain tests ascertain whether or not a lease is a capital lease or an operating lease. A capital lease indicates that it is being used to finance the equipment purchase, perhaps as a way to take advantage of an opportune purchase option once the lease ends.

In the case of a capital lease, similar to any financing arrangement, the asset will appear on the financial statements along any associated debt – this is known as a capital lease obligation. Interest is expensed and the assets are amortized, alongside with any other assets that have been purchased. When the tax return is prepared, the expense will appear as the actual lease payments made during the year while the interest and amortization will not be deductible.

What about GST?

Generally, agricultural equipment is not subject to GST; however, lease payments are. GST paid on a lease payment can be recouped via an input tax credit; that said, it still represents cash flow considerations. This contrasts from the GST treatment on a piece of equipment that has been purchased, where GST is usually recovered at the time of purchase, if applicable.

Are there restrictions for passenger vehicles?

A passenger vehicle refers to an automobile that carries other passengers besides the driver and two other riders, such as an extended-cab truck. Certain restrictions exist in the case of a purchase or lease of such a vehicle and should be closely examined.

An advisor can help you in evaluating the lease versus buy decision.

TAX ALERT  |  August 30, 2021

This article was orginally published on October 1, 2018 and has been updated.

As a farm owner, bequeathing your farmland to another party or to the next generation may be on your mind. In general, farmland rollovers can be complex from a tax perspective. The rules differ depending on several factors, including:

• whether a spouse or a child is your intended beneficiary; and
• whether you are alive or have passed away at the time of the property transfer.

This article explains some of the tax implications surrounding farmland rollovers. With a clear picture of the rules and regulations, the process of transferring farmland, as well as preparing to do it, is far less daunting.

Capital gains and gifts…yes or no?

One of the most common questions is in regards to whether or not land is eligible for the capital gains exemption.

A number of rules apply when determining which land and assets are eligible. First, you will need to determine how those assets have been used.

As an example, Ms. Barley has a tax pool of farming machines that have depreciated – their current undepreciated value is $100,000. She can transfer the $100,000 pool of assets tax-free to her child; however, before the transfer takes place, she must be able to prove that the assets were used primarily in the farming business.

There is no tax implication in a case where farmland is passed along as a gift. The CRA assumes this property has been passed along at base property cost. Meaning, if a farmer pays $200,000 for a portion of land and later gives it to his or her child, the child, in turn, inherits that $200,000 as the base cost. However, if a farmer sells land to his or her child, it is often at a higher value, with a possibility to utilize his or her capital gains exemption on the gain.

Where spouses and children are concerned, certain stipulations apply

For transfers of land between spouses, the tax treatment depends upon whether the farmer is alive or deceased. A living farmer cannot transfer land tax-free to a husband or wife. Said land needs to be sold, in this case, at fair market value. However, if a farmland rollover occurs following the death of the farmer, all of his or her assets automatically transfer to your spouse on a tax-free basis, at the property’s cost.

Where children are concerned, the above rules remain the same when passing land to the next generation. However, while a spouse cannot receive your land tax-free if you are still living, a child can. Your child needs to be a Canadian resident before the transfer can occur.

Fair versus equal is a common challenge faced by farm families when considering a rollover and figuring out who gets what – for example, if one child wants to take on the farm and the other pursues a different career. Most parents want the allocations to be as fair as possible; however, there is no rule requiring allocations to be equal. You may chose to offer first right of refusal for the next generation farmer to buy or rent any land left to his or her sibling, or you may equalize allocations by providing other assets to the siblings who chose not to pursue farming.

INSIGHT ARTICLE  |  August 30, 2021

This article was originally published on July 12, 2018 and has been updated.

As a farmer, buying or selling farmland is an important decision, one that will have a significant impact on farming operations and economic success. Your key to success is one that positions you well toward reducing future tax liabilities and improving your financial outcome. An advisor can help you map out an optimal business structure.

When buying or selling farmland, prior to meeting with an advisor, consider the following questions:

Selling farmland

IF THE SALE IS PART OF A RETIREMENT PLAN, HAVE YOU CONSIDERED ALL YOUR OPTIONS?

As you approach retirement, ask yourself if selling is the most advantageous action for your cash flow and retirement needs. Where no succession plan exists, we sometimes see farmers selling farmland as part of a retirement plan. Certainly, such a sale creates extra cash flow that can fund retirement; however, renting the land may be equally feasible. If a farmer decides to rent the farmland and use the rental income for living expenses in retirement, this may beget more after-tax revenue when compared to investing the money from the sale once taxes have been paid. However, if you are renting out the land for a longer duration, bear in mind this may affect the use of the capital gains exemption.

DO YOU UNDERSTAND THE TAX IMPLICATIONS AND TAX STRATEGIES THAT CAN MINIMIZE THE TAX BURDEN?

Before selling farmland, there are a few tax-related items to ascertain. First, is the property in question qualified farm property eligible for the capital gains exemption? Only individual taxpayers can apply the exemption on the proceeds from the sale of the sole asset. In addition, if the land is held personally, keep in mind that both the Old Age Security (OAS) clawback and alternative minimum tax (AMT) may be triggered on the sale. Plan appropriately.

WHO WILL BE PAYING THE TAXES?

Different tax implications apply depending on who has title and beneficial ownership. Depending on who purchases the farmland, title is delegated to a partnership, an individual or a corporation. In our experience, some farmers who hold land as a personal asset and add their spouse on the title believe that he or she is then responsible for half of the tax burden and that the spouse’s capital gains exemption can be applied to mitigate taxes. However, without beneficial ownership, the farmer may be unable to split or decrease the tax bill with their spouse, which leads to ambiguity regarding who is actually selling the property. Is it the one spouse, the corporation or is it held jointly? Make sure you know the answers to these questions before you sell.

HOW CAN YOU MITIGATE TAX CONSEQUENCES OF SALE?

RRSPs can be a beneficial consideration in the year of a sale, allowing you to mitigate the overall tax at the time of sale and defer some of the tax over a period of time. Other tax strategies can help to minimize the tax consequences of selling farmland. These include the following:

• Utilize the capital gains reserve, if applicable
• Time the sale properly

In certain circumstances where you receive payment for the sale over time, it is possible to claim the capital gain over time by employing the capital gains reserve. This strategy may also be beneficial to managing your AMT and OAS clawback implications. In addition, when you stagger payments from the sale over even two years – December 31, 2020, and January 1, 2021, as an example – this will decrease the capital gain inclusion each year, which in most cases saves tax.

Purchasing farmland

DOES THIS PURCHASE ALIGN STRATEGICALLY WITH YOUR LONG-TERM FARMING PLAN?

Before moving forward with a farmland purchase, ask yourself if it makes good business sense in your farming operations. A financial plan, including the timeline required to recoup the investment, is essential. Without considering the key financial and long-term implications, many farmers believe owning more land is the best way to grow their operations. But individual circumstances are key. Is increasing your land base a good way to grow your business? You need to speak to someone who understands the related issues and can steer you in the right direction.

HOW DO YOU INTEND TO PAY FOR THE PURCHASE?

Alternative financing avenues may serve you well in lieu of cash payments, as it supports your future cash flow. Using cash to buy land impacts your liquidity and in turn your ability to respond to the unexpected. This can adversely affect your farming operations. Financing, on the other hand, allows you to keep some working capital for increasing your herd, completing repairs or purchasing necessary crop inputs while deducting interest payments in the farming business. Financing arrangements need to be flexible and adopted to seasonality implications of the agriculture industry.

WHAT IS THE BEST WAY TO HOLD THE TITLE?

Whether you wonder if you should hold the title as a personal asset, jointly with a spouse or in the farming corporation, there is no one right answer. However, one key consideration is your ability to access the capital gains exemption in the future. Structuring any land purchase effectively from the get-go allows you to prepare for succession planning, including the intricacies of the tax-free rollover rules for ensuing generations, and save significant costs and potential tax liabilities.

IS IT A GOOD DEAL?

Do you know the boundaries and acreage of the land in question? Has the local municipality annexed any of it previously? Does it have good access? Does it have any easements that could cause difficulties in the future? While most farmers understand regional market rates, in our practice, we often find farmers do not spend enough time on municipal and county regulations that may affect their purchase, including property surveys or title research. Issues such as these need to factor prominently in your purchase decision.