Last updated: Apr. 14, 2022
Farm family makes money work for them despite challenging circumstances
Editors note: the farmer case study chose to use an alias due to privacy concerns. All other details remain intact and have been independently verified.
Third-generation cash crop farmer Jake Holborne did not always want to take over the family farm. In fact, he was pretty sure he was going to take a corner office in downtown Calgary one day. But after years of putting time in on the family farm in Saskatchewan, the move was more natural than not. In the beginning, transition talks were complicated by opposing expectations, and later, by the unexpected death of his mother. Working closely with transition coaches, accountants and lawyers proved advantageous, especially when it came to plan for the resulting financial and tax implications.
Jake, now 43, was only 24 years old when he began farming alongside his dad and two uncles. At that time, it wasn’t his main occupation. Following an agricultural studies degree, he spent 10 years working for an agro-chemical company, and nearly another 10 in farm data management. But he enjoyed working at the farm on evenings and weekends.
By 2009, the brothers—Jake’s father and uncles—began talks to split the 8,000-acre farm. The brothers went one way, and Jake and his dad went their way. They took the land they farmed which was about one-third of the acres and started to grow from there. Jake’s transition talks, which had begun a few years before that, intensified in 2010 following the split. As serious talks ramped up, the family decided to bring in two moderators. The first dealt with the people part of the equation, while the second dealt solely with tax and finance.
“You can’t move forward with money if nobody talks,” said Jake.
The first moderator brought the family together to talk expectations. Jake was clear on what he wanted—that is, to continue farming once his father retired. His sisters, however, had on-farm aspirations, and although they believed they should inherit some part of the farm, they hadn’t put in what the moderator called “sweat equity.” Dividing the farm into three equal parts wasn’t seen as fair, as Jake had put in more time.
“Value had to be put on previous time spent and previous equity put in,” he said. “What’s equal isn’t always fair, and what’s fair isn’t always equal.”
Once the family moderator completed his task, Jake and his family could then move on to discuss the numbers and figures. Parts of the transition had begun earlier, which made the final purchase less burdensome. Jake paid for equipment as it was updated, and his father contributed the trade value from the older equipment. When Jake finally purchased the corporation, he paid his father for the value of the traded equipment. Most of the land was included in the final sale, as well as equipment and the shop. Rental contracts were re-negotiated and transferred from father to son.
One of the first topics discussed was the farm’s viability, but Jake said it wasn’t a huge concern because he was already farming enough acres of his own. For him, viability meant being able to pay a healthy retirement package for his parents while managing debt. Looking forward, he wanted to solidify his ability to expand so he could pass the farm down to his children with little to no debt. Jake’s wife, Maggie, has an economics background, which was a huge asset during the transition. She had a clear understanding of the financial needs of the farm and the debt they were about to acquire.
What made the transition tricky was determining a living wage for Jake’s parents. Long-term comfort was one consideration, but so too were the tax implications. The idea was to keep the living wage as comfortable as possible, but not so high that it accrued too much tax and impacted their pensions.
Not long after the family finalized the sale, Jake’s mom unexpectedly passed away. This is one factor the contract did not cover off. Receiving the living wage for both he and his wife put Jake’s father in a higher tax bracket. Fortunately, though, they had built other clauses into the agreement that left him less vulnerable. Jake’s father, for instance, had retained ownership of the house and a half-section. While he retained farming status, Jake was hired to custom farm the land. Jake also supplied his father with a corporate vehicle. Looking back now, though, Jake wishes they had further explored those what-if scenarios.
After lengthy talks with the tax and financial moderator, it was decided that part of the land would remain with Jake’s father. This way he could keep his farm status, and the house could be left to the sisters when his father passes away.
Open discussion was an important part of making the final sale work, first with Jake’s sisters, and then with his parents. The moderator insisted that the family bring together their lawyers and accountants to discuss details openly in one room. Jake said this suggestion was integral to the success of the transition.
“We needed both our accountants to have open minds, we needed both our lawyers to have open minds, and then we needed all four of them to sit together and do it,” he said.
At that time, the family agreed on a price for the farm. “I pay until death,” said Jake, adding that small clauses were included in case that occurred sooner than 10 years. “Otherwise, the longer they live the more I pay.”
To some degree, Jake’s inheritance was built into this deal early on. This allowed him access to equity for leverage, should he ever need it. However, he could only leverage to certain risk ratios, as determined by the deal.
The transition took nearly two years to complete. And while the tax, estate, and financial consultant was crucial to the success of the transition, Jake cannot emphasize the importance of the family consultant enough.
“The family consultant is the most important part before you start anything,” he said. “Because if everyone’s not on the same page, it’s bad news.”
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