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Transition Planning for Farmers: Tax, Finance, and Estate Planning

Last updated: Apr. 14, 2022 

Capital considerations during a farm transition

As the incoming generation begins to succeed the outgoing one with farm ownership of their own, one critical piece to the puzzle are the financial, estate, and tax-related aspects.

Farms are often multi-million dollar operations that have serious financial implications depending on how a given year plays out. Younger farmers must understand this as they enter the management fray and begin to have financial accountability fall to them.

Independent farm transition and finance consultant Reg Shandro has more than 30 years’ experience helping farm families and he often asks them two basic questions when ‘money talk begins.’

Are you viable? Are you sustainable?

He says these two questions give almost every family a moment of pause as they consider them.

Being viable is simply having enough money to feed your family and live a life, farming aside. Before there is talk of debt service, tax, inflation and other important concerns, will there actually be income to lead even a basic life at the desired standard a young farmer has in mind?

Being sustainable is understanding the size and scope of your farm and how you are going to survive the business of it for, presumably, the next 40-plus years before you hand off to a future generation. If you farm near a major metro centre and hope to acquire additional land, which sells for $10,000-plus per acre, what is your plan? Similarly, if you run a livestock operation, 70 cows won’t do anything but leave you with a headache since there is no economy of scale. Or take interest rates. What is favourable today may cause a long-term issue if rates doubled – or even tripled – what they are now. Your farm needs to have a set plan in place for the lean years.

Shandro encourages any young farmers to focus on their liquidity ratio; a financial ratio used to determine a company’s ability to pay its short-term debt obligations. With no liquidity or working capital, a person has no manoeuvrability. Keep your working capital strong, which is a function of profitability. Those who are able to keep their working capital in a healthy position generally have more success to stay competitive.

Fair vs. Equal

When a family transitions there are times where one or more siblings do not intend to return to the farm operation, but the outgoing generation still want to ensure that they are taken care of and treat everyone either fair, equal, or both. This has the tendency to get difficult, according to Shandro, since the bulk of the assets often need to remain in the farm for it to continue on being viable into the future. Throughout his decades of working with farm families, Shandro always sees a minimum of 65 per cent, and a maximum of 100 per cent, of assets transferred to the incoming farmers while the rest is split among the non-farming family. This, he says, is the reality when faced with the financial picture of what the farm demands in terms of what essentially amounts to future investment.

Without that minimum amount transferred to the incoming generation, Shandro says it would be entirely burdensome or, worse, impossible, for the new farmers to make a successful venture. By having these conversations as early as possible, it can be determined what the future of the farm will look like and other important details may be sorted out from there.

Tax and Finance 101

With so many moving financial parts in a farm transition, there are some non-negotiables that the incoming/outgoing generation must satisfy before a change of ownership can take place.

Lifetime Capital Gains Exemption: Every individual on a qualified farm is eligible for $1 million in capital gains exemptions. This is a significant interest to farmers due to landbases appreciating in their lifetimes and determining how the land transfer will take place without incurring a serious financial loss through increased taxes.
See if your farm qualifies for the LCGE today!

Intergenerational Farm Rollover Provision: This is the ability to transition the farm to the next generation on a tax-deferred basis. Transitions are possible without accessing the IFRP but it becomes more complicated and creates more tax pressure.
Understand what an IFRP would look like for your farm family

Wills: A must have. A will should reflect a person’s intentions in the event of a premature death or death in general. Be sure to know to whom assets are going to be transferred and understand the implications of farming children vs. non-farming children. Will the farming child be able to buy out the non-farming siblings? Enlist a lawyer to guarantee everything you want is locked in and meets all legal criteria.

Executor: This is an important job to have and, although it is a one-time commitment, if it’s done poorly, the executor’s tasks will be extremely difficult. Also, consider the residency of the executor. If the person is outside of Canada this will complicate matters and potentially cost more money to close the estate. Look up your specific province or territory’s executor rules and regulations to stay on the right side of this area.

Tax on Split Income: Often called ‘income sprinkling,’ this is not the biggest consideration, but something farmers should still understand. There are many rules as to who can and cannot qualify.
Understand how TOSI may affect your farm business here

Now let’s find out how one Prairie family made their money work for them during their transition planning process.

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About FBC

Developing a succession plan is critical for increasing the value of the business you’ve worked so hard to build. It will also help minimize risk and help provide you with financial security.

FBC has 70 years of experience helping farmers, small business owners and tradespeople develop unique succession plans that help then successfully exit their business on their own terms.

Since 1952, we have worked exclusively with small business owners, farm operators, entrepreneurs, and independent contractors. Over the years, we have helped tens of thousands of customers from coast-to-coast, with customized tax services, including succession planning, financial and estate planning, business planning, bookkeeping, payroll, and tax preparation and optimization.

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