Tax Considerations for Farm Transitioning. Presented by Bill Wiebe, CPA, CA Tax Partner (2017/01/25)

Transcription

1 Tax Considerations for Farm Transitioning Presented by Bill Wiebe, CPA, CA Tax Partner (2017/01/25)

2 Farm Transitioning > Farm transitioning is the process of transferring the farm business to either the next generation or to unrelated parties. > Today we will focus on: Three strategies available to minimize the income tax on farm transitions, Some of the income tax tools available, Question and answers.

3 Farm Transitioning > We will look at 3 strategies Using a corporation to own the farm land (Landco). Selling the shares of a Landco Freezing the shares of a corporation

4 Using a Landco > A number of our clients have kept farm land outside of their corporation at the personal level Received as an inheritance so no debt Bought a while ago and debt paid off Sometimes for estate planning purposes

5 Using a Landco > Land values currently high > The capital gain deduction (CGD) is at $1 million > Operating company may have cash and be offside the rollover rules > Could sell the land to the operating company (Opco) > Consider a separate Landco

6 Using a Landco Mr. Mrs. 50% 50% Opco. M.r and Mrs. Jointly own some farmland personally worth $2.2 million and cost of $200,000

7 Using a Landco > Steps required: Incorporate a New Landco Mr. and Mrs.each get 50 common shares In Opco, create some fixed value preferred shares, need at least the value of the land to be transferred so $2.2 m. Could use partial freeze Transfer the Opco preferred shares to Landco using section 85

8 Using a Landco > Steps required: Opco redeems the preferred shares that Landco owns and Landco gets a P. note for $2.2 m. Mr. and Mrs. sell the land to Landco for $2.2 m and each get a P. note for $1.1 m. repayable over 5 years. They each report $1 m capital gain and use the CGD to offset the gains.

9 Using a Landco > Steps required: Mr. and Mrs. report the gain over 5 years to minimize the AMT. As cash is available in Opco it pays the note owing to Landco As Landco gets cash from Opco it can pay the notes it owes to Mr. and Mrs. Opco rents the land from Landco (instead of from Mr. and Mrs.

10 Using a Landco 50% 50% Mr. Mrs. Landco. Tax paid shareholders loan owing to Dad and Mom for $2.2 million from Landco Landco owns farmland with a FMV and cost of $2.2 million Loan owing to $2.2 million (secured) Opco.

11 Using a Landco What have we achieved? > Utilized the CGD for Mr. and Mrs. with the result they can withdraw $2.2 million with no personal income tax consequences > Farm land owned by Landco has a cost equal to the current fair market value (FMV) of $2.2 million > Mr. and Mrs. can leave the shares of Landco to farming and non-farming children. (could put in a long-term lease with a farming sibling)

12 Using a Landco What have we achieved? > Purified Opco for the rollover rules > Landco should also be qualified for rollovers What else could be done? > Opco shares could be transferred to a farming child > Landco could be transferred to the children, or a trust could be used to own the Landco shares; some protection against marital claims.

13 Selling a Landco > Some Landco s ( and Opco s that convert to a Landco) have farm land with FMV much higher than cost. > A corporation does not have a CGD. > Consider selling the shares of Landco > The gain on a sale of shares should be eligible for the CGD. > If CGD already utilized, CG tax rates still better than dividend rates

14 Selling a Landco > The purchaser of a Landco gets shares with a high cost base but the land still has the low cost base inside the old company > Buyer could use an existing (or new) corporation (Buyco) to buy the shares > Wind up the Landco into the Buyco or amalgamate with Buyco (no land title transfer fees with an amalgamation)

15 Selling a Landco > Buyco can elect to bump up the cost base on the land up to the FMV when the shares were bought > Example: Landco has land with FMV of $1m so Buyco purchased shares for $1 m, the land cost can be bumped to the $1 m. > Buyer could negotiate a reduction in price for the costs of getting back to 1 corporation. > Result Buyer has land with full cost base.

16 Corporate Share Freeze > A share freeze is a common method to transition the farming operation to the next generation > A sale of shares to the next generation and utilizing the CGD does not work well in a family situation ITA 84.1 requires some one to pay the tax > With a share freeze the tax can be triggered when the funds are taken.

17 Share Freeze > Typically all of the value of the common shares are frozen into fixed value preferred shares > Allows the next generation to obtain new common shares at nominal value > Future growth will accrue to the next generation > Mom and dad gradually redeem the preferred shares in future years

18 Share Freeze > Redemption of preferred shares create taxable dividends for mom and dad > Cash for the redemption comes from future after tax income generated in the company > Provides some protection for marital claims with the next generation as long as mom and dad continue to have significant value in their preferred shares

19 Share Freeze > Allows for future gifting of some or all of the preferred shares to the next generation > Mom and dad can keep control with a separate class of voting shares if desired > The preferred shares can go to non farming children if there are not enough non farm assets

20 Tax planning tools Choice of structure Partnership Corporation Joint venture

21 Tax planning tools Inter-generational rollovers during life or on death Farm land Farm equipment Farm corporation shares Farm partnership interests

22 Tax planning tools Capital gain deduction (CGD) Farm land Farm corporation shares Farm partnership interests

23 Tax planning tools Rollovers to partnerships and corporations Farm land Farm equipment Farm inventory; grain, livestock, etc. Quota s and other intangibles

24 Tax planning tools Corporate share freeze Holding corporations (Holdco) Land corporations (Landco) Joint ownership of land with spouse Family Trust Life insurance Rollover to spouse

25 Questions?? > To request handouts: Call (306) and ask for Ashley Will also be available on our website