Tax Tips, Strategies and Opportunities for Progressive Farmers Franklin H. Famme, CPA, CA
«The only thing raised successfully on this farm last year was taxes!»
Topics What is Farming? General Tax Tips For Farmers Tax Rates and Types of Ownership Qualified Farm Property Estate Planning and Inter-Generational Transfers Farm Subsidy Programs Questions
What is Farming?
What is Farming? Farming includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees Also includes Christmas tree farming, the operation of a wild game reserve or egg hatchery, and may include aquaculture, and the operation of feedlots, nurseries and greenhouses May include other activities (definition is not exhaustive) Does not include an office or employment under a person engaged in the business of farming
What is NOT Farming? Solar panels and other energy projects Solar panels get their own class for depreciation purposes but depreciation is limited to net income from solar panel Barn rental (not to be mistaken with custom feeding) Barns for rental purposes have a slower depreciation rate than barns for farming purposes Land rental (see next slide) Other
Renting vs. Sharecropping Crop-share arrangements involve a joint contribution of capital and labour to a farming venture, with the parties each receiving a portion of the harvest Is the landowner in this situation earning income from a farming business? CRA s longstanding position is that a landlord that receives a share of crop in lieu of rent earns rental income, not income from a farming business This presumption may be rebutted by the facts of a given situation, e.g. where the landlord contributes towards input costs True sharecropping results in the farmer sharing in both the rewards and the risks of the crop
General Tax Tips For Farmers
Cash Basis Filing Income from a farming business may be taxed on a cash basis Farmers (and fishers and corporations) may choose to adopt the cash method at any time, but must have Ministerial consent to switch back to accrual Farmers can prepay for expenses like see, fertilizer, feed, etc. at end of tax year to reduce tax owing but once begin cycle of prepaying it is almost necessary to do every year Cannot prepay expenses for more than one year Rules to prevent the creation of a loss by advance purchasing of inventory
General Tax Tips For Farmers Can deduct a reasonable percentage of house expenses Purchase of capital assets (eg. Tractors) is not an effective way to immediately reduce your tax balance as amortized in year rather than deducted therefore buy capital assets only when needed Cash basis rules do not apply to capital purchases but need to have asset available for use by end of year Land clearing, draining and tiling is an expense that can be written off 100% in the year of payment or carried forward to future years
General Tax Tips For Farmers You can pay a reasonable wage/profit share to your spouse or child as long as: The amount was actually paid The work performed was necessary for the farming operation The amount was reasonable given the person s abilities and is comparable with what an unrelated party would have been paid Deferred receipt of crop payments from grain elevators are an effective way to push income to the next year just be aware that these crop deferrals are no longer covered by the Ontario Grains Act
General Tax Tips For Farmers If purchasing a farm: Consider who s name to put it in to maximize potential capital gains exemption down the road, or to minimize income tax now Ensure you have an HST number so that HST does not apply on the purchase (the HST number must be in the exact name as the ownership) If selling logs out of the bush, need to distinguish between commercial (you sought the gain) and non-commercial (the gain sought you) woodlot for purposes of whether income versus capital gain Scientific Research and Experimental Development (SR&ED) tax credits may be available
Tax Rates and Types of Ownership
Personal Tax Brackets (2015 Ontario) Bracket General Tax Rate (capital gains at ½ of rates) $0 - $45,000 20.4% $45,000 - $90,000 32.6% $90,000 - $150,000 44.0% $150,000 - $220,000 48.0% > $220,000 49.5% ** ** Note: highest non-eligible dividend rate ~40% Rates and brackets are approximate
Personal Tax Brackets (2016 2015 Ontario) Bracket General Tax Rate (capital gains at ½ of rates) 2016 changes $0 - $45,000 20.4% $45,000 - $90,000 32.6% - 1.5% $90,000 - $150,000 44.0% $150,000 - $200,000 48.0% > $200,000 49.5% ** + 4.0% ** Note: highest non-eligible dividend rate ~40% 45% Rates and brackets are approximate
Corporate Tax Rates (2015 Ontario) Small Business Corporations 0 - $500,000 15.5% > $500,000 26.5% ** ** Ontario considers the business of farming to be manufacturing and processing, which means the highest marginal rate can be reduced to 25% in most circumstances
Corporate Tax Rates (2016 2015 Ontario) Small Business Corporations 0 - $500,000 15.5% -0.5%??? > $500,000 26.5% ** ** Ontario considers the business of farming to be manufacturing and processing, which means the highest marginal rate can be reduced to 25% in most circumstances
Types of Ownership: Proprietorships Mostly very small operations Rare, because of prevalence of partnerships However, common for farm assets to be owned individually or jointly by spouses E.g. owner of land and operator of farming business are frequently not the same person/entity
Types of Ownership: Partnerships Husband-wife and parent-child farming ventures are often de facto partnerships A written partnership agreement is strongly recommended, but unfortunately rare in practice Extremely important to properly identify whether the farm assets are owned in partnership or not Presumption that land is owned outside of the partnership, unless indications otherwise Land ownership may look like in partnership, but instead be jointtenancy or tenants-in-common
Types of Ownership: Corporations Single corporation fairly typical Usually owned by a combination of spouses, children Multiple corporations sometimes used to: Segregate non-farming assets from the qualifying farming business Multiply the small business deduction for separate businesses (e.g. cropping vs. livestock) Pre-divide farming assets for later succession to multiple children When to incorporate?
Types of Ownership: Trusts Relatively uncommon Sometimes used for transfer of farm assets to minor children Not compatible with many farm rollover provisions Useful when farm rollovers not available and more general succession & estate planning techniques are used instead May be becoming more relevant for estate planning purposes as farm values increase
Qualified Farm Property
Capital Gains Exemption Exemption limit for 2015 is $813,600 (up from $800,000 in 2014) Limit has been further increased to $1,000,000 for qualified farm property dispositions after April 21, 2015 Exemption can be used for disposition of qualified farm property (farmland and farm quotas), interest in a family-farm partnership, or shares in a family farm corporation Corporations do not have capital gains exemptions, just individuals
When is Land Eligible as Qualified Farm Property? If purchased prior to June 18, 1987 Or The property must have been principally used by certain individuals in the business of farming in Canada in the year of disposal The property was used in at least five years principally in the business of farming in Canada by certain individuals Watch if farm crystalized in 1994, it is deemed to be reacquired after June 18, 1987
When is Land Eligible as Qualified Farm Property? If purchased after June 18, 1987 And The property must have been owned by certain individuals for at least 24 months immediately preceding the time of disposition Either: In at least 2 years, the property must have been used principally in a farming business in Canada on a regular and continuous basis, and gross income from that business must exceed income from all other sources, or During any 24 month period was used in a farming business in Canada by a family farm partnership or corporation
Family Farm Corporation Shares as QFP To qualify as a share of capital stock of a family farm corporation, all of the following conditions must be met: The corporation must have existed for at least 24 months Throughout any 24 month period, more than 50% of FMV of corporation assets must be attributable to farming At the time of disposition, 90% or more of the FMV of the corporation s assets must be attributable to farming Much care must be taken to fall within these rules, and special planning often surrounds keeping companies pure for eventual sale.
Other Qualified Farm Property Considerations Capital gains reserve up to 10 years on proceeds not due Alternative Minimum Tax (AMT) can be carried forward up to seven years Cumulative Net Investment Loss (CNIL) balance Old Age Security (OAS) clawback Allowable Business Investment Losses (ABIL) Can advances planning occur to foresee multiplication of the capital gains exemption? Replacement property rules provide for a deferral of the gain on sale in certain circumstances (must be same or similar property and must fall within certain timeframes)
Estate Planning and Inter-Generational Farm Transfers
Estate Planning BASIC STEPS Write down a listing of all assets and debts, either realized or unrealized Determine how to split the assets fairly and when the beneficiaries get the assets Communicate your intentions Family meeting Drafting of will (consider dual wills) Create living wills (powers of attorney for property and health) Revisit your plan regularly
Estate Planning OTHER POINTERS When possible, keep it simple Is there a need for life insurance? Making a change to save probate taxes is not always a good idea Passwords, PINs, and user names Listing of trusted advisors
Inter-Generational Farm Transfers Fair is not always Equal
Inter-Generational Farm Transfers Farming property, including shares of qualified farm corporations or interest in family farm partnerships, can be transferred to a child by a parent at any value between a nominal amount and FMV (or maybe even gifted for net family property purposes) Consideration for transfer can take the form of a promissory note if cash unavailable (which may even be forgiven upon death if desired) Tax deferred transfer of farm property on death can also occur as part of estate planning Many options are available for corporate transfers and crystalizations as well (not covered in detail here)
Farm Subsidy Programs
Cost-Sharing Programs Growing Forward 2 Ontario Cost-share funding assistance supports projects in these six focus areas: 1. Environment and climate change adaptation 2. Animal and plant health 3. Market development 4. Labour productivity enhancements 5. Assurance systems (Food safety, traceability, animal welfare and weather risk mitigation) 6. Business and leadership development
Farm Subsidy Programs
Farm Subsidy Programs
Farm Subsidy Programs
Farm Subsidy Programs
Thank You. Questions? Franklin H. Famme, CPA, CA Famme & Co. Professional Corporation 125 Ontario Street, Stratford, ON, N5A 3H1 Tel. 519-271-7581 ffamme@fammeandco.on.ca