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Tax Considerations for
Farm Transitioning
Presented by Bill Wiebe, CPA, CA
Tax Partner(2017/01/25)
> 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.
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
Farm Transitioning
> 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
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
Using a Landco
Using a Landco
Opco.
Mr. Mrs.
50% 50%
• M.r and Mrs. Jointly own
some farmland
personally worth $2.2
million and cost of
$200,000
> 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
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.
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.
Using a Landco
Using a Landco
Landco. Opco.
Mr. Mrs.
50% 50%
Loan owing to
$2.2 million (secured)
• 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
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)
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.
Using 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
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)
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.
Selling a Landco
> 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.
Corporate 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
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
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
Share Freeze
Choice of structure
Partnership
Corporation
Joint venture
Tax planning tools
Inter-generational rollovers – during life or on
death
• Farm land
• Farm equipment
• Farm corporation shares
• Farm partnership interests
Tax planning tools
Capital gain deduction (CGD)
• Farm land
• Farm corporation shares
• Farm partnership interests
Tax planning tools
Rollovers to partnerships and corporations
• Farm land
• Farm equipment
• Farm inventory; grain, livestock, etc.
• Quota’s and other intangibles
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
Tax planning tools
> To request handouts:
• Call (306) 773-7285 and ask for Ashley
• Email [email protected]
• Will also be available on our website
http://www.starkmarsh.com/
Questions??
