Uncertainty in taxation policy lies ahead for Canadian taxpayers. The financial impact of COVID-19 combined with the recent fiscal budgets has resulted in historic levels of government spending. The federal debt has doubled from $619.3 billion in 2015-16 to $1.2 trillion last year. It’s expected to climb to $1.4 trillion by 2028-29. As a result, continued changes in taxation policy are generally expected to address the increased government spending.
Future tax policy will have a significant impact on farming and agriculture businesses in Canada. There are several potential impacts to consider and this article will briefly touch on a few important topics for Canadian family farms.
Business Structure and Future Tax Liability
Uncertainty over future income tax rates will have several potential impacts to your farming operations. If tax rates were to increase, how would this impact your farming business operation and structure? Would an increase in tax rates change your retirement or succession plan? Farm taxation is a complex area and there are a number of items to consider including inventory, accrued capital gains on land, quota and other assets when assessing your farms current and future tax liability.
Do you know what the current and estimated future tax liability of your farming entity is today? If the answer is no, you should be speaking to your tax advisor to ensure your farm is optimizing its tax position every year.
The Capital Gains Deduction
Taxpayers and farming businesses should always consider the availability of their lifetime capital gains deduction (“CGD”), which can be utilized on the sale of qualified farm or fishing property (“QFFP”). The requirements to meet the QFFP definition are beyond the scope of this article, but these are the main types of farming property that could qualify for the CGD at a high level:
- Land
This is usually the most common type of property when people think about QFFP or the CGD in relation to a farming business. If the farmland meets the technical requirements, it can qualify as QFFP for the taxpayer and potentially future generations, depending on how the farmland is owned and farmed by the family. As the value of farmland continues to increase, ensuring these assets continue to meet the requirements for you and potentially the next generation is vital.
- Shares of a Family Farm or Fishing Corporation
There are different business structures that farm businesses operate in, one being a corporation. The shares of a corporation are held by the shareholders, and shares of a family farm company may also qualify as QFFP. If you currently operate your farming business in a corporation, it is important to ensure the shares you hold personally meet the technical requirements to be QFFP. In order to meet the technical requirements, the assets of the corporation need to be analyzed. Passive investments such as excess cash or real estate not used in the farming business, or loans to other corporations are common examples of items that could potentially limit your access to the CGD and/or intergenerational gifting.
- Interest in a Family Farm or Fishing Partnership
The one asset class that could be the least known or utilized in this list is an interest in a family farm or fishing partnership. A farming or fishing partnership can be a powerful structure from both a business and tax perspective and, if structured correctly, can also qualify as QFFP.
- Quota
Farming quota can qualify as QFFP. Proper planning should be considered on any dispositions of this type of asset to ensure it qualifies for the CGD.
The CGD can provide tax savings of up to $270,000 per person on dispositions of QFFP depending on your province of residency when compared to current capital gains tax rates. This is a significant tax savings and taxpayers must ensure the farming property they own qualifies and continues to qualify for this treatment.
There are common pitfalls that can limit an individual’s ability to claim the CGD in all of the asset types highlighted above. It is important to not assume your farming asset qualifies for this preferential tax treatment and to consult with an agriculture tax specialist to ensure the technical requirements are met.
Family Farm Transition
Your family farm transition or succession plan will likely rely on your farming assets being qualified farm or fishing property for purposes of intergenerational gifting or the use of your lifetime capital gains deduction.
Intergenerational gifting is a tax deferral, rather than a savings, but is crucial to facilitate the transfer of a farm to the next generation. The tax legislation in this area is also complex. It is important to be aware of the current taxation policy and how any potential future changes could impact your family farm.
There are also significant tax deferral opportunities that should be considered in your overall succession objectives. You and your advisor need to be aware of the current strategies in place and how potential changes could impact the future transition of your farm to the next generation or to a third party. Uncertainty of future tax policy directly impacts your farm transition planning today.
Although tax is only one consideration in your farming operation, future increases in tax rates or changes to tax legislation can have a significant impact to your business and succession plans.
Now is the best time to have these discussions with your advisor to understand the tax landscape and plan accordingly. If you are looking to gain a better understanding of tax planning in the context of a farming operation or have any other queries MNP is here to advise. Contact myself or visit mnp.ca to find an agriculture business advisor near you.
Scott Assman
Partner, Specialty Tax
