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7/24/2019 Loopholes for Farmers
1/22
LOOPHOLES FOR
FARMERSTM
20142015A tax planning checklist
for farmers
" Tax Planning Professionals"
[email protected]@[email protected]
Toll free 1-888-818-FARM
www.farmtax.ca
Loopholes For Farmers is a tool that can be used to reduce the o verall taxes that you pay. This isnot an exhaustive list of tax planning ideas, but is simply a summary of the more significant savingsand planning opportunities available today in British Columbia. Professional advice should besought to ensure that a particular idea is applicable to your personal situation.
Please review the checklist, and if any of the items seem to relate to your situation, please do
not hesitate to call.Copyright 2015 Rossworn Henderson LLP $12.95 + GST (complimentary for clients)All rights reserved.
ROSSWORN HENDERSON LLPChartered Professional Accountants
Tax Consultants
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LOOPHOLES FOR FARMERS
Tax Law Planning Point
Rossworn Henderson LL P
Chartered Professional Accountants
Tax Consultants
1
HOW TO USE THIS CHECKLIST:
This Loopholes for Farmers guide has been divided into the following sections:
Page
General information 2
Deductible expenditures 5
Using your vehicle for farming 9
Capital expenditures 10 Farming in a corporation 11
Selling a farm & transfers to children 13
Government programs 19
There are very specific tax laws that relate onlyto farmers. It is very important that you areaware of how to use these rules to your advantage. If a tax rule is missed or misused, thiserror could easily cost you hundreds of thousands of dollars. This is especially true when you areselling your farm or transferring it to children.
1. Read each section that applies to you. Check the box of each loophole that could be used inyour circumstance.
2.
BE SURE TO TAKE NOTE OF THE NEW TAX RULES FOR THIS YEAR, WHICHHAVE BEEN HIGHLIGHTED IN BOLD.
3.
Bring this booklet with you when we are doing tax planning for you or preparing your income taxreturn and we will show you how to get maximum benefit from those planning points.
4.
These loopholes are simply the most common methods to use existing tax laws to your greatest
advantage. As a taxpayer, you should always look at the tax rules from different angles and
structure your tax planning in a way that will result in a benefit for you and your family.
5. For further information regarding your tax issues, please contact our offices at:
Armstrong: 250-546-8665 Enderby: 250-838-7337
Lumby: 250-547-2118 Salmon Arm: 250-832-5129Sorrento: 250-675-3440 Out of town (toll free): 1-888-818-FARM
Email: Chris Henderson [email protected]
Dustin Stadnyk [email protected] Merrill [email protected]
GENERAL INFORMATION
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On April 1, 2013 BC returned tocharging GST at a rate of 5%(previously HST at 12%).
Farmers are classed into three
categories:
Fu ll-ti me farmers
Full-time farmers are not subject to alimit on the amount of losses that aredeductible.
Part-time farmers
Part-time farmers are defined asthose whose gross farming revenuesdo not exceed their other sources ofincome (i.e. Pension, employmentincome, investments, etc.). Themaximum loss that may be claimedin one year is $17,500.
Hobby farmers Hobby farmers cannot deduct any
farming expenses as CRA viewsthem as being entirely for personal
benefit.
Business losses created on or after2006 can be carried forward for 20years. Losses occurring prior to2006 are limited to a 10-year carryforward.
Be sure your record keeping systemcaptures all the GST paid onexpenses. There are some sales itemsthat GST must be charged on byfarmers. For example, farmers mustcharge GST on the sale of equipment,land and hay for horse consumption.
You should try and establish yourfarm operation as full-time.
If possible, set your farm operationup as a partnership as each partnerwill be eligible for a maximum lossof $17,500.
Never advise CRA that you consideryour farm a hobby. Ensure you havedocumentation supporting a
reasonable expectation of profit.
If your business has losses that areabout to expire, it may be possible torenew these, so that they are availablefor another 20 years.
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If you or your spouse are self-employed, you have a June 15deadline for your personal incometax returns, however, any taxesowing are still due on April 30 andCRA will charge interest for unpaidtaxes as of April 30.
Partnerships that have more than
$5 million in assets OR revenues
plus expenses greater than $2
million will now be required to file
a T5013 Partnership Return.
Partnerships with less than 6
partners are not required to file a
T5013 Partnership Return. If no
T5013 is filed, CRA could take the
position that the Partnership
Return is never statute-barred.
A farmer can use deductions such asCCA for Guaranteed IncomeSupplement (GIS) purposes.
If you had a profit from your farm
last year and had to pay taxes at theend of the year, CRA will likelyrequire that you make instalment
payments for this year.
Taxpayers with gross revenue of lessthan $30,000 are not required toregister for GST.
You may want to consider making alump-sum instalment before April 30to cover the estimated taxes owing ifyou cannot file your return by thatdate.
The T5013 must be filed by March
31steach year. Please note, the
assets are calculated as the cost of
all assets both tangible and
intangible excluding any
depreciation. If you think that this
may apply to you please contact
our office.
You may want to consider filing a
T5013 Partnership Return even if
not required to do so to ensure that
your Partnership Return is statute-
barred.
You should deduct CCA for GISpurposes but not for income taxpurposes. This way you do not wastepersonal exemptions.
Individual farmers are allowed to
make one annual instalment due onDecember 31. Farm Corporationsare required to make monthlyinstalments.
Consider registering voluntarily, asyou will not charge GST on mostfarming income, but then you canrecover the GST paid on your
purchases.
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Easement sales qualify for the
capital gains deduction. ALR
swaps may also qualify for the
capital gains deduction. The first
year changes on surface leases also
may qualify for the CGE.
Properties with farm status havelower rates of municipal taxes and
property insurance. The BCAssessment Authority determinesyour status.
There is a new farm class for retiredfarmers under BC Assessment
The government has announced asystem of Carbon Credits. Farmerscan earn Carbon Credit by adopting
practices that reduce emissions, suchas no-tilling and direct seeding.
Partnerships provide a lot offlexibility with respect to future tax
planning and the ability to access theCapital Gains Exemption. However,there are very complex tax rules thatcan apply. Joint ventures offer highincome farms the possibility of
increasing the amount of income thatis taxed at low rates.
Siblings may break the ownership
line for the capital gains exemption.
There are income tax issues if lifeinsurance policies are not properlystructured.
If possible, consider using the
ACBadjustment instead of using
the capital gains deduction.
Try to have your property assessed asfarm. Farm property taxes are
considerably lower than residential.There are developing farmclassifications for starting farms.
Provided you meet all of the criteria,your property may still qualify asfarm property without having the
prescribed amount of sales.
Carbon Credits can now be boughtand sold on an open market, whichwill be taxed as income to the farm.
In situations where you are adding anew partner, removing an old partner,moving a partnership into a company,or dealing with a partner, you shouldalways consult with a knowledgeableadvisor.
Take this into consideration when
structuring farm ownership andsuccession.
Ensure the payor and the holder ofthe life insurance is the same or thereare taxable benefit issues.
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You can earn up to $3,500 of
employment income before it
affects your Guaranteed Income
Supplement.
Consider issuing yourself and your
spouse a T4 $3,500 each.
DEDUCTIBLE EXPENDITURES
Farmers may report income on either acash or accrual basis.
Any expenses relating to the farm are
deductible, including:- livestock purchases-
containers and twine-
fertilizer and pesticides
- seeds and feed-
property, equipment, and cropinsurance
- custom contractor fees-
machinery rentals-
utilities- office and supplies- professional fees-
rent and property taxes- wages- motor vehicle expenses-
veterinary and breeding fees-
machinery, fence and building
repairs-
fuel
-
licenses- small tools
The portion of expenses that relate topersonal use (i.e. slaughtering a cow forthe freezer or using hay for your hobbyhorses) is notdeductible by the farm.
Consider using the cash basis foryour farm operation, as it is generally
easier to manipulate the incomereported in any given period.
Cash basis farmers should purchase
supplies at year-end to increaseexpenses for the year if a farming
profit was generated in the year.Credit card payments qualify as
paid in the year. A note payableissued to a supplier may also qualifyas paid. The purchase of additional
livestock will be beneficial if in aprofit position, but will not bepermitted as an expense if doing sowill create a farm loss. Leasing
cattle can sometimes get around
these farm inventory rules.
Generally, it is easier to increase yourreported farming income to includewhat that farm would have receivedhad these items been sold to someoneelse.
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50% of meals and entertainment expensesare deductible.
A portion of home office expenses suchas rent, mortgage interest, property taxes,utilities, telephone, minor repairs and
home insurance are deductible. In-homeoffice expenses cannot be used to
increase a loss but can be carried forwardindefinitely and used in a year when thefarm has a positive income.
A farm can pay individuals assubcontractors, saving you the cost ofCanada Pension Plan (CPP) andEmployment Insurance (EI)
remittances.
The federal personal exemption for
2015 is $11,327 (BC $9,938), under
which no income tax is paid on
earnings.
Expenses incurred for clearing, leveling,
and draining land are 100% deductible.
Keep good records to support yourclaim, including who you attendedwith and for what purpose.
If possible, increase farm revenue ordecrease other expenses ensure yourhome office expenses get claimed.
There are specific criteria to considerif a worker is a subcontractor or anemployee. Ultimately, the risk of anyadditional tax liability resulting from
an incorrect assessment falls on you,so be sure before you start.
Pay reasonable wages to family
members (especially children) to
take advantage of these tax-free
limits. The children can then
contribute to an RRSP or RESP
with the funds. Ensure your
children file a tax return to
maximize their RRSP room for
future use and to claim the
Working Income Tax Benefit tax
credit.
Try and have farm expenses
characterized as land leveling andland clearing. You do not have todeduct all the costs for clearing landin the year they were paid. Youshould carry forward any or a part ofthe costs to a year you are taxable.
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CRA gives tax credits for legitimateresearch under the Scientific Researchand Experimental Development Program.It is designed to help small businesses doresearch to improve their products.Farmers who qualify for the program canget a 100% tax deduction for the money
spent on research and refundable credits.
If you use your life insurance policy ascollateral for a loan related to your farm,you may be able to deduct a portion of
the premiums paid.
Interest on money borrowed to earnfarming income is deductible. The
purpose of a loan is what determineswhether a loan is deductible.
CRA has recently changed their view,
stating that payments of mixed debt
must be split pro-rata based on the
personal and business percentages.
Leasing equipment is an alternative topurchasing, and the lease payments are100% deductible.
Test plots and machinery experimentscould qualify for this tax break.Check if contributions used forResearch and Development are alsoeligible for the refundable tax credits.Any expenditures that result in atechnological advance qualify. See
if you can get yours to qualify, itsworth it!!
When arranging financing, ask thebank for a letter saying that you needlife insurance to ensure the payments
are deductible.
Always structure loans to be for abusiness purpose, which makes them
deductible. If required, personalassets can still secure the loan.
This has not yet been tested in tax
court. You might consider splitting
your financing in to separate loans
(business vs. personal) and pay
down the personal loan first.
Ensure it says lease if you wantlease treatment. It can be structured
just like a loan with a $1 buyout and
still qualify. If you buy out the leasethen sell the equipment for a profit itmay be classified as business incomeand there will be no capital gains.
Watch out forthe lease rates. Theyare often much higher than
financing costs.
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$3,500 per year can be paid into a retiringallowance for employees, includingspouses and children, if you retire, foryears that they worked in your businessoperation before 1996.
Cash basis farmers that report a net loss
are required to decrease their loss basedon the amount of purchased inventory(livestock, fertilizer, chemicals, feed, seedand fuel) that is on hand at the end of the
year. This Mandatory InventoryAdjustment (MIA) will be deductible inthe next year.
Leased cattle are not subject to the MIA.
Cash basis farmers have the option ofreporting additional income up to the fairmarket value of the inventory on hand atthe end of the year. This is called anOptional Inventory Adjustment (OIA)and is deductible in the next year.
Transfer this retiring allowance intoan RRSP to avoid immediate incometaxes on it. CRA has said that wagesdont even have to be paid to the
spouse. The spouse and children onlyhave to have worked on the farm.
You are only required to include 70%
of the cost of Specified Animals(horses or animals registered undertheAnimal Pedigree Act). All horsesare considered to be specified
animals.
You should consider this as an optionif you wish to create a farm loss.
In many cases, it is beneficial to havea moderate amount of profitgenerated by the farm. For example:- to utilize non-refundable tax
credits, which would otherwiseexpire
- to have earned income forcalculation of your RRSPcontribution limit
- to designate the farm asQualified Farm Property, whichis eligible for the $813,600capital gains exemption
-
to average taxes over multiplelow profit years at low marginalrates as compared with no tax incertain years and very high ratetax in years when the farm doeswell.
USING A VEHICLE FOR FARMING
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Expenses relating to a vehicle used forfarm purposes are deductible based onthe percentage of kilometers driven for
business purposes, which must besupported by a travel log. CRA
auditors have stated that if a log is not
available, they consider the vehicle to
be 100% for personal use, and nodeductions are available.
Employers are permitted to deduct atraveling allowance paid to employees
for vehicle use, which is non-taxable tothe employees. For 2015, the rate in
B.C. is $0.55/km for the first 5,000
kilometers and $0.49/km thereafter.
If an employee uses a farm vehicle forpersonal use, the employer is required tocalculate an operating benefit and a
standby charge based on the number
of personal kilometers and include theseamounts on the employees T4. For
2015, the operating benefit rate is
$0.27/km. The standby charge is
2/3 of the annual lease cost or 24% of
the original cost.
A vehicle which meets the CRA
definition of automobile has specialrules that reduce the allowabledeductions for depreciation, lease costs,and interest. For 2015, the maximum
cost for depreciation is $30,000, the
maximum lease cost is $800/month,
and the maximum interest is
$300/month. If not determined to be anautomobile, the full expenses are
deductible.
Allowable expenses include fuel,repairs, insurance, loan interest, lease
payments, and depreciation. Receiptsmust be kept to support these amounts.
If you are audited and do not have a
log, you may be able to prepare a log
after the fact based on timesheets,
appointment books, or other means,and appeal the reassessment.
If actual vehicle expenses paid by theemployee exceed this allowance, the
employee can choose to include theallowance in income and deduct theactual expenses, resulting in a l argertax deduction. Make sure to keep all
vehicle receipts for the year to be ableto make this choice when preparingyour tax return.
The standby charge is reduced ifpersonal use is less than 50% and lessthan 20,000km/year in total. Becausethe standby charge is so onerous, avehicle should generally only be owned
by a business if it is used more than90% for business use and personal usewill be less than 1,000km/month.
A vehicle is not an automobile if:
It seats 3 people and is used morethan 50% for business use, or
It seats more than 3 people and isused more than 90% for business.This vehicle must be a van, pick-
up or similar vehicle and used totransport goods, equipment, or
passengers to earn income.These tests only apply in the year ofacquisition, therefore it may be
beneficial to acquire new vehicles just
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prior to the end of the year and ensure itmeets the test for this short period,thereby guaranteeing full expensedeductions for all future years.
CAPITAL EXPENDITURES
CRA allows farms to deduct an amountfor the depreciation of equipment used inthe farm, referred to as the Capital Cost
Allowance (CCA). The amounts fordifferent types of equipment are set by
CRA, although only of the annualamount is permitted in the year ofacquisition.
Tools with a cost less than $500 areconsidered Class 12 additions for tax
purposes, and are fully deductible in theyear of purchase.
Certain manufacturing assets andtechnological equipment can be put into aseparate class when acquired so that whendisposed of, a tax savings can be realizedif the selling price is lower than the taxvalue.
Machinery and equipment purchased isnormally included in CCA Class 8 and iseligible for a 20% CCA claim. For
manufacturing and processing
machinery and equipment purchased
after March 19, 2007 through to 2014,
the CCA claim will be temporarily
increased to 50%.
Trucks purchased that are used to haulfreight with GVW of larger than 11,788kg are included in Class 16.
To maximize your CCA deduction,consider making capital purchasesclose to the end of the year. In thisway, you have of the annual CCAeven if only owned for a short period.
Also, consider waiting until thebeginning of a new year to dispose ofequipment as there is no CCA claim
permitted in the year of sale.
It is important to ensure these areappropriately recorded, as the
alternative is Class 8, which is adeduction at 20% per year.
Dairy farms may be considered to bemanufacturers. Consider putting
these assets into these special classes.
Ensure manufacturing and
processing machinery and
equipment included in the
appropriate CCA class to take
advantage of this increased
deduction.
The rate of depreciation for Class 16is 40%. Be sure your truck isrecorded in Class 16 and not Class10, which is only depreciated at 30%.
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Construction costs for a paved road are acapital asset added to Class 17. The costsfor unpaved roads are deductibleexpenses.
If an asset has had too much CCAclaimed on it over the years, the tax valuewill be lower than the fair market value.
When sold, such an asset will result in anincome inclusion called recapture.
Leave the roads built on the farmunpaved, as the cost of building themis fully deductible.
Transfer Classes 2-12 to Class 1 inorder to defer the recapture of capitalcost allowance when you sell assets.
The purchaser, including children,can put the purchase into normal
classes.
FARMING IN A CORPORATION
The main reasons to incorporate a farmare as follows:
Lower tax rates
Separate legal entity
Ability to plan and control personalincome
Income splitting
Simplicity
Succession planning
Effective 2013, the corporate tax rate is13.5% on the first $500,000 of activeincome as compared with 46% whentaxed personally.
Eligible dividends are taxed at a
significantly lower tax rate than regulardividends.
A tax court decision has determined thatdividends can be paid to one class ofshare and not another.
Each of these reasons must beexamined in relation to your currentsituation and your expectations for
the future. There are additional coststo having an incorporated farm, so itis important to ensure the benefitswill outweigh this cost.
If you can leave excess cash in acompany there will be significantlymore after-tax dollars to invest ormake the farm grow faster and paydown debt.
If your company has active income in
excess of the $500,000 small business
limit, you should review whetherpaying eligible dividends is more
tax advantageous than managementbonuses.
When setting up your company, besure and give both spouses differentclasses of shares as it provides moreoptions for remuneration. Jointownership of shares with a spouse
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A dividend that has been declared, but notyet paid is reported on a separate taxreturn when you pass away and results in
the ability to get nearly tax-free money toyour estate.
When incorporating, cash basis accountsreceivable cant be rolled tax-free.
A corporation does not qualify for the
principal residence or the ProvincialHomeowner Grant.
Corporate losses cannot be transferred toan individual.
should be considered to avoidpossible probate if one of the spousesdies. This may reduce the ability todividend sprinkle.
If you are of ill health or elderly,consider declaring a dividend in yourcompany, but not paying it to
minimize some estate taxes.
Consider purchasing cattle inventoryin the proprietorship/partnership toreduce the impact of these accounts
receivable. The inventory can berolled to the company and the incomefor the sale of the inventory will beused to offset the deduction from the
accounts receivable.
You should attempt, by trust
declaration, to transfer the house and1 acre into your own name. Then, byregistering a 1/1000 interestownership of the property or a life-estate jointly into you and yourspouses names you can claim the
principal residence exemption andalso claim the B.C. Home OwnersGrant.
When starting a farm and you areexpecting start-up losses, operate as a
proprietorship or partnership. These
start-up losses can be used againstother income and can even be carried
back to prior years.
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SELLING A FARM & TRANSFERS TO CHILDREN
The Lifetime Capital Gains Exemption
Limit was increased to $800,000 in
2014 and will be inflated by the
Consumer Price Index going forward.
The indexed amount for 2015 is
$813,600.
The sale of a farm (or quota) may be tax-free if your farm qualifies for the lifetime$813,600 capital gains exemption.
With the 2014 Federal Budget, the
government is proposing to simplify
the rules for the taxation of quota.
This will be achieved by altering how
quota is taxed to match other
depreciable assets, such as buildings.This could increase the tax rate on the
gain on sale of quota from 13.5% to
45% and create Alternative Minimum
Taxes.
If you acquired the property after 1987,you must meet a 2-year gross revenue testto determine if farm property qualifies forthe capital gains exemption. This testrequires that your gross revenues fromfarming exceed all other sources of
income.
If you received your property from yourparents, you may be able to fall back onyour parents farming history to see if thefarm still qualifies for the capital gainsexemption. Property acquired fromsiblings does not qualify for the look back
Structure your affairs to ensure
you qualify for this deduction.
There are specific rules thatdetermine if your property qualifies
based on the use of the property andthe length of ownership. You should
always look at this option as it cansave up to $179,000 of tax per owner.
If you see yourself selling out or
transferring your quota to a
successive generation in the not too
distant future, you might consider
whether it makes sense to sell your
quota to a new company, just to sellit back again to reset the purchase
price of quota at todays values.
This will very likely create
immediate tax consequences but
may be worth it.
If you operate your farm as apartnership, you are not required tomeet this test. You should alwaysset-up your farm as a partnership toavoid this onerous test in the future.The land need not be registered in the
name of the partnership to be
considered partnership property if thefarmer has been reporting as a farm
partnership on their tax returns.
You should always look at the historyof a property when family isinvolved. You should have old taxreturns to support such a claim.Affidavits from neighbors, family
pictures and old dairy or apple co-op
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provisions through the parents.
If you owned a farm prior to 1987, butclaimed the 1994 capital gains election,you are considered to have re-purchasedthe property after 1987 and now mustmeet the gross revenue test.
You can transfer qualified farm propertyat its tax cost to children during your
lifetime or at your death.
The sale of timber from qualified farmproperty may qualify for the capital gainsexemption. Gravel sales follow the sametreatment.
If you are selling land with standing
timber, you may be subject to BCLogging Tax on the standing timber.
CRA has recently confirmed their view
that sharecropping is considered to be
a rental activity, not active farming.
As such, it may taint your ability to
meet the requirements for the Capital
Gains Exemption.
A company is not eligible for the capitalgains exemption when selling assets.Therefore, you should encourage the
buyer to purchase shares so as to utilizeyour capital gains exemption.
records all are good evidence.
You can still look to your ownershippre-1994 to determine if you meet thegross revenue test. Again, this should
be supported by tax returns.
The child acquires the farm propertyat the same tax value as the parents.
When a parents child dies, this
rollover is NOT available to thechilds spouse.
A tax court case involving the sale oftimber from qualified farm propertywas found in favor of the farmer. Ifyou are planning to sell timber, try to
structure the agreement for sale to besimilar with this case. If you have
paid tax on timber sold fromfarmland, you should file a Notice of
Objection as soon as possible.
Identify the value of standing
timber at $0 in the sales agreement
and insist that the purchaser does
not deduct the value of standing
timber on his/her tax return.
Structure your situation as a
Custom Farming Arrangement or
Farming Joint Venture Agreement,
where you are farmer and the
other individual is an employee
who gets paid with a share of thecrop.
Consider selling at a lower price toensure that the purchaser acquires theshares. The tax savings will morethan offset the reduction in direct
proceeds.
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An interest in a farm partnership alsoqualifies for the $813,600 capital gainsexemption.
Woodlots can transfer tax-free from onegeneration to the next. Woodlots, whose
marketable product can only be created atthe end of a time period beyond the lifeexpectancy of the taxpayer, may havereasonable expectations of profit
problems.
When reporting a sale using the capitalgains exemption, you will still have avery high net income despite not havingto pay much tax. This may affect yourability to claim social benefits such aschild tax, OAS, and the GIS.
Although the capital gains exemption
may reduce your taxes calculated underthe normal method to nil, the Alternative
Minimum Tax(AMT) rules may stillapply that will have you paying some tax.
If possible, always try to structureyour farm as a partnership as it
provides a significant amount offlexibility that result in tax savings.Also a new partner does not need tohold their partnership interest for 2years in order to claim the $813,600
capital gains Exemption. A familymember can transfer assets to an
existing family farm partnership andthen immediately afterwards use thecapital gains deduction on the sale ofthe partnership interest.
Ensure that the transferor or a familymember be actively involved as
required by a prescribed forestmanagement plan. This is arequirement for the tax-free inter-generational rollover.
There may be ways to spread out asale over a number of years to havethe same tax result, but allow you tocontinue to claim these social
benefits. These options are onlyavailable if drawn-up as part of thesale agreement, so you should seek
professional advice as soon as youthink you might want to sell.
AMT is essentially a prepayment of
tax for the next 7 years. If you havetaxable income in those years, youmay be able to offset the tax with theAMT that was incurred in a prioryear. AMT should always beconsidered when evaluating theoptions of a farm sale as it can likely
be reduced or eliminated.
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CRA provides for a taxpayer to sell theirhome on a tax-free basis using theprincipal residence exemption. The
principal residence exemption isgenerally limited to the home and the hectare (1.2 acres) it is situated on,although recent tax court decisions have
allowed significantly more than this.
If you sell your farm, but do not receiveall of the money immediately, you do nothave to pay the full amount of taxes. Thisreserve is claimed based on the pro-rata
portion of money received, with at least20% of the gain being reported in anyyear. This reserve is not available wherea gain is recognized on the transfer to a
controlled company.
If there are 2 parcels of farm land jointlyowned by 2 brothers, the land can be
portioned so that only 1 name will remainon each property.
If you sell farm property and replace itwith a similar farm property, the tax onthe initial sale can be deferred until thenew property is sold. In some cases
properties purchased prior to thedisposition of the farm property can be
considered replacement properties.
CRA has special rules when you areselling your farm to your children. In
particular, you may be able to transfer thefarm at a value between what you paid forit and what it is worth today, making thetransaction non-taxable
The principal residence exemptionand capital gains exemption can both
be claimed on a single property. Youshould always claim the maximumamount for the principal residenceexemption, thereby saving the capitalgains exemption for future sales.
If you sell to a related party (i.e. achild) you only have to report 10% ofthe gain in any year. You will needto determine whether it is more
advantageous to claim the income allin one year or over a number of years.
There are no tax consequencesproviding each parcel has the same
value.
Always try and have propertiesclassified as farm properties insteadof rental properties to ensure theyqualify for the replacement propertyrules.
This provides a lot of tax planningflexibility. In addition, you are still
able to claim the principal residenceexemption, the capital gainsexemption and the capital gainsreserve on such transactions. Theconsideration that is paid by thechildren may affect the elected value.Also, the children must own the farm
property for 3 years before selling;otherwise the parents will have to paythe tax on the gain.
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Once a farm has been transferred to achild, the child faces all the same rulesand tax options available to the parents.However, there are some holding periodtests to be met to ensure the variousexemptions will still apply.
If you want to transfer your farm to your
child, but do not necessarily want to givethem full control of the farm at this time,
a Family Trust may be used.
On death, most farm assets can
transfer to children at any value
between cost and fair market value.
Quota owned in a proprietorship is an
exception, which can only transfer at
cost at the date of death.
Inventory, when transferred to a child, isdone so at its fair market value and willlikely result in tax. However, if youincorporate a company, the inventory can
be transferred on a tax-free basis.
Leasing cattle to a child is an alternativeto a rollover of the cattle at their fair
market value.
When the owner of a farm property dies,he is subject to a deemed disposition ofall assets immediately prior to death.
Probate applies on death when assets areheld personally.
Do the transfer to children wellbefore (3 years) of an ultimate sale ifyou are intending to sell a farmoutside of the family group. If done
properly this can multiply the
capital gains election.
All of the above considerations
continue to be available, plus you getthe benefit of maintaining control of
the underlying assets. However, thisdoes come with the additional cost tosetup and maintain the Trust onceestablished.
Given the lack of flexibility at
death, it is generally preferable to
own quota in a family farm
partnership or a corporation.
You should consider transferring theinventory through your Will so thetax is deferred until it is actually sold.The inventory included in income the
previous year will be expensed thenext.
Make sure the lease gives your childthe option to purchase a percentage of
the herd (and you receive an annualpayment) so that CRA will not viewthe lease as a complete sale and taxyou on it.
Transfer property by bequeathing orgifting to defer any tax payable. Useas much of the deceaseds capital
gains exemption as possible. EnsureRRSPs are left to spouse for tax-freerollover.
Hold land and shares of companies injoint names with spouse to avoidprobate.
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In certain circumstances, land inside of
the ALR can be traded for propertyoutside of the ALR.
Land ownership can be separated from
the right to use the land, by use of a rentalor lease agreement.
There are a number of considerations
when transferring a farm to a
successive generation. M ost
importantly, these include: How to fund retirement cash needs
How to deal with non-farm children and
the Wills Variation Act How to protect against future legal and
matrimonial issues
How to avoid property transfer taxes
How to minimize the effect of AlternativeMinimum Tax and social benefitclawbacks
How to ensure the liquidity andcontinuance of the farm.
BC Probate taxes
At a farmers date of death, there is adeemed disposition of all his/her assets.
A developer may pay you to haveyour land designated as ALR land ifit creates the opportunity to swapfor land that could be subdivided anddeveloped.
Consider this strategy to help make
the allocation of farm amounts moreequitable amongst farm children and
non-farm children.
This is not an exhaustive list of
considerations, as each family and
situation is different. Further, your
answer to certain issues will
negatively affect other issues. As a
result, there is never a single
right answer. Instead, you
should involve your accountant,
lawyer, banker and investment
advisor from the beginning to
navigate through all theconsiderations and to determine
the course of action that best meets
your objectives.
There are tax free rollovers andcapital gains exemptions and the
ability to file a separate Rights &Things return. Be sure that your farm
properties qualify for the rollovers.
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GOVERNMENT PROGRAMS
Agriculture Canada has four programsavailable to farmers:- AgriInvest
-
AgriStability-
AgriRecovery- AgriInsurance
In order to qualify for Agri programs,
you must be registered and have paidyour annual fee.
AgriInvestis where the producer cancontribute up to 100% of theirallowable net sales once per year, and
the government will match the first1% of that amount. These types ofaccounts are used to help put moneyaside that would be used for smallincome shortfalls.
AgriStabilityis where a producerpays a fee to receive an insurancebacked by the government. The
program offers assistance once aproducers margin falls below 70% oftheir historical reference margin.
AgriRecoveryis a disaster reliefframework for governments to
provide special one-time relief notcovered by the other Agri options.
AgriInsuranceis an aggregation ofall existing production insurance for
particular industries.
Consider registering for as manygovernment programs as possible asthey are only available to
participants.
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The BC Provincial Government has a
program called Growing Forward 2
which provides funding to farmers for
the following services:
- Tier 1 - A farm assessment-
Tier 2 - Specialized business plan
The Environmental Farm Plan programprovides significant funding for farmers.
Starting in 2014, there will be a new
four-year program called the Western
Livestock Price Insurance Program
which is designed to help cattle andhog producers in Western Canada
manage price risks faced by the
industry.
The program is a 5 year program
and will be ending March 31, 2018.
To be eligible, the farm must have
a minimum of $10,000 in annual
gross farm income as reported to
CRA.
Tier 1a basic farm financial
assessment where the government
will support 100% to a maximum
of $1,900 with an upfront fee of
$100 paid by producers.
Tier 2a specialized business plan
to adopt progressive management
policies and strategies in nine
business management areas which
include succession planning,
reorganizations and tax planning.
The government will support 85%to a maximum of $3,000 with no
fees.
The government has fundingavailable to assist with the purchaseof equipment that helps to mitigaterisks for environmental issues.
For further information on this
pilot program please go online to
www.wlpip.ca
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NOTICE TO USERS: This information is of a general nature. We try to ensure its accuracy and
timeliness. No one should act on it without appropriate professional advice after a thorough examination
of the facts of a particular situation. Information in this booklet is current to January 31, 2015. Changesafter that date are NOT INCLUDED.
Copyright 2015 Rossworn Henderson LLP