What are the advantages of a corporate farm/ranch operation when purchasing land?
Let us give you a great example.
We met with a client (Peter) recently and he asked, “How can anyone possibly afford to purchase land at today’s prices?”
He then remarked that his brother Conrad (also a client) has been purchasing quite a bit of land over the years and Peter was trying to understand how Conrad was able to make the numbers work for him.
Both brothers run mixed-crop operations. They each have net farming income of $100,000 to $200,000 per year and have off-farm employment income of $40,000.
We explained to Peter that Conrad has a tax advantage and can afford to buy more land because of the corporation that he owns.
The following are the tax numbers for Peter and Conrad at $100,000 net farming income:
$100,000 on Peter’s personal tax return – tax/CPP payable $31,000 (average tax rate of 31%).
$100,000 on Conrad’s corporate tax return – tax payable $11,000 (average tax rate of 11%).
Peter pays $20,000 more tax than Conrad.
We then showed Peter that the gap gets worse the more with a higher farm income. The following are the tax numbers for Peter and Conrad at $200,000 net farming income:
$200,000 on Peter’s personal tax return – tax/CPP payable $74,000 (average tax rate of 37%).
$200,000 on Conrad’s corporate tax return – tax payable $22,000 (average tax rate of 11%).
Peter pays $52,000 more tax than Conrad.
When Conrad buys land, he purchases the land through his corporation.
Conrad has extra cash flow within his corporation because he is paying far less in income taxes than Peter.
The corporate tax savings provide Conrad with a huge advantage when he bids on land.
When it comes to bidding on land, Revenue Canada has tilted the odds heavily in favour of corporate farms.
What’s a guy to do? Looks like Peter will be setting up a corporation for his next land purchase!