This is the third part in a new series on Farming & Agriculture. If you haven’t had a chance to read it yet, check out Part 1: How Farm Corporations Win the Land Purchase Game and Part 2: How To Use The $1 Million Capital Gains Exemption When All Of Your Land Is A Farm Corporation.
Here are some of the dos and don’ts when establishing a farm corporation.
We met with a client (Peter) recently as he wished to set up a farm corporation. Peter wanted to purchase land and had heard that there were significant tax savings when purchasing land in a farm corporation (Peter is 100% correct in this regard).
Peter runs a mixed-crop operation making $100,000 to $200,000 per year.
Peter owns all of the land that he farms.
Peter has $500,000 of bank debt from a land purchase that he made a few years ago.
We explained to Peter how the corporation would be established:
- EQUIPMENT & INVENTORY: We would transfer the farm operation into the new corporation. This means that we would transfer all of the farm equipment and grain inventory into the corporation. When the inventory is sold from the bins, the income will be taxed in the corporation (at a corporate tax rate of about 11%). Future farming income will be taxed at 11% corporate tax rates.
- DEBT & LAND: We would like to make the company responsible for repaying the $500,000 bank debt (using corporate after tax dollars). For this reason, we will transfer the debt into the new corporation. At the same time, we will transfer in enough land to cover this debt. Each quarter of Peter’s land is worth about $500,000, so we will transfer one quarter into the new corporation. Generally speaking, we will only transfer land into the corporation to cover bank debt. If there was no bank debt, we likely would not have transfer any land into the corporation.
- TAXATION CONSEQUENCES: Revenue Canada permits the transfer of equipment and inventory to be made without taxation consequence. For the land transfer, Peter’s original cost on the transferred quarter was $100,000. Therefore, we will declare a $400,000 capital gain on Peter’s personal tax return when we transfer the land into the corporation.
Peter will use his farm property capital gains exemption ($1 million lifetime) to eliminate the income taxes that would otherwise have been payable on this gain.
We confirmed to Peter that it is very common to have a farm operate through a corporation and still have the majority of the land held personally.
Holding the majority of the land personally provides the best long-term tax flexibility for Peter and will make things simpler when he transfers the farm operations to his child in 30 years.
We also confirmed to Peter that he will not charge rent to the corporation for the use of the personal land. Revenue Canada does not require a rental charge and it is normally not desirable for tax purposes.
When it comes to establishing a farm corporation, Revenue Canada has made it easy to keep all or most of the land in your personal hands!