On a 4,000 acre farm in southWestern Manitoba, a couple we’ll call Herb, 56, and Lorie, 45, grow grains and raise 600 head of cattle. They have been successful over the years with Herb and his brother buying the family farm in equal shares. That buyout provided Herb’s parents with a retirement income and gave Herb and his brother a chance to expand the farm. Herb and Lorie’s part of the original farm included 800 acres and half the parents’ machinery.
Today, Herb and Lorie have three young children. They hope that at least one will take over the farm. Herb’s brother’s two young children have not expressed an interest in farming. Their reluctance to commit to continuing the family farm has forced Herb and Lorie to postpone succession planning. They want to build a substantial off-farm income for retirement. That way, selling off the farm would not be necessary, and one of their children could still choose to farm. Boosting off-farm investment income is the goal.
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Herb and Lorie approached Don Forbes and Erik Forbes of Don Forbes Associates in Carberry, Manitoba, for guidance. Their object is to develop a plan for retirement that would separate them from the farming operation. As well, they want to provide savings for each child’s post-secondary education.
Herb currently takes $60,000 a year in salary from the farm and Lorie earns $38,000 a year teaching part-time. Their pre-tax income is $98,000 a year. They can and should raise their payouts, Don Forbes advises. That would provide money for more contributions to their Registered Education Savings Plans, RRSPs and Tax-Free Savings Accounts. They can easily add $8,000 to Herb’s income from farm operations. If he then contributes $18,000 to his RRSP, he will bring his tax rate down from 43 to 33 per cent, Erik Forbes estimates. Lorie can take a $70,000 bonus from the farming corporation to add to her $38,000 teacher’s salary. Before tax, the couple’s income would be $176,000. Lorie would put $18,000 into her RRSP and thus bring her tax rate down from a 48 per cent marginal rate to 38 per cent.
Herb and Lorie can set up RESPs for their three children and contribute $2,500 each every year until the kids — currently ages 11, 13 and 15 — turn 18 and are no longer eligible for the lesser of 20 per cent or $500 per year per beneficiary maximum Canada Education Savings Grant. If they contribute at that level, they will get the full 20 per cent Canada Education Savings Grant. When the children are ready for university, the eldest would have $16,550 for tuition, the middle child $29,000 and the youngest, receiving $2,500 from the parents and $500 from the CESG for seven years $42,750. The parents could even out the sums and given each child $29,450 for tuition.
When opening a new RRSP for the older children in their teenage years, a double contribution of $5,000 the opening year will allow for an additional bonus raising the total to $1,000 per child. These results are in future dollars with no inflation adjustment and five per cent annual growth. The kids could get summer jobs to supplement the RESP payments, Erik Forbes notes.
Herb and Lorie have contributed $5,000 each to their Tax-Free Savings Accounts. They have a present limit of $46,500 each for their TFSA. Thus each has $41,500 room for contributions. They can shift cash from their savings accounts to fill that space with income from their higher salaries plus one-time payouts from the farm corporation. The payouts would attract tax, but long-term growth tax-free inside the TFSAs makes it worthwhile, Don Forbes says.
Herb and Lorie have $32,200 each in their RRSPs. If they add draw additional pay from their farm corporation this year and in subsequent years add 18 per cent from their prior year farm salaries, the maximum allowed, then in nine years when Herb is 65, they would have $258,400 or $516,800 total in their RRSP accounts. Annuitized when herb is 65 at the same five per cent annual growth, this balance would generate $31,600 a year for 41 years.
If the TFSA accounts receive $41,500 each this year and thus have $46,500 by the end of 2016 and then receive $5,500 for each for nine years to Herb’s age 65, each TFSA, growing at five per cent a year, would have a balance of $135,800 assuming the money goes into each account at the beginning of each year. The couple would thus have $271,600 when Herb is 65. If at that time this balance is annuitized for 41 years and still generating five per cent a year before inflation adjustments to Lorie’s age 95, it would generate $16,600 a year.
At age 65, based on Service Canada data, Herb would receive $700 per month from the Canada Pension Plan. At her age 65, Lorie would get $650 a month from CPP. When each is 65, Old Age Security would pay $571 a month, assuming that the qualification age for OAS is rolled back to 65, as the present government has promised.
The farm, still in the family, could produce $250,000 a year before tax. We will assume that this income is left in the farm corporation as retained earnings or is paid to Herb and Lorie as income from the corporation. For present purposes, the corporate farm income could be regarded as a top up.
When the farm is sold, its appreciated value, which could be as much as $2.4 million including a capital gain of $1.5 million, might be realized without tax via the Farm Land Capital Gains Exemption for $1 million per owner, Erik Forbes explains. That money could become part of the couple’s retirement planning. Erik Forbes notes.
At retirement
When Herb is 65, the couple would have RRSP income of $31,600 a year, TFSA income of $16,600 a year, Herb’s CPP at $8,400 a year and OAS at $6,846 a year. The total, $63,446 a year before tax, could be supplemented with a farm buyout from the one son they expect to continue farming. When Lorie is 65, she would add $7,800 from CPP and $6,846 a year from OAS. That would make their combination of annuitized retirement savings and government pensions $78,092 a year. If income is split, an allowance is made for TFSA tax-free income, which would be about a third of total income, then after 10 per cent average tax, they would have $5,860 a month to spend from savings and pensions plus whatever income could be derived from the farm buyout.
Their 2.9 per cent mortgage with $90,000 outstanding and $1,064 monthly payments will have been paid by the end of 2024, a year before Herb’s retirement. That will free up $12,768 a year for other spending when the following year, Herb’s retirement begins.
“This is a success story,” Don Forbes says. “Herb and Lorie have ample time and capital to build a comfortable retirement.”
