I had many interesting chats withGrainewsreaders in the last few months. I have to admit the headline is a bit misleading, but some of our farmer readers are really do refer to their investment portfolios in the context of agriculture terms. Some stocks produce income like a milk cow when we sell covered calls on them. Other stocks grow like a heifer or steer. Some farmers have figured out that gearing down the farm is a good idea so they are selling farmland at good prices.
Some farmers have also figured out that there won’t be an armored truck or U-Haul behind the hearse so they’re spending some of their money while they are healthy enough to do so and spreading other money around to help children and grandchildren. Let me explain.
DON’T FEAR CAPITAL GAINS
One reader called to say they just sold some farmland and they were going on a holiday. The idea of selling some land crossed their mind one day so he and his wife sat down and listed all the benefits they could see if they sold some land. I didn’t get into the details but he said there were “a lot” of benefits. They put the land up for sale and there was a buyer ready to buy.
The capital gain will be tax free because a lot of farmers in Canada qualify for what is called a capital gain exemption of up to $750,000. In most cases husband and wife can both qualify for the exemption.
If you or your dad or granddad owned that farmland before 1986 the capital gain is pretty well automatic and can go with the land even if your children own it after you. If you bought the farmland after 1986 there are some extra rules (we’ll get into them another time). Don’t let coffee shop talk scare you into thinking the government is going to tax all your money away when you sell part of your farm.
If you are over 65 you should be collecting Old Age Security, and you might lose some or all of that for a year after you sell farmland. Why? Because the taxable half of capital gain is added to income, potentially clawing back your OAS. If your income is above a threshold somewhere near $67,000 you lose the OAS for a year. But then near the bottom of page four of your tax return on line 254 that taxable capital gain is subtracted before your income is taxed. You lose the OAS for a year but don’t pay tax on the money eligible for the capital gain exemption.
If you and your wife collect Guaranteed Income Supplement you likely will lose that for a year too after you sell some farmland. In most cases the money lost (not received) is quite small compared to having tax-free capital gain. Don’t be afraid of the tax on capital gain unless you are selling a lot of farmland.
I thought this farm couple was going on holidays because they had sold some land. No he said, they sold land to downsize the farm so they wouldn’t have to work as hard. They were going on holidays because their stocks had made them good money. That was nice to hear too.
Here’s a bit of history. Years ago I wrote quite an emotional article in Grainewsentitled “Charlie, sell some land.” It was a letter to a farmer who was struggling to save his farm. Now 30 years later some farmers are selling land to gear down and enjoy life more.
OK, I don’t tell readers what to do with their money, but I can tell you what some readers have done with the money they made from stocks and or from selling some land or cows or from savings.
Some readers are helping their adult children set up a Tax Free Savings Account (TFSA) and gift them $5,000 as seed money. Then they help the children learn how to make money with that money. Some help by buying their child a subscription to my newsletter StocksTalk while others have learned enough that they can teach them how to use this strategy.
I more than doubled the money inside my TFSA with Consolidated Mining (CLM) when it doubled. We called that stock our growing calf. Our other accounts made less because we were selling covered calls on our stocks, and it’s hard to double money in a year doing that. But 15 to 22 per cent per year was quite easy to do the past few years, and I’m happy with that.
Another thing parents can do with extra cash is contribute to a grandchild’s Registered Education Savings Plan (RESP) so the children can have money to help them go to college or university or trade school. Five or 10 years from now odds are university is going to cost a lot more than it is now so any financial help grandparents can give now to young children should pay off in bushels. Especially if the parents or grandparents learn how to make good money with the money in the RESP.
Plus, if the children can work either on the farm or for someone else and save some of that money they can graduate without a loan. A child can earn around $10,300 and pay no income tax so this is an almost perfect tax-splitting idea. Your farm can pay your children $10,300 a year and claim the total expense and the money is tax free to the children.
If they put at least some of the money into an RESP then the contribution to the RESP really will be tax deductible dollars. If someone in the family learns how to make good money with the money as we have done by selling covered calls on good stocks, then money in the RESP will grow at a nice rate. When the children go to college they can take the money out, and since they likely will be in a zero-tax bracket, all the money coming out of the RESP will be tax free.
Plus the federal government tops up RESP contributions with 20 per cent, and if the child is in the zero-tax bracket all the money will be tax free when it comes out during college. You can set up an RESP for children at a young age and parents, grandparents or uncles and aunties can pay into the RESP.
I know graduates who have a student loan, and it does create a financial hardship or at least squeezes the cash flow. Some students want to pay the loan off as soon as possible which is a good way to think if he or she doesn’t know how to make money with money. But most students don’t know how to do that because no one taught them so they are victims of cash flow pressures and no knowledge.
I personally think a student should stretch out the payments as long as possible since this a low cost loan with tax deductible interest. Most graduates cannot claim the cost of interest on other loans on their income tax. They can on a student loan.
Say a student paid $200 a month less with the long payback instead of the short one. In a year or so he or she could have almost enough money to half fill the TFSA for a year. If parents or grandparents matched the amount soon the student would have a nest egg to work with. But he or she needs knowledge or someone with knowledge to help make money with the money so as to balance, then surpass, the interest paid on the student loan.
I want to expand on a thought I just wrote: matching deposits. Remember the old NISA program? Now, we have AgriInvest. You deposit cash according to your farm income and the government will match it. I think some parents and grandparents could use the same matching contribution plan for the TFSA.
I think someone in the family should learn how to manage the money by learning how to sell covered calls on stocks in the TFSA. I don’t sell calls on all of our stocks. Our Consolidated Mining (CLM) really was more of a growing steer, so I just let it grow from $8 to $17 in eight months.
But stocks like Yamana (YRI), Barrick Gold (ABX), and Bank of Nova Scotia (BNS) have not been growing all that quickly so I sell what is called covered calls on them and pick up one to three per cent a month many times a year. I call them my milk cows. They just keep producing month after month.
While on the subject of AgriInvest and matching funds, a lot of our readers are taking the money out after the matching deposit is in the account and putting the money into their TFSA.
You put money into a TFSA and make 15 or 20 per cent on it during the year. Come next fall you can defer some income to keep taxes down, but you still need money to pay bills. You could take money out of the TFSA to pay tax-deductible bills. Then in January of the next year you sell the grain or livestock and replace the money in the TFSA and put it to work again.
As I said I have to look into this a bit more before next fall but I don’t see any restrictions on this strategy.
Andyismostlyretired.Hepublishesa newslettercalledStocksTalkwherehe tellsreadersindetailwhathedoeswith hisinvestments.Ifyouwanttoreadit,goto Google,typein StocksTalk.net, clickonfree month,,filloutafewlinesandclicksubmit.