There is often the mistaken assumption that the incoming generation will automatically possess the skills required to run a farming business and yet they are rarely tested in this area until the outgoing generation has departed. In addition, farming is now a much more demanding, complex business that requires as many skills in the office as it does in the tractor. These are new skills, which may need to be learned outside of the business.
Part of the problem is the reluctance of the older generation to hand over the reins too early, but that could leave the younger generation handcuffed when it comes to developing essential management skills.
This leaves us with the conundrum, how to pass on the necessary skills without risking the family income?
One answer is to encourage the incoming generation to invest early in their own land, to pay for this with their own money and to manage it as a micro business. Get them to finance the purchase through a lending institution, use a line of credit for the inputs, pay for the use of equipment and understand the risks and rewards of crop choice and marketing. They should produce written budgets, manage cashflow and consider the key performance indicators that make or break a business. This micro-business can be run along side the existing family business without becoming part of it, thus reducing the risk and exposure of the main farm.
If run successfully, this process will help to hone the skills of the younger generation (or expose some early issues.) It will reduce the time needed to fill the skills gap at more critical points in the succession process and also have other advantages for the introduction of the incoming generation to the family business.
TAX BENEFITS OF MICRO-BUSINESS
There can be significant tax benefits if the micro-business is structured correctly and this can help with the purchase of the outgoing generation’s assets if required.
Specifically, the tax laws in Canada offer farmers considerable opportunities to manage the amount, and rate, of tax they pay and the time they pay it. This becomes more critical at the point where the assets are going to be transferred or sold. By creating a partnership early, the incoming generation can grow the value of its Partnership Interest (net worth), which can then be utilised to take advantage of the capital gains exemptions. By doing this, the incoming generation can buy down some of Mom and Dad’s assets at a preferential tax rate and realize significant tax savings.
The above example is an over simplification of a complex process. The use of a competent and experienced tax specialist with specific knowledge of farm tax laws is crucial to the success of this process.
Succession planning is a complex undertaking that requires time and effort to get right. I’m not sure if there is a specific time to begin, but I am sure that the window of opportunity reduces with age. So why not buy the first quarter before the age of 30? It may be some time before the outgoing generation is ready to quit, but it can’t hurt to get a little ahead of the game.
Bob Tosh is a senior farm management consultant
with Meyers Norris Penny in Saskatoon.
Contact him at 306-664-8303 or [email protected]