— KEVIN JAQUES
“By doing the will himself, the farmer saved perhaps $50, but it cost his beloved sister a $500,000 loss out of the inheritance he undoubtedly intended for her.”
Passing a farm down from one generation to the next is the dream and goal of many farmers. Saving the farm from being severely reduced by taxes, and ensuring that children or even grandchildren inherit what they should requires the skills of accountants and lawyers in this specialized field and, of course, a farmer who understands his own wishes and limitations.
Kevin Jaques, a lawyer in Regina, recalls a client who figured he knew what he wanted and decided to draft his own will.
“He was an immigrant from Europe. He came to Canada with nothing, but in the course of his life, he built a $750,000 estate in farming. He had done it by teaching himself how to do things and being self-reliant. So he applied those principles to his will,” Jaques says.
“He got a lawyer-drafted will and amended it to what he thought he needed to say. It started off with ‘…being of sound mind and body, I do hereby devise and bequeath all my property by real and personal now and hereafter acquired to my sister in trust.’ She was named in the will. Then he stopped.”
“Unfortunately, the phrase “in trust” made her the trustee of a trust,” Jaques recalls. “He wanted to benefit that sister with all of
his estate and to exclude to other sisters with whom he had poor relationships. But the trust he created was vague as to whom should benefit. So the court reviewing the will applied a literal meaning that she was a trustee without direction. The rules of intestacy then were applied and the estate was divided equally among the three sisters. By doing the will himself, the farmer saved perhaps $50, but it cost his beloved sister a $500,000 loss out of the inheritance he undoubtedly intended for her.”
The Saskatchewan farmer’s basic dilemma was a need to pass on a farming interest — and not have it divided up among farming and non-farming family. “It is more important to have a will done when there are multiple siblings and when the farm is organized in corporations with shareholders,” says Ian Wishart, president of Keystone Agricultural Producers in Winnipeg.
A will is important in expressing your wishes and keeping the farm in tact, but it’s only one component of a larger succession plan.
THE MONEY-SAVING POWER OF A WILL
The will is vital, for in the absence of the document and the succession planning that goes with it, there can be massive tax bills, warns Stan Galbraith, an Edmonton lawyer. “Farmers may be faced with a need to sell some portion of their holdings to pay taxes on capital gains,” he explains. It is important to realize that a will is not a contract, he adds. “There does not have to be a meeting of minds.” That is all the more reason to understand what the will has to do.
Jerry Lupkowski, a chartered accountant with Meyers Norris Penny in Portage la Prairie, Man., is a specialist in issues involving farmers. “Ninety per cent of my practice involves farmers,” he notes.
He is candid about the twin
problems of succession and taxation. “We look at succession planning as business continuity planning. It is not an event, it is not driven by technical issues or tax planning. It is to secure the future of the family farm.”
A farmer and certainly the lawyer or accountant involved in shaping an estate for a will to be used to transmit it to children has to select the form of organization that works best for savings taxes and retaining the character of the farm. The choices of methods are vast, but the principal ones are partnership that divides income and reduces taxes that an heir may pay, the farming corporation whose shares can be willed to others and that allows the farm to retain income that would otherwise be paid as tax, and the trust that can postpone distribution of the estate until children grow up or, indeed, it becomes clear which children will farm and which will not.
Organization of the farm into a corporation is often done to reduce taxes and to facilitate transmission to the next generation. In fact, the corporate form of ownership can be used even if the next generation is not going to farm. For example, in Manitoba, a corporation pays tax at a rate of just 12 per cent on the first $400,000 of taxable income. The tax on that is just $48,000. If were earned personally, the tax bill would be $150,000. If the income generated within the corporation is not paid out, tax is deferred. That deferral is a very good tool for farmers who want to keep capital on the farm, he notes. Shares in the corporation and, indeed, the farm itself can be willed to children with no tax consequences, Lupkowski explains. “There is no deemed sale, as there would be for children taking over a grocery store. As long as the descent is linear to
THE WILL AS PART OF A BIGGER PLAN
One of the special uses of a farming corporation is to separate the interests of children who may inherit the farm from parents who want to get an income from the farm during their retirement. In this case, the farm corporation can issue fixed value preferred shares and growth or common shares to the farming children, says Mark Verwey, a general partner in accounting firm BDO Dunwoody LLP in Portage la Prairie.
If the corporation buys life insurance on the lives of the parents, then, after they die, the insurance proceeds can flow through to the children who also own shares in the corporation, “There should be an agreement that the insurance proceeds will be used to redeem the preferred shares that the parents may have bequested to the nonfarming children,” Verwey says.
The bottom line is really a question. “The list of beneficiaries of a farm or any other business is going to include the Canada Revenue Agency,” Verwey emphasizes. “The purpose of a will and properly worded shareholder agreement is, in part, to control what CRA will get and what will be left for the family.”
As well, suggests Patrick Ennis, a lawyer in Saskatoon who does will and estate work for farmers, it is important to consider the tax situation of potential heirs. “If the beneficiaries in a will are in high tax brackets, it may be useful to leave shares in a trust. That will cut the marginal tax rate on farm income.”
The planning has to be done before fate resolves succession planning on its own. “Most farmers don’t get a will until they are in their 60s or 70s. I think everybody should have a will. And certainly, as soon as you have kids, you should have a will and a power of attorney,” Ennis says. “If you don’t have a will and a power of attorney, then death or serious illness can allow the provincial public trustee to act for the farm. That is not necessarily a desirable situation.”
Andrew Allentuck’s latest book, “When Can I Retire? Planning Your Financial Life After Work,” was published earlier this year by Viking Canada.