The driving force

I have worked in multiple accounting offices in my career thus far, and each office uses the same primary driver to determine invoice amounts for clients – time. Some of you may be thinking, “Well, my accountant doesn’t charge me for every phone call or meeting.” While you might be right, the time still likely gets tracked on your file to determine how much your overall bill should be. So, consider this when interacting with your accountant — make sure you are getting value out of your conversations and meetings.

READ MORE: Common pitfalls in farm finances

One of the largest, most time-consuming factors reflected on your bill is messy bookkeeping. This is one area that farmers typically have some control over. For some of you, bookkeeping is a thorn in your side, and the idea of spending more time learning how to improve your processes sounds like a nightmare. That’s OK — you might just pay your accountant more. But, for those of you who want to see your next accounting bill go down, it might require some effort on your end to understand what improvements need to be made.

The best way to achieve this is by thoroughly reviewing and understanding the adjusting journal entries your accountant has made to your records. If you are unsure of why amounts were adjusted, it is likely that the same error will be made again next year, costing you a second time for the same mistake. It may not be realistic to eliminate all adjustments, as some are a result of complex calculations, such as your tax amounts. However, as a rule, the fewer the adjusting entries, the lower your overall bill is likely to be.

Make the most out of your meetings

When dealing with the same accountant for years on end, annual meetings can become somewhat routine — lacking in the value they once had. While more time gets consumed “catching up” with your advisors, it can feel like significant time was spent sitting in a boardroom with little or no insight gained. So, here is what you can do to make sure you are paying for valuable time with your accountant:

Take some time to reflect on the prior year’s operations in advance. This time of reflection can add a lot of great discussion to your meeting. For example, consider asking for a copy of your financial statements prior to the meeting so that you can go through it in detail ahead of time. Even if you don’t understand every detail of your financial statements, reviewing them first could highlight areas worth discussing.

Come prepared with questions. I have had meetings with individuals who come with pages of questions and it usually adds a lot of valuable insight to both parties. It helps guide the conversation as well as provides your accountant with a deeper understanding of what is important to you and your business. This understanding can ensure your accountant is considering your values and long-term goals throughout the year. As rules and regulations are constantly changing, if your accountant knows what your goals and concerns are, it’s easier for them to strategize on your behalf as new tax rules enter the arena.

Less can be more

Logically speaking, bringing your files to your accountant should make things a lot easier for them, right? Wrong. While this might be a point of convenience for you, you are likely paying for it.

I have had clients bring in what feels like the entirety of every record in their office. Every invoice, every receipt, for the entire year. Yes, this means that if your accountant needs to see a bill of sale for a new combine you purchased in the year, they can just go get it from your mobile office. But this also means you are spending money for your accountant to look through your records to try and find it. Not every farm has the same filing system as you. And nobody knows yours better — making you the most efficient at finding what’s needed.

So, give your accountant only what they need. It may take some time to understand what it is that they need and why but having a discussion with your accountant the next time you meet with them could help highlight what “typical” records are required for your accountant.

Hiring the right accountant

While this may not be a required step for some of you, I have had many conversations with farmers who are not satisfied with their current advisors. Some spend years dissatisfied with the same accountant because it requires effort to make a change.

Some might argue that there is a benefit to keeping the same accountant because they understand your farm history. While this may be true in some cases, if your current accountant is not meeting your needs, sometimes a fresh pair of professional eyes can make a significant impact on the profitability of your business.

Finding the right advisor for your needs is critical. So, if you have been thinking about making a change, here is your permission to shop around for a new accountant.

Across the board, professional fees keep rising with inflation and the demand on accountants continues to increase as fewer individuals enter the industry – a recipe for larger bills for everyone.

By reducing your adjusting journal entries, coming prepared to your meetings, cutting out the excess information and ensuring you are working with the right accountant, you might just have a fighting chance at keeping more money in your jeans while still gaining valuable insight from your advisors.

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George and Mary have 300 acres of certified organic grain and another 180 acres of pasture with 30 cows grazing. George and Mary have three children in their 20s, all with university degrees and accreditation in their professions.

George and Mary want to hand over the farm to two of their children interested in keeping the farm going. The youngest, 22, and the eldest, 26 are ready to carry on what their parents and grandparents built.

The problem is to structure the farm succession tax efficiently. For a farm not certain to make money, the tax rule which denies expense deductions to so-called hobby farms that do not make money could be an issue.

Three types of farms

To ensure that generational changeover does not lead the farm and the children who take it over into tax problems, George and Mary approach Don Forbes and Erik Forbes of Forbes Wealth Management of Carberry, Man., for advice.

“The issue is that for the last 70 years, Canadian tax policy has prevented persons who prefer a rural lifestyle from being subsidized by the Canadian taxpayer for money-losing farm operations,” Don Forbes explains.

Farm operations are structured for tax purposes into three categories, Don Forbes says.

1. Full-time farming: Full-time farming has normal business deductions for costs. The super capital gains deduction requires profitability two years out of seven. A minimum of $2,500 of gross farm income is need for either full-time or part-time farm status.

2. Part-time farming: Part-time farming status automatically occurs when non-farm income is more than half gross personal income. Farming losses are limited to 100 per cent of the first $5,000 of losses and 50 per cent of the next $5,000 for a maximum of $7,500 of losses that can be claimed against non-farm income. The two years out of seven profit rule is also relevant. The Canada Revenue Agency (CRA) is likely to audit returns when a farm has losses for seven or more years in a row. They ask why a farm is in business if it just generates losses.

3. Hobby farming: Hobby farming is the classification when the CRA considers the farm not a business. If there is no business plan, no profit and no prospect of a turnaround, all farm income is claimable as taxable income and expenses are disallowed as deductions.

The advice

Forbes suggests that neither child will run a profitable farm. Moreover, each child has a profession and an income. The farm would be a sideline and its losses would probably not qualify as deductible, Erik Forbes says.

Adding to the problem: George and Mary want to generate retirement income from the farm. They could buy a small store in a nearby town with a bank loan secured by a 160-acre parcel of land. They could get cash by selling cows, farm machinery and land to their children, but they prefer to transfer the land with a large discount on the price. They would sell the land at $500 per acre rather than the going price of $2,000 per acre and offer very flexible payment terms.

The problem with that generous offer is that the farming operation is not likely to generate much in the way of taxable profits. It is likely that the farm, as transferred, would generate losses and thus trigger the hobby farm barrier to deducting expenses.

The children taking over the farm will have to show a minimum of $2,500 gross farm income per year each year and make a profit two years out of seven to avoid the hobby farm loss exclusion rule.

As well, the farm and proposed store business should generate modest amounts of taxable income and tax liability each year so that tax deferral does not result in hefty tax on the estate after the parents’ deaths.

Tax management

Properly structured, the well of the parents’ wealth will not run dry. Tax management is the key, Don Forbes explains.

On transfer, the gain in personally-owned farmland will be offset by the $1,000,000 Personally Owned Farm Land Capital Gains Tax exemption for which George and Mary are eligible as well as the allowable exemption of the primary residence, the farmhouse and one acre of land. The sum, $132,000 perhaps, would make the total exemption $1.13 million, Erik Forbes estimates.

The parents can transfer land to their children at any price between book value and today’s estimated market value. That includes land, equipment and inventory.

The object is to use up all eligible tax credits and tax exemptions without claiming the entire market value of the farm and having to pay tax on it when transferred.

A good approach would be to sell 310 acres to one child at $2,000 per acre for a total price of $620,000. Take off the original cost at $150 per acre, $46,500, and the capital gain, $573,500, would be offset by the Capital Gain Tax exemption as discussed. Federal tax payable would be zero. Provincial tax is on a different schedule with different brackets and so could trigger some tax payable. There would be an Alternative Minimum Tax which could add $30,000 to tax on other net taxable income of $20,000. Total taxable income would be $50,000 and the Alternative Minimum Tax, say $12,0000, would have to be paid. But it would be a tax credit carry forward recoverable in the next seven years, Don Forbes explains. In the year of sale, Old Age Security would probably be clawed back.

A similar tax-management plan would work for the rest of the farm, though land used for collateral for an outstanding loan would be excluded from sale and transfer until the loan is paid.

It is prudent for the farming parents to take a zero-per cent interest promissory note on the land so that the parents’ financial interests are protected should either of the inheriting children get into difficulties with loans or divorce. Creditors or an estranged spouse could come after the value of the assets, but that person would have to pay off the parents before their claims would be considered, Don Forbes explains.

With these plans and provisions, the couple’s after-tax monthly income would be $3,272. If their living expenses are perhaps $2,000 per month, they could have a surplus to save for travel, a newer car, or gifts for their children or charities.

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“I was very, very offended by all of this,” said Kurt Oelschlagel, of BDO Canada, who was part of a panel on the government changes at the CAFA event, held Thursday in Guelph and online.

Many of the slides in his presentation were made redundant, as Finance Minister Bill Morneau backtracked Thursday on yet another part of the changes.

The Liberal government’s proposed changes to small business corporations were initially aimed at high-income earners who have created personal corporations to manage their incomes to pay taxes at the lower corporate tax rate.

However, when accountants started examining the potential changes, they were much further reaching and complex than expected. They included changes to capital gains tax, tests that determine whether dividends distributed are to people who have contributed to the business and punitive tax rates on savings made within a corporation.

This week, Morneau has backtracked on two of those proposals, including capital gains. The government will now allow up to $50,000 per year to be saved in passive investments in corporations. He says that means that only five per cent of small business corporations will be affected by the higher passive investment return taxation levels.

At the Thursday event, the organizers played Morneau’s latest backtrack on the policy live, as he stood at an Erinsville, Ont. farm and talked about delaying the implementation of the capital gains changes.

That means most of the day’s presenters had to change their presentations after that announcement and the announcement on passive investment earlier in the week.

Justin To, director of policy and budget director for the minister of finance, was slated to speak to the meeting, but he backed out, citing the announcements by the government of changes to the tax proposals and especially the fact Morneau was making an announcement the same day.

“We live in a representative democracy and it looks like politics is coming into play,” said Stephen Sweeney, a Waterloo, Ont.-based partner at Miller Thomson LLP, a law firm that works with agriculture clients.

Sweeney said it will take 10 years to sort out all the implications of such significant tax changes and instead he suggested that time be taken to do thorough and well-thought-out tax reform, adding that the modern version of the Income Tax Act came into force in 1972.

“More complexity in the tax system means more creativity for tax advisors,” he says. “I’m not sure if it is good that tax advisors prosper by uncertainly felt by ordinary Canadians.”

Farmers were warned their accounting bills would rise due to the increased complexity and on-and-off changes.

One of the significant changes made by the government is in how it will measure who has meaningfully contributed to the business and therefore deserves remuneration in the form of dividends.

John Mill, a Guelph lawyer who works with farmers and farm advisors on tax reorganization, told the meeting that “family members who meaningfully contribute will not be impacted,” but that there will be little legal flexibility if family members are paid without contributing.

If there hasn’t been a meaningful contribution, then the money will be added to “split income” and taxed at a higher level.

He has concerns about how the amount that’s reasonable to be paid for work will be decided. Would it be possible for the revenue ministry to find someone who would do the work at minimum wage? Then anything above the hours worked at minimum wage rate could be taxed at a much higher rate.

The test for “reasonableness” will take in functions like assets contributed, risks assumed and prior compensation. Documenting hours could become necessary, which is a challenge when farmers live at their work and are on call all the time.

“The CRA is missing the point that farmers grow up in the family business. We train farmers in the family business and on family farms.

“Eight hundred million dollars per year (the total of the revenue increase of the new policy) is idiotic with the enormous societal cost of these idiotic policies,” Mill said.

The question has arisen relating to the payment of children of farmers who farm under a corporate structure.

Sweeney said the new “reasonableness” test will likely drive businesses from paying them through income sprinkling and to making them actual salaried employees of the farm.

Scott Ross, director of business risk management and farm policy with the Canadian Federation of Agriculture, said moving family members to employees, if they deserve to be paid, is one of the main goals of the government.

They want to drive activity away from dividend sprinkling and back to salaries, he says.
There was relief at the meeting that some of the most problematic provisions of the Liberal proposals were off the table, but also anger at the time wasted.

“How much non-billable time have we spent on this since it came out?” asked Oeschlagel, adding that many meetings were held with clients to prepare them for potential quick changes to their business organizations by the end of the year.

There remain a lot of unknowns — which will still mean a lot of work ahead for accountants, advisors and incorporated farms.

— John Greig is a field editor for Glacier FarmMedia based at Ailsa Craig, Ont. Follow him at @jgreig on Twitter.

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The federal finance department tabled a series of proposals July 18, opening them for public comment until Oct. 2 for a proposed effective date of Jan. 1, 2018.

The proposals call for an overhaul of the private corporation tax system. According to the federal finance department, the proposals are meant to “ensure that high-income individuals cannot use strategies involving private corporations to gain unfair tax advantages.”

The proposals speak to measures such as income splitting, dividend payments to family members, and lifetime capital gains deductions.

The government noted the number of Canadian-controlled private corporations (CCPCs) has increased “substantially,” from 1.2 million in 2001 to 1.8 million in 2014, with an “increasing proportion of self-employed individuals” now choosing to incorporate.

CCPCs, the finance department said, now also account for more than twice the share of taxable active business income (relative to gross domestic product) that they did in the early 2000s.

But the proposals, according to the Ontario Federation of Agriculture, also stand to affect an estimated 25 per cent of Canadian farms that operate as private corporations.

The comment period alone is a point of contention for groups including the Canadian Federation of Agriculture, which recently said a “75-day consultation in the middle of the harvest season is not enough to allow a comprehensive review.”

Given the consultation timeline, “there has been nowhere near enough time to understand the implications of the proposals,” Todd Lewis, president of the Agricultural Producers Association of Saskatchewan, said in a separate statement. “The changes are very technical in nature, and we need more time to fully understand their potential impacts.”

As for the proposals, they represent “transformative changes that would bring about major uncertainty for farms that are incorporated, especially for multi-generational family farms,” CFA president Ron Bonnett said in a release Thursday.

“The government must recognize that small business owners face unique risks and costs — especially in agriculture where farmers must plan for a wide range of factors that can affect their operations from year to year.”

‘Higher costs, fewer options’

Business groups including the Canadian Federation of Independent Business, Canadian Bar Association, Canadian Medical Association and others on Thursday announced a joint campaign as the Coalition for Small Business Tax Fairness, to oppose the tax proposals.

“If implemented, the proposals will restrict small business owners from sharing income with family members; limit certain forms of saving in the business, making the firm more vulnerable in bad economic times and less able to innovate and grow; and change capital gains rules which could make it more difficult for business owners to transfer their business to the next generation,” the coalition said Thursday.

Agricultural and related groups signing on so far for the joint campaign include the CFA plus the Canadian Pork Council, Canadian Cattlemen’s Association, Grain Growers of Canada, Canadian Horticultural Council, Grain Farmers of Ontario, Western Canadian Wheat Growers Association, Canadian Association of Farm Advisors, Agricultural Manufacturers of Canada and Canadian Veterinary Medical Association.

“If these changes are implemented as proposed, farmers will face higher costs with fewer options to manage business risks, and the complexity of the proposals could lead to other unintended consequences,” the CFA said Thursday.

“The proposed changes to the tax code will dramatically limit the ability of (farm) families to invest in their businesses, encourage the next generation to remain on the farm, and engage in succession and retirement planning,” Grain Growers of Canada president Jeff Nielsen, an incorporated grain farmer, said in the coalition’s release.

In a recent separate statement, Ontario Federation of Agriculture president Mark Wales said that under the proposals, any farmer who has incorporated his or her business needs to review his or her succession and tax plans with an advisor, “to ensure they make sense under the proposed changes.

“The tax implications of not being in compliance with the new rules could be severe,” he said, noting the changes could also “penalize farmers who choose to transfer their incorporated farm business to the next generation.

“It is completely unacceptable that legislative changes would make it easier and lower the tax bill for a farmer to sell their farm business share to a stranger, rather than their own child or grandchild.”

“In my view, this is the biggest tax reform package since 1971,” farm business management expert Merle Good told Alberta Farmer’s Jennifer Blair recently. “These changes that they’re bringing in are primarily going to restrict our ability to convert farmers’ wealth into retirement income and their flexibility in transferring the farm to the next generation.”

“My main concern is that they’re going to go through with these changes no matter what and the farmers are going to be caught off guard, and it will be too late at that point in time,” Allan Sawiak of accounting firm Kingston Ross Pasnak in Edmonton said in the same article. — AGCanada.com Network

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It’s inevitable that Jack and Martha will want to leave their farm. It will be a complicated transaction, for the farmland was used as collateral for a $150,000 loan for Jack’s trucking business. He would like to accept a neighbour’s offer to purchase 480 acres of the farm for $800,000 and to rent the remaining 160 acres.

Farm Financial Planner asked Don Forbes and Erik Forbes of Forbes Wealth Management Ltd. in Carberry, Manitoba, to review Jack and Martha’s situation.

Jack’s accountant has verified that the sale can work. Jack and Martha can have the Qualified Farmland Capital Gain Tax Credit. If they take the $800,000, they will have to deduct the $250,000 Jack’s business owes for the truck loan, then put $50,000 into their respective RRSPs, $62,000 to top up their Tax-Free Savings Accounts to the maximum allowable contribution level, reserve $38,000 for home renovations and $400,000 for non-registered investments. With this allocation, they will have done just about the best they can with the purchase offer and sale.

The optics of the deal are a little complex, but the RRSP allocation will bring Jack and Martha down one tax level and provide a rebate just a little more than the anticipated retirement tax rate. Eventually, the couple will have to take the money out of their RRSPs, but there should be no need to do that until they stop working and earning taxable income. Waiting to convert to a Registered Retirement Income Fund no later than the year in which each partner turns 71 is ideal, for it will allow growth of assets within the RRSP without tax. But if they need to draw money out sooner, they can just tap it off the RRSP before RRIFing and pay the tax. Ideally, they should not draw down registered assets until they stop working. The best bet is for Martha to take income, for she is in a lower tax bracket than Jack, Don Forbes suggests.

Jack and Martha should each contribute the maximum allowable sum to their TFSAs, That’s $46,500 as of 2016. In January, they can add another $5,500 to each account. Jack has $39,000 of room and Martha $23,000 of contribution space.

Shopping for investments in today’s market is no easy task. It is never a cinch to make investments in stocks or bonds, but with interest rates low and perhaps near starting an upward trajectory, special care is needed, for as interest rates rise, bond prices fall — leading to capital losses. But stocks with hefty dividends in the 3.5 to 5.5 per cent range are available from solid companies like BCE Inc. and the chartered banks. Their prices are sensitive to interest rate changes, but rising dividends over time provide compensation for price declines. Moreover, the dividend tax credit means that payouts from public companies are taxed as a lower rate than ordinary earned income. If there are capital gains that the couple can realize, so much the better, for only half of gains are recognized as taxable income.

Future benefits

Timing the start of Canada Pension Plan benefits is tricky. Martha, who has no other income, can take CPP at 60 and pay little or no tax. Jack should not take CPP benefits until 65 after he has sold the trucking business and ceased active farming.

Each can take Old Age Security at $6,846 at 2016 rates at age 65, but if they like, each can defer starting OAS to age 70 with a premium for each year of deferral. That’s 36 per cent if they wait to age 70 when further deferral is not possible.

Similarly, each can defer taking CPP with a bonus of as much as 42 per cent if they wait to age 70. Playing the waiting game is profitable. Even allowing for a 25 per cent average tax, 36 per cent is 27 per cent after tax or an annualized, after-tax, non-compounded return of 5.4 per cent a year. The 42 per cent premium on CPP with the same tax rate works out to a 6.3 per cent annual simple return. These returns have no risk. No government bond pays such returns now. Some stocks may, but they come with a lot of market risk, Erik Forbes notes.

This strategy is simple, understandable, and tax-efficient. If Jack and Martha adopt it, then in 2016 Mack will earn $5,000 a month and Martha collect $700 from her RRSP, $300 from CPP (or less if benefits are deferred for future gains), and $500 from land rental. That’s a pre-tax family income of $6,500 a month before tax.

In 2020, when the retirement plan is in full effect, Jack, then 65, can take $1,000 from his CPP account or defer it as noted for higher future income, take $570 at 2016 rates from OAS, $600 a month from his RRSP, total $2,170. Martha can take $700 from her RRSP, $300 from CPP, $570 from OAS, $1,000 from taxable investments, and $500 from land rental. Family income at this point would be $5,240 per month or $62,880 a year. With splits of eligible pension income, they would pay average income tax of about 15 per cent and have $4,454 a month to spend. That would cover their modest way of life, Don Forbes says.

The portfolio

Jack and Martha can get more money out of their financial assets by setting parameters for what each of their asset classes may return. For example, stocks have traditionally generated a long run return of seven per cent a year before inflation adjustments and bonds three per cent before inflation adjustments.

If inflation runs at an average annual rate of two per cent, then the after-inflation returns are five per cent for stocks and just one per cent for bonds.

The conventional asset allocation is to set the percentage of bonds in your portfolio equal to your age. That would mean Jack and Martha would have 60 per cent low yield bonds liable to lose a great deal of market value if and when interest rates rise. The better allocation in today’s market leans toward solid common stocks like telecommunications firms, public utilities, a few major retailers and some foreign stocks with strong and diversified products and a history of raising dividends regularly. Jack and Martha can buy the stocks directly or use low fee Exchange Traded Funds that package indices and have very low fees Any investment decisions should, of course, be made with the advice of their advisor.

“Jack and Martha have done the right things in building their farming business,” Erik Forbes notes. “This is a plan for migrating away from the farm, generating income from government pensions and financial assets, and, if they are frugal, leaving a nice legacy for their son.”

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Ezra and Lucy should be able to leave the farm to Edward, but before that happens, they should do some tax management. First move: make Lucy an equal partner in the farming operation. Her value for income splitting is greater than her value as a deductible dependent, notes Don Forbes, head of Forbes Wealth Management Ltd. in Carberry, Manitoba. Don, who worked on the plan with Erik Forbes, a principal at the advisory firm, say that if Ezra and Lucy follow the plan to smooth out their individual annual taxable farm income at $30,000 per year for each and take other measures to harvest value from the farming operation, they can retire in comfort.

They can use the money they take out of farm capital for off-farm investment. For example, they can fill up their Tax-Free Savings Accounts and add money to their non-registered savings. This money could serve as a legacy for their daughter.

At the moment, Ezra and Lucy have all their off-farm money invested in low yield guaranteed investment certificates. They could do much better if they were to move their money to dividend paying common stocks, so-called dividend aristocrats that have paid steadily rising distributions of corporate earnings for at least 10 years, notes Erik Forbes.

Getting started

Ezra and Lucy can also start a process of shifting fractions of the farm, say a quarter section at a time, to Edward. The parents would take back zero interest promissory notes. Edward would pay rent on the land to the parents. The note would be a forgiven obligation at the death of the second parent, Don Forbes suggests. The strategy of gradual transfer of farm capital to Edward will hold income tax down to about 26 per cent a year. The alternative is to defer taxes until death. The latter plan would put farm income distributions at risk of being taxed at a 50 per cent rate. Or more.

The risk is that the federal government may reduce the qualified farmland capital gain exemption, currently $1 million for each farm owner. The prudent thing is to make use of it while it exists, Don Forbes says.

The Alternative Minimum Tax can be charged when using a large credit like the farmland capital gains tax exemption. So when making use of the farmlands capital gains credit, the income tax calculation is done before application of the credit. If the capital gains tax payable in a given year exceeds $40,000, it will be necessary to pay additional tax. However, the AMT levied in a high capital gains tax year for which the farmland capital gain is used remains on the books as a credit toward future federal income tax payable. It becomes a way of prepaying tax, Erik Forbes adds.

In Ezra and Lucy’s case, the temporary cost of the AMT causes can be reduced by the slow transfer of just one or two quarters a year — the amount of land depending on gains in declared value. That should keep the capital gain tax owing under $40,000, Don Forbes explains. Liquidating cattle and crop inventories over several years can help to even out the potential tax burden.

RRSP contribution room can be preserved for years in which there is an income spike that pushes up the couple’s tax bracket. In the year of an auction sale, for example, when income rises, there is higher income that can be defended from progressive tax rates by making RRSP contributions. The goal should be to keep individual taxable income below $90,000, Don Forbes says.

RRSP accounts can be maintained to age 65, then converted to Registered Retirement Income Funds to take advantage of the $2,000 per year pension credit. The first $2,000 withdrawn each year per person will be tax-free and after that, RRIF income is taxed at the higher rate as ordinary income.

Tax-Free Savings Accounts can be used to the present maximum of $46,500 each. If both partners make the fullest use, then after 10 years with initial deposits of $46,500 augmented by $5,500 per person growing at three per cent per year after inflation, the balances will be $127,450 per person or $254,900 when Ezra and Lucy are 68 and 66, respectively. If this money continues to grow at three per cent with no further contributions and is paid out for the next 20 years so that the TFSA balances are zero in 2046, the couple would have $16,650 a year of non-taxable income, Erik Forbes estimates.

Further steps

There is more that Ezra and Lucy can do to boost their retirement income. They can invest in the AgriInvest program up to 1.5 per cent of qualifying commodity sales. The matching government grant is fully taxable when withdrawn prior to or at retirement, Don Forbes notes. Increased annual taxable income ultimately extra Canada Pension Plan entitlements, which boost eventual CPP pensions. It also raises the couple’s eligibility for CPP disability entitlements.

Edward, the son who will eventually return to the farm, can have land transferred to him at any price between the book value and current market value, Don Forbes notes. Bella could be given the value of the growing TFSAs if the total retirement income generated is far in excess of what Ezra and Bella need. This could be a very large sum if, for example, the TFSA grows at three per cent for 30 years. For the couple, both maximizing TFSA contributions of $5,500 a year each after making a $46,500 each contributions to fill space in 2016, the combined balance would be $764,800. The money, representing what might notionally be half of the farm’s present value, would go to Bella in lieu of a division of the estate. Just making her designated beneficiary of the TFSAs would be necessary. This is an efficient way of dividing the couples’ estate and far less costly than buying a comparable amount of life insurance late in life, Don Forbes says.

If Ezra and Bella retire when Ezra is 65, they will each have an estimated one-third of maximum Canada Pension Plan benefits of $13,110 at 2016 values or a combined total of $9,440, OAS benefits at 2016 rates of $6,846 (both in force when Bella is 65) of $13,692, tax credits of about $6,000, TFSA income of $16,650, RRIF income of $4,000 and continuing farm income of $30,000 each. That is a minimum of $109,782 annually. If taxed at an average rate of 25 per cent, they would have almost $6,900 a month to spend. That would more than exceed their present $3,600 a month expenses.

“We can solve most of the problems Ezra and Lucy have in dealing with the transition of their farm provided the couple adopts our plan and follows it,” Don Forbes says. “If they follow the plan, it will work for everyone, ensuring a smooth transition of ownership to the son and a good inheritance for the daughter.”

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Who’s a farmer?

If you raise a few farm animals or have a plot to grow your own food, you are considered a hobby farmer, rather than a business, and you can’t deduct any expenses or losses. On the other hand, if you devote the majority of your time to farming by investing in buildings, machinery, and inventories to run the operation, you’re likely the owner of a farming business. Keep in mind that farming income does not include money earned from working as an employee on a farm or from trapping.

For more information on farming, including the types of farming income and deductions and tax credits available to farmers, go to www.cra.gc.ca/farming.

What’s deductible?

Generally, farmers can deduct any reasonable current expense incurred to earn farming income, including interest on loans and losses, and the cost of fertilizer, feed, veterinary fees and materials to pack and ship goods. Other expenses that may be eligible include machinery rental, electricity, insurance and motor vehicle expenses. And if you decide to farm out some of your accounting duties, you can also deduct the fees you paid to your accountant.

Not every year can be a winning year. If you had a farm loss for the year, you may be able to deduct up to the full amount of your loss. A farm loss can be carried back from the current year to any of the previous three years or carried forward up to 20 years. For more information on farm losses and how to calculate and apply them, see Chapter 6 of CRA Tax Guide T4003. (Find this document online at www.cra-arc.gc.ca.)

Eligible farmers who dispose of breeding livestock in a tax year because of drought or flood can exclude a portion of the sale proceeds from their incomes until the following tax year, under the Livestock Tax Deferral Provision. The rule also extends to bees and to all types of horses that are over 12 months of age that are kept for breeding. (Find more information about this by searching for “Livestock Tax Deferral” on the Agriculture and Agri-food website at www.agr.gc.ca.)

Are employee expenses deductible?

Do you hire seasonal farm workers? If you hire a qualified Red Seal trade apprentice, such as an agricultural equipment technician, you may be able to claim your employee’s salary as an expense. You may also be able to claim the apprenticeship job creation tax credit. This non-refundable investment tax credit is equal to 10 per cent of the apprentice’s salary or wages. The maximum credit an employer can claim is $2,000 per year for each eligible apprentice. For more information on the Apprenticeship Job Creation Tax Credit, go to www.cra.gc.ca/smallbusiness.

What about errors and instalments?

You pride yourself on producing the cream of the crop, so don’t risk your reputation by underreporting your farming income. Under-the-table cash deals undermine the integrity of Canada’s tax system and deprive Canadians of funds for vital programs that benefit everyone. If you are caught evading taxes, you may face fines, penalties, or even jail time. Save yourself the trouble — don’t participate in the underground economy. For more information, go to www.cra.gc.ca/undergroundeconomy.

Stay on top of your record keeping throughout the year to avoid the stress of ploughing through countless invoices and receipts. You need to keep complete records of your business-related expenses to support your claims. Without these supporting documents, the CRA could disallow your credit or deduction. Plant the seed and get in the habit of keeping complete records! To learn more, go to www.cra.gc.ca/records.

If you have ever made an error or omission, the CRA is offering you a second chance to correct your mistake through its Voluntary Disclosures Program (VDP). If you make a valid disclosure before you become aware of any compliance action taken against you by the CRA, you may only have to pay the taxes owing plus interest. Find more information on the VDP at www.cra.gc.ca/voluntarydisclosures.

If you owe tax or have to pay tax by instalments, take advantage of preauthorized debit to set up your payments. To learn more about your payment options, go to www.cra.gc.ca/payments.

When’s the deadline?

The deadline to file most Canadian income tax and benefit returns for 2015 is April 30, 2016. However, since this date is a Saturday, the CRA will consider your return as filed on time and your payment to be made on time if it receives your submission or it is postmarked by midnight on May 2, 2016. Self-employed individuals and their spouses or common-law partners have until June 15, 2016, to file their income tax and benefit returns, but any balance owing is still due no later than May 2, 2016.

From the growing popularity of farmers’ markets to farm-to-table menus, today’s consumers want locally grown and sustainably sourced produce and meats. Another trend most Canadians are cultivating is filing their taxes online! Filing online is fast, easy, and secure. If you’re entitled to a refund, you can enjoy your money in as little as eight business days, by combining online filing with direct deposit! For a list of tax software and web service options, including those that are free of charge, go to www.cra.gc.ca/netfilesoftware.

New this year, the CRA’s Auto-fill my return service is available through some certified tax preparation software. This secure service automatically fills in certain parts of your income tax and benefit return. To use Auto-fill my return, you must complete your registration in full for My Account. For more information, go to www.cra.gc.ca/auto-fill.

You know the growing seasons and plant rotations by heart, but what about important dates related to your taxes? Like the Farmers’ Almanac, the CRA Business Tax Reminders app can help! This new app lets you create reminders and alerts for key CRA due dates for instalment payments, returns, remittances, and other tax-related business matters, so you won’t have to worry about penalties and interest.

You can also stay up to date by registering for online mail through either My Account or My Business Account. When you register for online mail, we will no longer print and mail eligible correspondence. Instead, we will send you an email when it is available to view in your secure online account. Access these services through CRA’s My Account or My Business Account, available at www.cra.gc.ca/loginservices.

Stay on top of the latest CRA news or tax tips by following @CanRevAgency on Twitter.

For Grainews readers who prefer to get their tax information off-line, call the CRA’s general inquiries phone number, 1-800-959-8281. They will be able to answer your questions and send you paper copies of the forms and publications you need.

Heidi Hofstad, CRA spokesperson

The post Make the least of your farm taxes appeared first on Grainews.

The farm as presently set up consists of the original 320 acres of the parents’ land and another 1,180 acres they later purchased. They have done well with bumper crops and good prices for their grain. However, they want to reduce taxes. Their strategy has been to pre-pay farming expenses to reduce taxable income and to defer selling grain until prices are up and their cash position is down. They have prepaid as much as two years of expenses and they hold two years of inventory.

Tax management has produced personal issues, for the couple has a problem generating enough money to cover living costs. They approached Don Forbes and Erik Forbes of Don Forbes Associates Inc. in Carberry, Manitoba to help them restructure their farm as a corporation. The goal: get cash flow up and taxes down.

The problem is structural, Erik Forbes explains. “Incorporation brings complexity and the costs of professional fees for corporate accounting and legal costs,” he says “Ultimately, incorporation provides the flexibility to expand and grow personal net worth over the long term.”

The larger problem, which incorporation solves, is the question of how long revenue can be deferred and expenses prepaid. The issue, Erik Forbes notes, is earnings management. Farmers can elect to use cash accounting or accrual when filing tax returns. They could potentially defer for many years as long as their reporting is consistent with CRA rules.

The concept of incorporation is to contain the business of the farm under the umbrella of a separate legal entity apart from the personal affairs of the owner. Money held within the corporation and not taken as income can be reinvested in the business, that is, the farm.

After paying salaries and other expenses, the first $450,000 per year of net profit remaining in the company is taxed at an 11 per cent rate rather than the personal rate which, with combined Manitoba and federal tax, can be as much as 46.4 per cent in Manitoba using 2015 rates. The cash flow freed up in the farming corporation, which would otherwise be used to pay a higher tax bill, is retained on the corporation’s books as retained earnings and will become taxable when paid out as dividends sometime in the future. The retained earnings are available to increase the working capital of the farm business, Don Forbes explains.

Moving to a corporation

In Nick and Mary’s case, incorporation allows them to sell grain inventory up to the small business net profit level of $450,000 that they would otherwise defer to another tax year. Any tax-paid equity in farm machinery and /or grain inventory when transferred to the corporation could be liberated as tax-paid principal when it is rolled over into a corporate shareholder loan. That raises cash flow. The shareholder loan reflected in Nick and Mary’s tax-paid equity invested in the corporation can be redeemed in future without tax, Erik Forbes notes.

Moreover, when one incorporates, it is possible to raise the depreciated value of machinery to current market value. That move increases the room for capital cost allowance.

The corporate form of organization allows the business to pay salaries, which allow more structured Registered Retirement Savings Plan contributions, Don Forbes notes.

Both Nick and Mary will be eligible for the qualified farmland capital gains tax exemption when the book value of the personally owned farmland is sold or transferred. However, farmland held within the corporation will not be eligible, so all of their personal land holdings should be kept in their personal names.

In Nick and Mary’s case, farmland with a market value of $2.6 million and a book value of $1.2 million has a nominal capital gain of $1.4 million. Using the $2 million farm land capital gains tax credit based on $1 million per person and allowing $200,000 for the personal residence plus one acre, all capital gains tax liability can be offset. So a potential sale or transfer of the farmland would be tax-free, Don Forbes says. In addition, the residue of $800,000 can be used in future to offset the capital value of the land.

For 2016, the new corporation should realize $450,000 net profits. Some income can be deferred to 2017 to stay under the $450,000 threshold. The extra cash in 2016 can be used to pay off machinery and thus save interest expense, to increase salaries of Nick and Mary to as much as $90,000 each, to top up their child’s RESP, their TFSAs and RRSPs, and, if there is still money left, to pay bonuses for further RRSP contributions of as much as $18,000 for Nick and $14,000 for Mary. If there is still cash leftover, it can be put into a joint non-registered account. The value of this type of account is that the underlying investment in the account can flow to the survivor without tax if one dies. Once the survivor dies, all of the deferred gains become taxable.

Once RRSP space is used up, the next use of cash should be enhancement of the couple’s Tax-Free Savings Accounts. Nick and Mary each have $27,700 in their respective TFSAs. Topping each up to the 2016 maximum of $46,500 this year and taking advantage of the additional $5,500 space for each partner in each successive year with potential indexation will provide a total balance of $583,400 by the time Nick is 65 assuming three per cent annual growth after inflation.

Nick and Mary have a Registered Education Savings Plan for their child with a present balance of $35,000. If they continue to add $2,500 a year and receive the Canada Education Savings Grant of the lesser of $500 or 20 per cent of contributions for eight years including this year, the plan will have $71,814 if it grows at three per cent after inflation. That would cover four years of study at any university in Manitoba for books, tuition and even some room and board. A summer job could provide any additional money, Erik Forbes notes.

Achieving a three per cent after inflation return may seem modest, but it is actually a challenge in today’s low growth, low inflation economy.

The odds of getting three per cent average growth improve if management fees are reduced. A 2.6 per cent mutual fund fee for one year adds up to 26 per cent in 10 years and 52 per cent in 20 years. Rather than use high fee mutual funds, Nick and Mary could use exchange traded funds with average fees of as low as 1/10 of one per cent. Even paying a one per cent advisory fee would leave them ahead. After all, giving up in fees what the couple has struggled to save with a corporate organization would be a waste.

The post Farm Financial Planner: Moving to corporate structures appeared first on Grainews.

Herb and Cathy have concentrated on producing wheat and canola, but they were late to the business and therefore incurred high costs for equipment. Added to that, there were years of crop failures. They scraped by on the modest payouts of crop insurance. Nevertheless, they have substantial farm losses they carry forward.

Farm Financial Planner put the problems Herb and Cathy face to Don Forbes and Erik Forbes of Don Forbes & Associates/Sterling Mutuals in Carberry, Manitoba. The couple should be able to retire with no debt, says Don Forbes. He notes that recently, after two years of exceptional yields and good commodity prices, they have eliminated much of their debt and decided to quit and retire. Their grain inventories, machinery and income from their farm corporation will use up all their loss carry-forward credits, making all income tax-free.

Herb and Cathy have a farm corporation with a half interest held by a silent partner. Along with the land, inventory and machinery, they have three quarter sections of farm land they own personally and other machinery and inventory they own personally.

The recommendation

Best bet: sell all remaining grain inventory in the 2015 tax year or at least as much as possible. The income from sale will be covered by the existing carry forward capital losses, about $247,000, rendering most of that income tax-free, Erik Forbes says.

The sale of two of three quarter sections of personally owned farm land this year will probably generate large capital gains, but all of those gains will be tax exempt via the farm land capital gains tax exemption, Erik adds.

In 2016, they can sell any remaining machinery and take a capital gain on the sale of the last quarter section of land. If they get $200,000 from sale and apply $126,000 of book value and $74,000 of recaptured depreciation, they will have no tax exposure, Forbes notes.

Herb and Cathy are each eligible for $813,600 of capital gains exemption on their personally owned farm land. Although the entire three quarter sections will be eligible for $1,627,200 capital gains exemption, the Alternative Minimum Tax will apply. A few thousand dollars of AMT will be due for 2015 but can be recaptured in future tax years, Don says.

Herb and Cathy each have about $10,000 of Locked In Retirement Accounts from years past when they worked off-farm. They can unlock the accounts for 2015. All of Herb’s LIRA and half of Cathy’s can be taken out, subject to provincial legislation. If put into cash accounts, the money can be withdrawn as needed. Cathy can use up her money relatively quickly to use up her AMT credit after the 2015 tax year. If she does not use up her AMT credit in 2016 or 2017, it may not be useable, as the couple’s future income will be relatively modest.

If the couple sells $29,000 of inventory in 2015 and $69,000 of land in each of 2016, 2017 and 2018 and pays taxes of $3,200 for 2015 and then $13,000 in each of the three following years, they will have remaining cash of $193,800. The total gain on the land sale will be $173,000, which will be subject to tax on half the gain — $13,000 will be the tax payable in 2016 to 2018 inclusive, Don estimates.

There is an alternative to taking taxable dividends. That is to issue shareholder bonuses which are a 100 per cent expense to the farm corporation. This would be advantageous to Herb, though Cathy, with a lower tax bracket, would not benefit as much, Erik notes.

In retirement, the couple’s retirement income would be a total of $1,010 from the Canada Pension Plan, full Old Age Security benefits of $1,140 in total and investment income from capital released from the farm of $1,740. That adds up to $3,590 each month before tax or $43,080 annually before tax. Their tax would be negligible, Don says.

Enjoying retirement

What sort of retirement will $3,590 a month buy? If the couple allocates 25 per cent of income for rent, $898 a month, they will get at most a modest apartment outside of a major city. The remaining $2,692 would allow $200 a month for car expenses, $800 for food, $200 for clothing, $300 a month for travel, $200 for entertainment, $200 for charity and gifts, $300 for health related costs and $492 for discretionary spending. Comfortable, yes, but not lavish.

Assuming that after sale of farm property, including the farm house, the couple has $375,000 to invest, the question arises — how to do it? The usual answer is mutual funds, yet over a long term, average mutual fund fees of 2.5 per cent on equity funds add up to 25 per cent over ten years and a whopping 50 per cent over 20 years, Don Forbes estimates.

The remaining issues concern end of life. Chances are that Herb and Cathy will have a few good decades together, but if they persist in their frugal ways and have moderate success with their investments, they are likely to pass with substantial residual assets. Their children will be in their sixties in this scenario and contemplating retirement, Erik Forbes observes.

In their wills, Herb and Cathy may want to contemplate a generational shift in their assets with bequests to good causes, to their grandchildren, or to more distant family members. The cost of discussions with their lawyer and accountant of the tax implications of generational shifts of property will be money well spent, Forbes says.

“This couple can go from today’s burden of debt to a future of relative prosperity with a new problem of wealth administration,” Don Forbes says. “They need to be ready for that change.”

The post Pay off debts before selling the farm appeared first on Grainews.

Their off-farm assets are just $100,000 of non-registered term deposits. To leave the farm, they would need to buy or rent a home in town. That would take, they estimate, $400,000. Their current combined income, $62,000 before tax, and their relatively small cash holdings make it imperative that they work out a way to sell the farm to their son.

Aware of the need to work out a way to quit and pass the farm on to their son, they approached Don and Erik Forbes of Don Forbes Associates in Carberry, Manitoba. Their prescription is a workout plan for the farm.

The plan

The farm has intrinsic value apart from the aging buildings. They have a production quota from their marketing board with an estimated value of $1.1 million. What is essential is to free up cash embedded in the land and buildings.

First move: approach the bank to reamortize farm loans for machinery from the current eight-year repayment period to 20 years. The present four per cent loan for $150,000 costs $1,800 a month to service. If they shift to 20 years, the cost at the same rate would decline by half and they would liberate about $908 a month.

Next: they have to work out a sale agreement with their son. The question, of course, is what he should pay. Assuming that the son has made an investment of his own via sweat equity that amounts to a third of the value of the operation, that interest, with an estimated value of $900,000 needs to be recognized, Erik Forbes suggests. That implies that their value in the farm and quota is $1.5 million. That is the amount to be financed in the buyout.

The plan has to be to convert the couple’s 200 common shares in the farming corporation into fixed value preferred shares. These 200 shares will be retracted by the corporation and the accumulated capital gain is switched to the preferred shares on a tax-deferred basis. The deferred gain would then be taxable as dividends on redemption or death. The son will continue to run the farm and benefit from any future increase in its value. In this plan, Herb and Martha’s interest in the farm will decline each year, giving the son a growing share of the business.

Tax implications

The workout plan has tax implications. The land qualifies for the Farmland Super Credit by the couple but the family farm corporation has different and stricter criteria to meet. The two key elements in qualification are: 1) the farm corporation has to have 90 per cent or more of farm assets in active production, as it will be, and 2) the purchaser of the assets has to be a qualified share purchaser, as the son will be.

The transactions required to value shares and to transfer them at agreed upon value to the son need to be vetted by an accountant or tax lawyer to ensure compliance. The Alternative Minimum Tax will remain a liability. The property transfer may then be done over several years to reduce the AMT cost. Some of the AMT that may be paid can be used as a credit against future tax, Don Forbes suggests.

To ensure that, in a financial sense, the succession plan works, the farming corporation should buy a key person lie insurance policy for the son. He is 37, does not smoke, and could probably be insured for $2 million at a cost of $106 per month for a 10-year level term. That would ensure that the corporation is protected in the unlikely event of the son’s death and would cover most of his debt. The policy would eliminate the need for costly mortgage life insurance and would have a tax advantage if the proceeds were received directly by the corporation, Erik Forbes adds.

Herb already receives Canada Pension Plan benefits of $421 a month. Martha can apply this year for benefits at age 60, which, with a 7.2 per cent per year reduction of each year before age 65 at which benefits begin, would be $370 per month. Each will receive Old Age Security benefits at $565 a month at age 65. A proposed shareholder loan for purchase of the farm by the son would pay the parents $3,500 a month. Redemption of preferred shares would add $2,180 to income on top of $100 of investment income from the couple’s existing financial assets and $400 for farmland rental to third parties. The total, $8,101 a month or $97,212 a year after 20 per cent average income tax, would leave the couple with $6,480 a month. After age 65, age credits for income, provincial seniors’ school tax paid and pension income deductions would reduce tax to about 14 per cent and leave their income for spending at $6,970.

This income and various buyout plans will provide the couple with $300,000 for purchase of a home in town. The son can move out of his mobile home into the farm house. There will be another $100,000 available for investment or for use as a down payment for the town home.

Beyond the farm transition workout is the problem of what the couple can do to enhance their way of life in retirement.

If they use the $100,000 cash payment from the workout for a home down payment, they will have no new investment problems. If they choose to rent, which is a viable choice if they can find a rental home which suits their needs, their income would support as much as $2,000 monthly rent.

If they therefore retain their workout capital and add it to their existing $100,000 of non-registered assets, they should discuss with their accountant a potential move of existing their assets, currently just term deposits, to a Tax-Free Savings Account. At present, they do not have a TFSA. The $82,000 available shelter would provide future tax relief. They might also seek investment advice to assist them in investing in stocks or exchange traded funds with yields higher than what their term deposits provide.

Many financial advisors like capital gains, which not only have lower taxes than income or, in most cases, dividends, but can be reaped at the asset owner’s will. If the couple’s financial assets do migrate to TFSAs, the tax issue will be irrelevant. But timing gains would be relevant. Thus it would be wise to choose stocks or exchange traded funds for stocks or bonds which have very low management fees, under one per cent in the case of mutual funds, under 0.50 per cent in the case of ETFs. The assets chosen should produce steady and rising dividends. These tend to be no decision assets in which dividends patch over times when capital markets slump.

“Herb and Martha can retire with more income, more income security, and less effort to earn a living than they have now,” Erik Forbes says. “All that is needed is to act with advice and prudence. They have earned a secure retirement.”

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