By Connor Lynch
OTTAWA — The federal government released its budget in March, which included some changes to how the taxes on quota are handled. Those changes come into effect Jan. 1, 2017.
The new rules change how quota is taxed in a number of different ways, for both incorporated and unincorporated farmers. Here’s a quick reminder on what’s coming.
First off, the rules for writing off quota will change. Eligible capital properties (including quota) will roll in with other depreciable assets, such as buildings and equipment. That means any quota sale within a corporation gets taxed as investment income, instead of business income. Ontario’s investment income tax rate is about 50 %, whereas business income gets taxed at about 15 % up to the first $500,000.
If you sell your quota this calendar year, you’re safe. If you sell quota on Jan. 1, 2017 or later the tax change that kicks in will mean you lose money. How much? It will take five years to make it back, said Collins Barrow accountant in Renfrew County, Dean Faught. If you can’t sell this year, the best plan is to do nothing unless the farmer is looking to collect serious dividends from the company, such as if your children are going to be taking over the farm.
For a farmer who is planning on buying or selling quota, the simplest answer is to get it done before the year is out. If that’s not possible, talk to your advisor to figure out what you can do.
For unincorporated farmers, the changeover can also mean trouble. Farmers were able to dodge the alternative minimum tax (AMT) if they applied their $1 million lifetime capital gains exemption to a quota sale. Not anymore, as of Jan. 1. That means an up front tax on a quota sale if you use your exemption, although the AMT is refundable against your regular tax over seven years.
Ultimately, said Faught, the tax change is going to cost anyone selling quota, starting in 2017, more in taxes no matter what tax avoidance strategy they use.
