By Gord Hawley
Are you like the majority of our current farmers? 55 plus? Are you starting to think about rolling your farm over to your child or children? Or are you one of the farmers who does not have children who will want to be the next generation farmer on your empire?
Neither is easy to do without a lot of stress. I have clients in both situations every year. They ask me, “What is the best way to move forward?” I tell them, first get your will done or updated and then be patient. It does not happen overnight either way. And get ready to write a big cheque to cover the cost of the change.
Making a transition either to a family member or a stranger takes a lot of time getting organized and avoiding taxes legally. Dont let yourself get caught making a bad decision. Or selling first and asking questions afterwards. Even worse is to have an active farm operation with no will and a sudden death of one or more of the owners. You will find that a large part of what you planned to pass on to your children or through your estate is now government money and not yours to give away.
Can you avoid some of the pitfalls? Yes. Arrange a meeting with your accountant but this is normally not the best time of year to do it, as we are all very busy with regular tax season and cannot afford the time without charging you double or more the cost for our time.
Plan to take a few years to sort out your wishes. Meet with your lawyer to discuss legal issues of changing over the ownership of the farm. Are there going to be land transfer taxes to be paid on the transfer to a family member? What if you change from a sole proprietor to a partnership? Is it better to be incorporated? Advantages and disadvantages? A client asked me last year how does he get out of his corporation? It is not as easy as you think.
Remember, a corporations money is not really your money. It is treated as a separate thing, where you only own some or all of the shares and must follow the tax rules for corporations at the time of incorporating and at the time of disposition of the shares and sale of the business.
Many times it can take up to five years to do a proper transition of the farm. Plan early. Get good, competent advice from professionals who have handled more than one such case. If your lawyer has never handled a farm transition, get a different lawyer, same as your accountant. It is not a simple matter. Beware of the fees you will be paying. I had a client who sold the farm for $2 million. Their lawyer charged them $20,000 in legal fees. For what? I felt they were being charged too much based on my 20-plus year of real estate brokerage work. I suggested we go to the law society for a determination and at the end of the day the fees were reduced to $8,000. The lawyers work is no different than selling a house with a little extra work to deal with cattle, quota or equipment and bills of sale.
Speaking of quota, do you own dairy or poultry quotas? What are they worth? What did they cost you and have you amortized the original cost over time so that the book value is now much less than market value? You may find yourself in a recapture situation for values as well as capital gains. It is similar to the $150,000 tractor or combine that is now worth $120,000 but has a book value of only $80,000.
Can you transfer or sell your quota? Does your marketing board force you to give back some of the quota that you are not allowed to sell?
What about the bred heifers and cows, the unborn animals, the crops in the fields, including the value of fall wheat in the month of February? As for other crops in storage, who sets the value and quantity? What about shrinkage, and storage and drying costs?
Who owns the car or truck, the farm business or you personally? What about some value given to your child or children, who are not going to continue farming? Will he or she get some current or future value as one of your children?
Too many questions, too few answers. Spend the time and the money to get good advice.
Gord Hawley is an Ottawa-based independent farm tax planner and can be reached at 613-716-2280 or at email@example.com.