Agriculture Estate Agriculture Estate PlanningPlanning

Dean Gallimore, CA.CBVDean Gallimore, CA.CBV

KPMG LLPKPMG LLP

Transitioning Your FarmTransitioning Your Farm

“…the final test of greatness is “…the final test of greatness is the ability of the business the ability of the business

owner to let go…”owner to let go…”

A good succession plan takes A good succession plan takes 10 to 15 years! 10 to 15 years!

““Why do we want the farm to Why do we want the farm to pass to the next generation?”pass to the next generation?”

““Who’s going to take over?”Who’s going to take over?”

““How do we afford to retire?”How do we afford to retire?”

Succession planning is a Succession planning is a continuous process to transfer continuous process to transfer

knowledge, skills, labour, knowledge, skills, labour, management, control and management, control and ownership between the ownership between the

generations.generations.

Transfer of labour occurs first Transfer of labour occurs first and is straightforward.and is straightforward.

Transfer of management and Transfer of management and decision-making is more decision-making is more

difficult. difficult.

It involves letting go of control.It involves letting go of control.

Finally, the transfer of Finally, the transfer of ownership of the assets ownership of the assets

involves the actual purchase involves the actual purchase or gifting of the farm assets or gifting of the farm assets from one generation to the from one generation to the

next.next.

Successors won’t feel secure Successors won’t feel secure until the parents transfer voting until the parents transfer voting

control. control.

The “surprise” return of a once-The “surprise” return of a once-retired business owner is retired business owner is

frightfully common. frightfully common.

Business Planning must include Business Planning must include written, up-to-date Wills, written, up-to-date Wills,

insurance policies, open talks insurance policies, open talks about the “what ifs” like illness, about the “what ifs” like illness,

injury, exit, cohabitating, injury, exit, cohabitating, marriage, separation, divorcemarriage, separation, divorce

Retirement plans must include Retirement plans must include financial expectations, financial expectations,

retirement housing, and retirement housing, and fair treatment of the fair treatment of the off-farm children. off-farm children.

The Succession Plan is The Succession Plan is communicated to family.communicated to family.

Tax andTax and Related Issues Related Issues

Farm Estate and Sale Farm Estate and Sale PlanningPlanning

OUTLINEOUTLINE

Inheritance & Gift Tax – Exist?Inheritance & Gift Tax – Exist?

General Farm Rollover RulesGeneral Farm Rollover Rules

Tax Planning Tips & TrapsTax Planning Tips & Traps

Selling out – Managing the TaxSelling out – Managing the Tax

Is there an Inheritance Tax?Is there an Inheritance Tax?

In Canada there is In Canada there is notnot currently an inheritance tax currently an inheritance taxProbate fees in some provinces act similar (Not Probate fees in some provinces act similar (Not Alberta)Alberta)The deemed sale of properties on death (unless The deemed sale of properties on death (unless left to spouse acts like an inheritance tax)left to spouse acts like an inheritance tax)The U.S. does have an inheritance taxThe U.S. does have an inheritance tax

Is there a Gift Tax in Is there a Gift Tax in Canada?Canada?

None in Canada (does exist in U.S.)None in Canada (does exist in U.S.)

However, before you act, consider rule in However, before you act, consider rule in Tax Act that treats a gift as a sale for income Tax Act that treats a gift as a sale for income tax purposestax purposes

Is there a Gift Tax In Canada?Is there a Gift Tax In Canada?

ExampleExample– Gift of $10,000 cash to a childGift of $10,000 cash to a child– Gift of $10,000 of shares in Royal Bank (cost of Gift of $10,000 of shares in Royal Bank (cost of

$1000) to a child $1000) to a child – Tax as a result of cash gift is nilTax as a result of cash gift is nil– Tax on gift of Royal Bank shares could be as high as Tax on gift of Royal Bank shares could be as high as

$1,755 $1,755 and is payable by the parentand is payable by the parent

No limits on the amount of gifts in a year (In U.S. No limits on the amount of gifts in a year (In U.S. smaller gifts can be made subject to an annual smaller gifts can be made subject to an annual limit)limit)

Rollovers for Farm PropertyRollovers for Farm Property

Generally all farm property (except Generally all farm property (except inventory) can be transferred to a child if inventory) can be transferred to a child if certain conditions are met either during the certain conditions are met either during the farmers lifetime or on death without farmers lifetime or on death without triggering the tax as if the property had triggering the tax as if the property had been sold been sold

Rollovers for Farm Property - Rollovers for Farm Property - conditionsconditions

Child must be resident in CanadaChild must be resident in CanadaProperty was, before transfer used Property was, before transfer used principally in the business of farmingprincipally in the business of farmingThe farmer, spouse or a child was actively The farmer, spouse or a child was actively engaged on a regular and continuous engaged on a regular and continuous basis in the farming businessbasis in the farming business

Rollovers for Farm Property - Rollovers for Farm Property - IssuesIssues

Rental of farmland on a crop-share or cash basis Rental of farmland on a crop-share or cash basis does not constitute carrying on a farming does not constitute carrying on a farming business – consider historic usebusiness – consider historic useCan be left to a non-farming child as long as one Can be left to a non-farming child as long as one of the appropriate people involved (Mom, Dad or of the appropriate people involved (Mom, Dad or sibling)sibling)Inventory does not rollover without tax during Inventory does not rollover without tax during lifetime but can on death as a Right or Thinglifetime but can on death as a Right or ThingShares of a family farm corporation do qualify for Shares of a family farm corporation do qualify for rollover, but is the company on side as a family rollover, but is the company on side as a family farm corporation?farm corporation?

Capital Gain ExemptionCapital Gain Exemption

Special exemption for sales of qualifying farm Special exemption for sales of qualifying farm land and buildings (not equipment or inventory) land and buildings (not equipment or inventory) or shares of qualifying farm companiesor shares of qualifying farm companies

Limited to $750,000 per person lifetime (each Limited to $750,000 per person lifetime (each spouse has $750,000)spouse has $750,000)

Can use during lifetime or on deathCan use during lifetime or on death

Capital Gain Exemption - IssuesCapital Gain Exemption - Issues

Should a farmer use now in case Should a farmer use now in case government takes it away?government takes it away?

Impact on Old Age Security, Senior’s Impact on Old Age Security, Senior’s benefit, Child tax benefitbenefit, Child tax benefit

Consider alternative minimum taxConsider alternative minimum tax

Is the exemption available to you and does Is the exemption available to you and does the farm asset qualify?the farm asset qualify?

Estate Freeze ConceptEstate Freeze Concept

An estate freeze is an estate planning strategy An estate freeze is an estate planning strategy used to minimize income taxes on deathused to minimize income taxes on deathFocuses on locking in value of an asset at a point Focuses on locking in value of an asset at a point in time and passing on future growth to the next in time and passing on future growth to the next generationgenerationSome estate freezes are relatively straightforward Some estate freezes are relatively straightforward such as selling or gifting an asset to a child – but such as selling or gifting an asset to a child – but many have immediate tax consequencesmany have immediate tax consequencesIn the case of incorporated business, can be In the case of incorporated business, can be effective without any current tax costeffective without any current tax cost

Estate Freeze ExampleEstate Freeze Example

Mr. A owns 100% of shares of AcoMr. A owns 100% of shares of Aco

Aco value is $1,000,000 (but expected to Aco value is $1,000,000 (but expected to increase)increase)

If qualifies for capital gain exemption, tax on If qualifies for capital gain exemption, tax on death could be $50,000 (if not could be death could be $50,000 (if not could be $195,000)$195,000)

If value doubles (Mr. A takes no action) tax If value doubles (Mr. A takes no action) tax exposure could increase to as high as exposure could increase to as high as $390,000$390,000

Estate Freeze Example Estate Freeze Example An estate freeze would involve Mr. A exchanging An estate freeze would involve Mr. A exchanging his shares for new shares - fixed value equal to his shares for new shares - fixed value equal to today’s value ($1,000,000)today’s value ($1,000,000)New growth common shares might go to childrenNew growth common shares might go to childrenResult is Mr. A has “frozen” his value in the Result is Mr. A has “frozen” his value in the company and capped his exposure to tax on company and capped his exposure to tax on deathdeathAs well, shares could be bought back from him to As well, shares could be bought back from him to fund his retirement – possibly $35,000 per year fund his retirement – possibly $35,000 per year tax free (if no other income)tax free (if no other income)Could consider using capital gain exemption at Could consider using capital gain exemption at same timesame time

Unrelated Farm Company Unrelated Farm Company Planning PointPlanning Point

WATCH FOR THE TAINTED WATCH FOR THE TAINTED COMPANY TRAPCOMPANY TRAP

Many farmers aware that shares of a farm Many farmers aware that shares of a farm company rollover to a child on death (or company rollover to a child on death (or during lifetime)during lifetime)

Tax rules very complex – if more than 10% of Tax rules very complex – if more than 10% of assets of company are not farm assets (eg assets of company are not farm assets (eg investments), then company is offsideinvestments), then company is offside

If offside, tax is paid on full value of company If offside, tax is paid on full value of company shares (shares (even the value of the farm assetseven the value of the farm assets!!) !!)

Tainted Company TrapTainted Company Trap

Tainted Company TrapTainted Company Trap

Possible SolutionPossible Solution

Divide company into two pieces so farm assets are in Divide company into two pieces so farm assets are in one company (qualifies for rollover) and non-farming one company (qualifies for rollover) and non-farming assets are in another company (won’t rollover but at assets are in another company (won’t rollover but at least won’t taint assets in farming company)least won’t taint assets in farming company)

Can be done tax-free in most circumstancesCan be done tax-free in most circumstances