As a farmer you are entitled to report income and expenses on a cash basis. This creates opportunity for most farms, ranches and feedlots to build massive tax deferral into many of the assets owned. A growing farm operation results in increasing inventory values that have not been taxed. Machinery and equipment depreciation defers current taxable income until these assets are sold. As land value appreciates it creates future taxable capital gains, resulting in immense tax deferrals.
At the time of the sale, the tax man is looking to be paid for the years of deferrals, including:
- Income tax on the sale of all grain, livestock and other inventories
- Tax on recaptured depreciation for proceeds received in excess of depreciated value on machinery, equipment and buildings
- Capital gains tax on increased land values or shares of a farm company (less available Capital Gain Deduction)
The sale strategy(s) Marcel LeBlanc Real Estate Inc. designs are specifically tailored to your assets and the least taxable method to sell them. The use of partnerships, corporations, share sales, or conversion of inventory to capital property are a few of the opportunities available.
These are a few of the tax maneuvering strategies which may be used, depending on the circumstances:
- Sell Partnership interests into a Corporation to create shareholder loans and reduce tax by as much as 64% (decrease from 39% to 14% Alberta)
- Sell the shares of an Inventory Company to reduce tax cost by as much as 90%
- Use a land holding partnership to qualify the land for use of the $750,000 CGE (Capital Gain Exemption) per partner to multiply the CGE
Opportunity to Incorporate
Once a partnership has been established and operating for at least 24 months, there is an opportunity to consider incorporation. The possibility of generating large shareholders loan on the sale of partnership interest and the reduced tax rate of 14% on net corporate earnings of up to $500,000 per year are key factors that would motivate such a plan.
When a partnership interest is transferred to a corporation there is an opportunity to elect the transfer at FMV. Keeping in mind the partnership interest is a capital asset, the possibility of capital gain exists. Assuming the partnership is a qualified family farm partnership, the gain would be eligible for the $750,000 capital gains exemption.
The primary advantage of this strategy is that the value of the inventory and potential recaptured capital cost allowance (which are income assets and fully taxable) can be converted to capital property (the partnership interest) and be sheltered from tax by the capital gains exemption.
Sale of Partnership to Corporation
1. Partner A transfers his/her partnership interest to farmco via Section 85 Rollover, electing a transfer value for tax purposes to shelter the resulting capital gain from tax. The transferee receives one nominal valued share of Farmco and a credit to his/her shareholder loan account in the amount of the elected transfer value.
2. B completes a similar transaction with Farmco at a suitably staggered date.
3. Farmco becomes the entity operating entire farm and owning the farm assets. The partnership no longer exists.
Client Document Checklist
Year of purchase or receipt
Your estimate of V-Day value (Dec. 31, 1971)
Your estimate of current fair market value
AgriInvest/Agri Stability Statements
Grain C./Coop Equity Statements (or information)
Listing of all debts or liabilities (both farm and personal) including amounts owed and payment terms
Tax returns for past 3 years
Personal (including spouse’s)
Corporate (where applicable)
Corporate Financial Statements (where applicable)
Corporate Minute Book (where applicable) including Share Register/Director
Farm Income & Expense summary for past 3 years (usually included with tax returns)
Current wills (including spouse’s)
Investment statements or certificates (including spouses) including GIC’s, Term Deposits, Bonds, Stocks, Mutual funds
RRSP or RRIF statements (including spouse’s)
Annuity Statements (or information)
Life Insurance policies
Employer sponsored pension plan statements or information (where applicable)
Canada Pension Plan statements
Information concerning any other pension, or benefit being received, or expected
Information concerning any inheritance, which is expected in the near future