Tax Tips, Strategies and

Opportunities for

Progressive Farmers

Franklin H. Famme, CPA, CA

« The only thing raised successfully on

this farm last year was taxes! »

Topics

What is Farming?

General Tax Tips For Farmers

Tax Rates and Types of Ownership

Qualified Farm Property

Estate Planning and Inter-Generational

Transfers

Farm Subsidy Programs

Questions

What is Farming?

What is Farming?

Farming includes tillage of the soil, livestock raising or

exhibiting, maintaining of horses for racing, raising of poultry,

fur farming, dairy farming, fruit growing and the keeping of

bees

Also includes Christmas tree farming, the operation of a wild

game reserve or egg hatchery, and may include aquaculture,

and the operation of feedlots, nurseries and greenhouses

May include other activities (definition is not exhaustive)

Does not include an office or employment under a person

engaged in the business of farming

What is NOT Farming?

Solar panels and other energy projects

Solar panels get their own class for depreciation purposes but

depreciation is limited to net income from solar panel

Barn rental (not to be mistaken with custom feeding)

Barns for rental purposes have a slower depreciation rate than

barns for farming purposes

Land rental (see next slide)

Other

Renting vs. Sharecropping

Crop-share arrangements involve a joint contribution of capital and labour to a farming venture, with the parties each receiving a portion of the harvest

Is the landowner in this situation earning income from a farming business?

CRA’s longstanding position is that a landlord that receives a share of crop in lieu of rent earns rental income, not income from a farming business

This presumption may be rebutted by the facts of a given situation, e.g. where the landlord contributes towards input costs

True sharecropping results in the farmer sharing in both the rewards and the risks of the crop

General Tax Tips

For Farmers

Cash Basis Filing

Income from a farming business may be taxed on a cash basis

Farmers (and fishers and corporations) may choose to adopt the

cash method at any time, but must have Ministerial consent to

switch back to accrual

Farmers can prepay for expenses like see, fertilizer, feed, etc.

at end of tax year to reduce tax owing – but once begin cycle

of prepaying it is almost necessary to do every year

Cannot prepay expenses for more than one year

Rules to prevent the creation of a loss by advance purchasing

of inventory

General Tax Tips For Farmers

Can deduct a reasonable percentage of house expenses

Purchase of capital assets (eg. Tractors) is not an effective way

to immediately reduce your tax balance as amortized in year

rather than deducted – therefore buy capital assets only when

needed

Cash basis rules do not apply to capital purchases but need to

have asset available for use by end of year

Land clearing, draining and tiling is an expense that can be

written off 100% in the year of payment or carried forward to

future years

General Tax Tips For Farmers

You can pay a reasonable wage/profit share to your spouse or

child as long as:

The amount was actually paid

The work performed was necessary for the farming operation

The amount was reasonable given the person’s abilities and is

comparable with what an unrelated party would have been paid

Deferred receipt of crop payments from grain elevators are an

effective way to push income to the next year – just be aware

that these crop deferrals are no longer covered by the Ontario

Grains Act

General Tax Tips For Farmers

If purchasing a farm:

Consider who’s name to put it in to maximize potential capital gains exemption down the road, or to minimize income tax now

Ensure you have an HST number so that HST does not apply on the purchase (the HST number must be in the exact name as the ownership)

If selling logs out of the bush, need to distinguish between commercial (you sought the gain) and non-commercial (the gain sought you) woodlot for purposes of whether income versus capital gain

Scientific Research and Experimental Development (SR&ED) tax credits may be available

Tax Rates and Types

of Ownership

Personal Tax Brackets

(2015 Ontario)

Bracket General Tax Rate

(capital gains at ½ of rates)

$0 - $45,000 20.4%

$45,000 - $90,000 32.6%

$90,000 - $150,000 44.0%

$150,000 - $220,000 48.0%

> $220,000 49.5% **

Rates and

brackets

are

approximate

** Note: highest non-eligible dividend rate ~40%

Personal Tax Brackets

(2016 2015 Ontario)

Bracket General Tax Rate

(capital gains at ½ of rates)

2016 changes

$0 - $45,000 20.4%

$45,000 - $90,000 32.6% - 1.5%

$90,000 - $150,000 44.0%

$150,000 - $200,000 48.0%

> $200,000 49.5% ** + 4.0%

Rates and

brackets

are

approximate

** Note: highest non-eligible dividend rate ~40% 45%

Corporate Tax Rates

(2015 Ontario)

Small Business Corporations

0 - $500,000 15.5%

> $500,000 26.5% **

** Ontario considers the business of farming to be manufacturing

and processing, which means the highest marginal rate can be

reduced to 25% in most circumstances

Corporate Tax Rates

(2016 2015 Ontario)

Small Business Corporations

0 - $500,000 15.5% -0.5% ???

> $500,000 26.5% **

** Ontario considers the business of farming to be manufacturing

and processing, which means the highest marginal rate can be

reduced to 25% in most circumstances

Types of Ownership:

Proprietorships

Mostly very small operations

Rare, because of prevalence of partnerships

However, common for farm assets to be owned individually or

jointly by spouses

E.g. owner of land and operator of farming business are frequently

not the same person/entity

Types of Ownership:

Partnerships

Husband-wife and parent-child farming ventures are often de

facto partnerships

A written partnership agreement is strongly recommended, but

unfortunately rare in practice

Extremely important to properly identify whether the farm

assets are owned in partnership or not

Presumption that land is owned outside of the partnership, unless

indications otherwise

Land ownership may look like in partnership, but instead be joint-

tenancy or tenants-in-common

Types of Ownership:

Corporations

Single corporation fairly typical

Usually owned by a combination of spouses, children

Multiple corporations sometimes used to:

Segregate non-farming assets from the qualifying farming business

Multiply the small business deduction for separate businesses (e.g.

cropping vs. livestock)

Pre-divide farming assets for later succession to multiple children

When to incorporate?

Types of Ownership:

Trusts

Relatively uncommon

Sometimes used for transfer of farm assets to minor children

Not compatible with many farm rollover provisions

Useful when farm rollovers not available and more general

succession & estate planning techniques are used instead

May be becoming more relevant for estate planning purposes

as farm values increase

Qualified Farm

Property

Capital Gains Exemption

Exemption limit for 2015 is $813,600 (up from $800,000 in 2014)

Limit has been further increased to $1,000,000 for qualified farm

property dispositions after April 21, 2015

Exemption can be used for disposition of qualified farm

property (farmland and farm quotas), interest in a family-farm

partnership, or shares in a family farm corporation

Corporations do not have capital gains exemptions, just

individuals

When is Land Eligible as

Qualified Farm Property?

If purchased prior to June 18, 1987

The property must have been principally used by certain

individuals in the business of farming in Canada in the year of

disposal

Or

The property was used in at least five years principally in the

business of farming in Canada by certain individuals

Watch – if farm crystalized in 1994, it is deemed to be reacquired

after June 18, 1987

When is Land Eligible as

Qualified Farm Property?

If purchased after June 18, 1987

The property must have been owned by certain individuals for at

least 24 months immediately preceding the time of disposition

And

Either:

In at least 2 years, the property must have been used principally in a farming business in Canada on a regular and continuous basis, and

gross income from that business must exceed income from all other sources, or

During any 24 month period was used in a farming business in Canada by a family farm partnership or corporation

Family Farm Corporation

Shares as QFP

To qualify as a share of capital stock of a family farm corporation,

all of the following conditions must be met:

The corporation must have existed for at least 24 months

Throughout any 24 month period, more than 50% of FMV of

corporation assets must be attributable to farming

At the time of disposition, 90% or more of the FMV of the

corporation’s assets must be attributable to farming

Much care must be taken to fall within these rules, and special

planning often surrounds keeping companies “pure” for eventual

sale.

Other Qualified Farm Property

Considerations

Capital gains reserve up to 10 years on proceeds not due

Alternative Minimum Tax (AMT) – can be carried forward up to

seven years

Cumulative Net Investment Loss (CNIL) balance

Old Age Security (OAS) clawback

Allowable Business Investment Losses (ABIL)

Can advances planning occur to foresee multiplication of the

capital gains exemption?

Replacement property rules provide for a deferral of the gain

on sale in certain circumstances (must be “same or similar”

property and must fall within certain timeframes)

Estate Planning and

Inter-Generational

Farm Transfers

Estate Planning

BASIC STEPS

Write down a listing of all assets and debts, either realized or

unrealized

Determine how to split the assets fairly and when the

beneficiaries get the assets

Communicate your intentions

Family meeting

Drafting of will (consider dual wills)

Create living wills (powers of attorney for property

and health)

Revisit your plan regularly

Estate Planning

OTHER POINTERS

When possible, keep it simple

Is there a need for life insurance?

Making a change to save probate taxes is not always a good

idea

Passwords, PINs, and user names

Listing of trusted advisors

Inter-Generational Farm

Transfers

‘Fair is not

always Equal’

Inter-Generational Farm

Transfers

Farming property, including shares of qualified farm

corporations or interest in family farm partnerships, can be

transferred to a child by a parent at any value between a

nominal amount and FMV (or maybe even gifted for net family

property purposes)

Consideration for transfer can take the form of a promissory

note if cash unavailable (which may even be forgiven upon

death if desired)

Tax deferred transfer of farm property on death can also occur

as part of estate planning

Many options are available for corporate transfers and

crystalizations as well (not covered in detail here)

Farm Subsidy

Programs

Cost-Sharing Programs

Growing Forward 2 – Ontario

Cost-share funding assistance supports projects in these six

focus areas:

1. Environment and climate change adaptation

2. Animal and plant health

3. Market development

4. Labour productivity enhancements

5. Assurance systems (Food safety, traceability, animal welfare and

weather risk mitigation)

6. Business and leadership development

Farm Subsidy Programs

Farm Subsidy Programs

Farm Subsidy Programs

Farm Subsidy Programs

Thank You.

Questions?

Franklin H. Famme, CPA, CA

Famme & Co. Professional Corporation

125 Ontario Street, Stratford, ON, N5A 3H1

Tel. 519-271-7581

ffamme@fammeandco.on.ca