It’s mid-February and that means one thing for countless Canadians — tax time is right around the corner. That includes farmers on the Prairies who are busily gathering reams of information to prepare their 2022 tax returns.
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It’s something Matt Bolley is quite familiar with. Bolley is a business advisor and partner with MNP’s tax team in Brandon, Man., and frequently works with farm families in the region.
Bolley was a featured speaker at Manitoba Ag Days 2023, held Jan. 16-18 in Brandon. He spoke about the top tax tips and traps that farm families should be aware of when it is time to prepare their taxes.
The chartered accountant said a common and problematic situation farm families sometimes have to deal with is when two or more siblings own farm property together but farm independently of each other.
While it’s not an issue from a farming perspective, it can be from a tax standpoint, Bolley explained. That’s because for farmland to qualify for the capital gains exemption or be transferred intergenerationally on a tax-free basis, at least 50 per cent of that land must be used by an individual referred to as a qualified person.
To determine whether land is considered qualified farm property, according to the Income Tax Act, the land must have been farmed by you or another qualifying person, which can include a parent, child, grandparent, grandchild or a spouse.
Unfortunately, siblings aren’t considered qualified persons according to the Income Tax Act. As a result, the land does not qualify as farm property and doesn’t qualify for the capital gains exemption or intergenerational transfer rules.
“In the end, they can get a nasty surprise where now it’s a taxable disposition and the taxes on that could be up to 25 per cent of the appreciation,” said Bolley.
The good news is there are ways to address the issue, he says. One option is something referred to as a land swap in which the siblings exchange their half interests in the land for whole interests in half of the land. As long as they are both farming, there is no tax penalty and they both own the land they are actively farming. Another option is to form a partnership together, which will then qualify the land for both the capital gains exemption and intergenerational transfers in the future.
Bolley’s advice to anyone who may find themselves in this situation is to address it as soon as possible.
“It’s important to identify this sooner rather than later. We don’t want to identify it when someone is looking to sell or after they quit farming,” he said.
Equipment deductions
In 2021, the federal government proclaimed new legislation that allows businesses, including farms, to fully deduct the cost of equipment that is purchased by a business. For corporations, that includes any equipment purchased after April 2021, while individuals can claim any equipment purchased after January 2022, up to a maximum of $1.5 million. The deduction applies to equipment only and not buildings.
Bolley said while this new rule is good news for farm-based businesses, individuals must be careful about how and when they use it. If you claim the entire expense immediately, it means there is no cost base left on the asset. That means if you flip it in three years’ time for another new asset, you may have an income inclusion for the full amount of what it sold for.
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Andrii Yalanskyi/iStock/Getty Images
“You have to be careful because you could end up paying more tax on the sale than what you deducted when you purchased it,” he said. “We don’t necessarily want to jump right into every situation and immediately expense equipment. We want to know what the long-term plan is for the farm to make sure that they’re going to save more tax or as much tax on the purchase as they’re potentially going to pay on the disposition (of that equipment).”
Bolley said in the case of a farm corporation, immediate expensing makes sense since the tax rate is 27 per cent and (farmers) are never going to have to pay more than that when selling an asset. However, he said it’s important for individuals to make sure the deduction they are taking is in a higher tax bracket so when they have that income inclusion down the road, they’re paying a lower tax rate or at least the same amount of tax.
“These are potentially beneficial rules, but don’t just blindly use them because you can end up with a really nasty surprise in a few years,” he added.
Update your will
Bolley said one of the best things farm families can do when it comes to preparing a good tax plan is to ensure they have a proper and up-to-date will in place. Too often he sees clients create a will when their children are young and then never update it, which can create confusion or strife among family members decades later.
The key to creating a good will, he explained, is to make it clear and simple. If it becomes too convoluted, it can suddenly become open to interpretation, which can cause bitterness or resentfulness. And it doesn’t have to be perfect. Good is usually good enough, at least for the time being, he added.
“A lot of times, people don’t change their wills until they have everything perfectly in place. My advice is to get a good will in place (now), and we can make it perfect later because if you don’t have any will in place and something suddenly happens, you could be in a lot of trouble,” he said.
It’s also important to discuss what’s in your will with your children ahead of time, he said, otherwise each of them may expect something different and ultimately no one will be happy.
Capital limit
Another tax change farm families should be aware of is an increase to taxable capital limit for farm corporations. At present, incorporated farms can have up to $10 million in capital assets and still qualify for the small business tax rate of nine per cent rather than the corporate rate of 27 per cent. The access to the nine per cent rate gradually decreases as the value of capital assets rises above $10 million until it reaches $15 million, at which point a farm must begin to pay the full corporate rate.
The good news is that upper limit was increased from $15 million to $50 million in the last federal budget and the decreased access to the nine per cent tax rate for exceeding the $10-million floor will be much more gradual. The not so good news, Bolley said, is this change will not take effect until next year, so it will not help farm families when it is time to file their 2022 tax returns.
His advice to farmers who may be at the $15-million mark for 2022 is to determine if there are ways to reduce that number, either by taking the immediate expensing deduction noted earlier or reducing optional or mandatory inventory adjustments to keep income as low as possible.
The next generation
A growing number of Canadian farmers nearing retirement means many will soon be passing their land to their children. Bolley said that’s why it’s important for farmers to understand the tax implications of renting out their land compared with farming it themselves.
For farmers to pass their land to their children without potentially incurring a steep tax bill, the land must have been used primarily for farming for more than 50 per cent of the time it has been in the family.
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payphoto/iStock/Getty Images
In the case of land that has been in a family for 39 years, that means the owner must have farmed it for at least 20 years but could have rented it to someone else the past 19. In that specific case, the land would still qualify as farm property and can be passed on to the farmer’s children tax-free. If years of ownership were reversed, it wouldn’t qualify as farm property and would have to be passed on to a farmer’s children at fair market value.
Bolley said he advises anyone who may be considering passing on farmland to children in the near future to gather a detailed history of the farm’s usage to share with a financial advisor.
“Gather it when the people who are intimately familiar with the history of the land are still alive,” he said. “It can be very difficult to gather that information from municipal records once parents or grandparents have passed on.”
New rules
While many Canadians may not be familiar with Bill C-208, this federal government amendment to the Income Tax Act could have significant implications for many farm families.
Passed in 2021, Bill C-208 makes it far easier and less costly for siblings to split up a farm corporation. In the past, the siblings would have been required to get a ruling from the Canada Revenue Agency (CRA) on any proposed split and the process could cost as much as $100,000 including lawyers’ and accountants’ fees.
Bolley said the new regulations have helped streamline the process and allow farm corporations to be split up in a way that makes sense for a farm operation moving forward. Some of the options now available, including splitting one corporation into two, maintain the corporation as a single unit but splitting ownership of the land, or a tax deferred buyout of a sibling.
The other noteworthy change resulting from Bill C-208 is it makes it easier for children to buy out parents from a farm corporation. In the past, if a child wanted to buy out parents’ shares in a farm corporation, that child was hit with a big tax bill to get money out of the corporation to pay Mom and Dad if the parents wanted to use their capital gains exemption for the proceeds of the sale. Bolley said the new rules make it far simpler for children to buy their parents’ shares and for parents to use their capital gains exemption.
Bolley noted there are several requirements that individuals must meet in order to buy a parent’s shares in a farm corporation. First, the corporation must match the CRA’s definition of a family farm corporation. The children must also incorporate a holding company to purchase the shares, which can then be amalgamated back into the corporation after five years. There also has to be an independent valuation of the corporation regardless of whether or not family members agree on its value.
Tax time can be stressful. These tips can help
Lauren Van Ewyk knows all too well how stressful tax time can be for many farmers.
Van Ewyk and her husband operate a small sheep farm near the village of Courtright in southern Ontario. She’s also the CEO and co-founder of the National Farmer Mental Health Alliance (NFMHA), an organization that provides ag-informed training to psychotherapists and offers one-on-one counselling services to farmers.
Van Ewyk says it’s not uncommon for farmers to feel overwhelmed at this time of year.
“There are a lot of farmers who feel overwhelmed at this time of year because they’re basically taking inventory of what happened last year while they’re also planning for next year. There are so many uncertainties. We can go from earning a lot of money to losing a lot of money at the drop of a hat. That can be very stressful,” she says.
“As farmers, I don’t want to say we’re eternally hopeful, but there’s this piece of us that says eventually all of this hard work will pay off and our ship will sail in… and we’re going to have this comfortable, steady life. This time of year, that hope is really put to the test when we go through this post-year evaluation process from a financial perspective.”
Van Ewyk says one of the best things farmers who may feel overwhelmed at tax time can do is to step back from the current moment and try to gain a big picture perspective of things. That can help ensure they don’t get lost in the day-to-day details of their work.
“It’s important not to panic, and to take an inventory over the long term,” she explains. “As farmers, we want to function in the here and now. What’s the next thing I have to do? But at the same time, we’ve got to learn how to step away from the here and now and take in that big picture at the same time.”
She also advises farmers to enhance their support network, whether that’s finding a sympathetic ear to share their troubles with or adding a professional to their team who can help with things like bookkeeping.
“As farmers, we need to be able to say this is an area where I need help. I may be gifted in areas like… planting or seeding or evaluating genetics, but it’s OK to ask for help in these other areas.”