This will provide options for withdrawing funds from the business over a number of years and hopefully reduce the tax burden.
For instance, farmers who are thinking about retiring and selling off their shares or assets next year could benefit by dividing the sale between this year and next year.
It is the result of Canada’s progressive tax rate system, in which taxpayers are taxed at 15 percent on the first $43,953 of income and at 22 percent on the rest. As a result, $87,906 in income from the sale of property would be taxed at a higher amount if the property was sold in one year than if it was sold over two years.
Another technique involves transferring cattle to the children who will be responsible for the ongoing operation of the farm.
Selling or transferring assets to children must be done at fair market value, which can create a financial burden for the children and a financial hit for the parents who are selling the inventory all at once.
An alternative would be to lease the cattle to the children. In effect, you are financing the cattle on their behalf and benefitting from an income stream through the lease.
However, there is a downside to this tactic. There is no mandatory inventory adjustment for tax purposes because ownership of the cattle is not transferred and the title to the cattle is still with the parents. As a result, tax losses cannot be maximized.
Lease arrangements require detailed documentation to support this non-arm’s-length relationship because the Canada Revenue Agency can scrutinize these transactions in regard to ownership of property, legal agreements, lease payments and bank account transfers.
Using this lease provision may also make it difficult for the children to obtain loans from financial institutions because they do not own the cattle. Banks may request that the parents get involved in the financing of the children’s loans, potentially through personal guarantees or liens against the cattle.
Giving away some of the assets while you’re still alive is another option, but only if you are confident that you will have enough to live on during your retirement.
If so, this may be a good strategy for reducing probate fees and taxes because you have reduced the overall size of the estate that will be subject to such fees and taxes. More importantly, it may also help reduce family infighting about who gets what after your death.
In any case, developing a sound strategy for retirement well in advance of your departure date, including the preparation of a detailed legal will and testament, can certainly help ease your exit from the business.
FBC is Canada’s Farm & Small Business Tax Specialist, providing tax accounting and bookkeeping services to over 20,000 farms and small businesses from Ontario to British Columbia. Our complete financial planning for farm and small business owners takes a long-term approach to address your specific needs at all stages of life and business, minimizing your taxes year after year. Year-round services include tax planning, tax optimization, business consulting and audit protection.
This article originally appeared online at AgAnnex in February 2015.