So, you have decided to incorporate your farming business. Congratulations! There are now several decisions that need to make to ensure that everything is set-up to make this process as smooth as possible:
Corporations can opt for a year-end other than December 31 without incurring adverse tax consequences. You will need to determine whether a year-end date other than December 31 could be beneficial to your business.
For example, cash cropping operations may find that an October year-end would be beneficial as crops could be sold for cash in November and December but the tax on this income would not have to be paid until the following year. Additionally, an October year-end would make it easier to ensure financial statements are ready in time to obtain financing for the following spring’s planting season.
You also must also choose the date at which you will be begin to report operations as a corporation, rather than a proprietorship or partnership.
Oftentimes a financial statement must be prepared for the period leading up to incorporation. To avoid having to prepare financial statements for a short year-end, it may make sense to consider delaying incorporation until your proprietorship’s or partnership’s year-end is nearly complete.
Alternatively, it may be beneficial to incorporate as soon as possible if there is a significant taxable income event coming up (for example, a higher than normal amount of inventory to sell). In this case, expediting incorporation will allow you to transfer the tax liability to the corporation and avoid having to pay tax at higher personal rates.
Seasonal cash flows should also be considered. For example, cash crop operations often have substantial income and minimal expenses in the first few months of the year. Not taking these seasonal fluctuations into account before incorporating could expose you to a higher than expected personal tax bill.
Another thing to keep in mind when considering the date of incorporation is that inventory can be transferred to a corporation but accounts receivable cannot. Therefore, if you have a large amount of inventory it would be better to hold off selling it until after incorporation takes place.
When incorporating, you have the option of naming your company or using a numbered company. While incorporating a numbered company is slightly less expensive than a named company, it is greatly preferable from an administrative and marketing standpoint to opt for a named company.
If you decide to go with a name, the first name you choose may not be available due to it being legally registered to someone else. Therefore, it is important to have at least one other name in mind.
Directors and officers
Every corporation must have at least one listed director. Directors are legal representatives of the company who can be held personally liable for Canada Revenue Agency (CRA) debts including income taxes, payroll deductions and HST. Because of this personal liability, most corporations usually have no more than one director listed.
Corporations can also choose officers, legal representatives of the company who have limited liability. There are certain advantages to having officers, for instance there is no requirement to pay WSIB premiums on the wages of active company officers. Accordingly, you may wish to consider including your spouse and even some of your children as officers.
Types of shares
Two main types of shares can be issued by corporations; special shares and common shares.
Special shares are often issued to represent the value of equity you are transferring from the partnership or proprietorship to the corporation. This value remains fixed unless shares are redeemed by shareholders.
Common shares, sometimes called growth shares, represent the value of the company from the date of incorporation onwards. It is possible to issue a separate class of common shares for each shareholder. Having various common share classes increases flexibility in allocating dividends to optimize tax planning.
Assets and liabilities at the incorporation date
To properly document the transfer of assets from a partnership or proprietorship to a corporation, your adviser will need a complete list of assets (both the current fair market value and their original cost) and liabilities as of the date of incorporation. Assets and liabilities include such items as cash, accounts receivable, prepaid expenses, inventory, farm equipment, investments, accounts payable and loans.
Ideally, your advisor should be able to have access to statements supporting more significant balances, such as bank statements, invoices and loan statements.
For real estate, your adviser would require information on the cost, year purchased and estimated fair market value of any land, buildings and houses. A professional appraisal may be required.
For marketing quotas, they would require details on the year each quota unit was purchased, the amount of CEC or Class 14.1 CCA claimed each year since inception (depreciation taken on the quota for tax purposes), the historical cost of the quota and its current fair market value. Your adviser would also need to be aware of the history of any quota obtained from family members for less than fair market value.
Transferring land and marketing quotas to the company
It is not always necessary or desirable to transfer all proprietorship or partnership assets to your company. This applies particularly to land, homes and marketing quotas.
If land or marketing quotas are transferred to the company, you will have less flexibility in transferring these assets to the next generation at less than fair market value. It will also be more difficult to access your capital gains exemption when it comes time to sell these assets in the future. Additionally, the transfer of these assets to the company could have a significant immediate impact on your personal income tax (including refundable minimum tax) and the social benefits you receive, such as the Canada Child Benefit.
If you transfer your personal home to the corporation, you will lose your principal residence capital gains exemption and be subject to a personal taxable benefit for the use of corporate-owned property.
Despite these negative consequences, you may still wish to transfer these assets to the company for a variety of reasons. For example, if you have debt that you want to transfer to the corporation, you will have no choice but to transfer enough assets to be able to assume this debt. Additionally, the negative consequences may not matter in situations where you have maximized your capital gains exemptions or have no desire to transfer assets to the next generation.
Shortly after your lawyer files articles of incorporation, the Canada Revenue Agency (CRA) will mail you a letter with your new business number. On receipt of this letter, you must call the CRA to set-up new corporate HST and payroll accounts, which will be used for your regular filings moving forward.
Another thing to keep in mind is that if there are any T4 slips to prepare for the old partnership or proprietorship, these will need to be filed by the end of the month following incorporation – not February of the following year when they are normally due.
Customers and suppliers
After incorporation, you should contact all your customers and suppliers to ensure that payments and invoices are now made out in the name of your company rather than your old proprietorship or partnership. If invoices are not in the company’s name, the CRA may deny deductions and HST credits to the company and/or include company income as personal income.
Please note that some customers, like quota marketing boards, may require you to complete a special administrative process before they can begin issuing payments to your corporation.
The above article summarizes a few of the major planning items that need to be considered before and after incorporating a farm business. If you are interested in incorporating, it is suggested that you consult with your trusted advisor.