For a farm business operating as a corporation, the most common approach when purchasing land is within the existing corporation. While this isn’t necessarily a problematic approach, it places all the business assets within a single corporation, which limits your flexibility in the future – particularly during the succession process. While you may want to distribute your business assets among several children, if the assets are all within a single corporation, you will only be permitted to distribute shares without significant restructuring.
Fortunately, there is an often overlooked alternative that allows you to own a piece of land separately from the rest of your business: a single-purpose land corporation. Rather than purchase the land within your existing corporation, this is a process of establishing a corporation for the purpose of a new land acquisition, so it can be managed separately from your corporation’s other assets. This is ideal if you want to transfer your business assets to a new owner but retain control over a piece of land or transfer it to someone else. If you are a farmer who believes in the importance of being prepared for the future, there are several reasons to consider the benefits of starting a single-purpose land corporation.
The lifetime capital gains exemption
Every individual has access to a lifetime capital gains exemption of $1 million on qualifying farm property. In other words, if you sell qualifying farmland in the future, you do not have to pay tax on the first $1 million of capital gains. However, if all your properties are part of one corporation and you decide to sell a single property, it will not qualify for the capital gains exemption, because it is just one of your company’s many assets. In contrast, property owned by a single-purpose land corporation is a standalone asset, allowing it to qualify for the capital gains exemption when it meets the other conditions. In this situation, the shares of the single-purpose land corporation would be sold and those shares that would qualify.
Eliminating income tax
While farmers also have the option to purchase land personally, this usually requires them to take more money out of the company to pay for the property, which results in a great deal of personal income tax. The primary reason for starting a farming corporation is to reduce your tax bill, but you lose that benefit when you start withdrawing money personally. If you purchase the land in a single-purpose land corporation, your farm corporation can finance the purchase without incurring any new income tax.
No room for error
While it is possible to purchase land within your corporation and transfer it to a single-purpose land corporation at a later date, this would have to be done at fair market value, which has costly tax consequences – unless it is classified as a section 85 rollover. In some provinces, you may be responsible for paying the land transfer tax, which may not apply if you make the initial purchase in a single-purpose land corporation.
Consider the drawbacks
There are several benefits of purchasing farmland in a single-purpose land corporation, but there are some perceived drawbacks. Every corporation has to file its own tax return and financial statements, while paying additional fees for lawyers and bookkeeping. A second corporation also results in more administrative work, though there is no change in total tax for the corporate group because rent is deemed active. While the impact of these drawbacks is relatively minor, it is enough to act as a deterrent for many farmers. However, it may be wiser to focus on the tax savings you can enjoy through a single-purpose land corporation.