Special tax rules for farmers and fishermen

Jan 02, 2019 | Joshua Opheim


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Make the most of special tax deferrals and exemptions

Tax-deferred transfers to family members

If you own certain qualified farm or fishing property located in Canada that you use directly for your farming or fishing business, you may be able to transfer the property to your children on a tax-deferred basis during your lifetime, or when your estate is settled. This also applies when a family corporation or an interest in a family partnership is transferred from a parent to their child.
Our tax system provides special tax planning rules to meet the business succession needs of farming and fishing businesses.
If your business qualifies for a tax-deferred transfer at the time of death or if you choose to transfer it during your lifetime, you may be able to postpone the payment of tax on any taxable capital gain until the child sells the property. You can also transfer such business property to your spouse or common-law partner during your lifetime and potentially postpone payment of tax on capital gains until your spouse decides to sell.
 

The capital gains exemption

A capital gains exemption may be available on the sale of your qualifying farm or fishing property, subject to some conditions. If your business meets the “ownership and usage” criteria, you may be eligible for the exemption. If you have previously claimed the exemption on a disposition of qualified property, the amount you claimed will reduce the amount of exemption available on the sale or transfer of your farm or fishing property.
 
If you transfer the property to a qualifying family member at its fair market value or at less than its fair market value, there may be an opportunity to multiply the use of the capital gains exemption. Talk to your professional legal and tax advisors to determine whether these opportunities could work for you and your business.
 

Who will inherit/purchase the family business?

When deciding who will inherit your family farming or fishing business, there are many factors to consider. The choices you make can determine how the business will prosper in the years ahead, so take some time to discuss this with family members. A large percentage of agricultural business owners consider it important to keep the business in the family, but relatively few family businesses survive until the second generation.
 
Do you intend to retire from the business and pass it on to the next generation during your lifetime, or on your death? If one of your children/ grandchildren is to take over the business, ask yourself whether they have the business acumen, experience or desire to do so successfully. If there are several children in the family, are any other children likely to be involved in the ongoing ownership and management of the business, and, if not, are you making other arrangements for these children? Have other family members made a commitment to the business, financial or otherwise, or a contribution that you should recognize?
 

Determining what is fair

Treating your children fairly does not necessarily require that you provide each of them with an identical inheritance. If only one of your children will inherit the business, and there are insufficient funds to provide an equivalent-sized inheritance to your other children, try to structure a division of property that is fair to everyone.
 
If there are children who are not involved in the farming/fishing business, have you already provided gifts to these children? For example, have you funded their university education? Can they inherit nonbusiness assets? If any of them already holds an interest in the business, have you provided for this in the transfer arrangements? In some cases you may be able to structure more equivalent sized inheritances for each of your children through the use of life insurance policies.
 
Depending on the circumstances, you may wish to transfer to the farming or fishing child only those assets that are essential for the economic viability of the business. To ensure the transfer is fair to all your children, consider the resale value of the assets transferred, the profit your business successor is likely to make and the contribution that person may have already made to the business.
 

Is the business profitable enough to support more than one household?

When you transfer the business during your lifetime, remember to take into account the financial position of all the households involved. If you are to receive a lump-sum capital payment, when will it be paid and will it involve indebtedness for the transferee household? What level of debt repayment can they tolerate and what rate of debt repayment can you accept that will provide you with adequate retirement income? Consider your household’s lifestyle needs and retirement goals and factor in any financial commitments you have made to any children in the family, other than those you have transferred the business to.
 

Think about the transition period

Will you retain control of the business for a period of time? Consider the structure of the new business (for example, a partnership or a corporation). Will you continue to be involved, perhaps as a manager, and, if so, for how long? Give some thought as to how responsibilities will be divided in the new business. There may be matrimonial circumstances affecting the children who are taking over the business. Are there safeguards in place to prevent the family business from being adversely affected by a matrimonial dispute or marriage breakdown?
 
At the Opheim Wealth Management Group, we can help you collect the information you will need in the decision-making process and review the critical issues of the business transfer to ensure your retirement goals remain on track. We can also work with you to invest the proceeds of sale in a manner that’s consistent with your needs and goals and, if necessary, act as an objective third party to help you identify issues that may need to be addressed. Ask us how this kind of succession planning could work for your business.