4 tax tips for transferring the family farm

Farm producers in Quebec benefit from great tax toolbox to
make the transfer of family assets to their offspring go

Nicolas Mesly | Journalist

Farm tax specialist, Mario Dumas, handles transfers of farms worth $5 million to $25 million. To ensure a smooth transfer from parents to children, owners should start planning up to 20 years in advance. 

Farm producers in Quebec benefit from great tax toolbox to make the transfer of family assets to their offspring go smoothly.

However, some of those tools can change when parents turn sixty. "As soon as you have a successor, a child in his twenties perhaps, it's time to get the ball rolling," says Dumas, who negotiates about 30 cases a year at his Ormstown office.

An expert on farm taxation, Dumas urges farm owners to ask themselves an important question during this delicate process: How to generate income while keeping taxes to a minimum?

Below is a list of the main tax tools:

1. Capital gains tax exemption
Both Ottawa and Quebec City have acknowledged the contribution agriculture brings to society, says Dumas, and allow for a generous capital gains tax exemption of $1 million. This can serve to cover a portion of the assets that are transferred to the next generation.

2. Registered Retirement Savings Plan (RRSP) 
"You need to ask how much parents will depend on a farm's income," Dumas explains. As a tax strategy, the parents' portfolio should be diversified to include investments outside agriculture. A good way to do this is with an RRSP, and the sooner you start investing the less dependent you will be on the farm's income. That will simplify the transfer of the farm to your children.

3. Life insurance
If the successor dies, parents can use the funds to continue managing the business and hire employees to replace the deceased child.  Life insurance payable to after the second parent dies can be bequeathed to non-farming children "to divide the estate more fairly among the children." Life insurance has the advantage of being non-taxable.
4. Family trust
This entity complements the corporation (it holds shares of the corporation).  It is a technique that allows the family to extract funds from the corporation by reducing their personal tax burden, explains Dumas. He says one of the greatest challenges when transferring a farming business is good communication between parents, brothers and sisters.  "Having an open dialogue is the key to success! Don't be afraid to broach sensitive issues."

A fair estate distribution among the children is one of those issues. "If a young man inherits the family business but decides one day to sell it for $5 million, how should he compensate his siblings to ensure they all get a fair share?"

Stack the odds in your favour
Mario Dumas reminds us that the transfer of a farming business is an ongoing process that takes several years. In his view, even if it isn't mandatory it's in the best interest of young farmers who inherit multi-million dollar farms to study management at a recognized school. They should even work outside of the family business to bring home new ideas.

The tax expert emphasizes the fact that a transfer is ultimately based on a written agreement that clearly states the rules of the game for all shareholders, and covers areas such as life insurance, RRSPs, divorce and death. This agreement will become the legal document once a notary's seal is affixed to it.

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