Étienne Gosselin | Agronomist | Journalist
How do you save for retirement while still putting everything you need into your business? Farmers aren't always the first in line for retirement and don't often spend a lot of time thinking about it during their working years. We asked Maryse McMahon, head of the accounting tax team for the Centre-du-Québec, to give us some retirement tips for farmers.
You work hard for your business every day. You take out loans to boost productivity and profitability, putting money into assets you'll put up for sale when you retire. But will you be selling to your kids or to someone else? Or will you be breaking up your business and selling it off in parts?
Selling your business to finance retirement sounds great
"A big majority of farmers think of the sale as their pension fund," says McMahon. But is that a bad reflex? "No, and especially when it comes to solid assets like land. But you need to make sure the return on your investment is big enough and doesn't put your financial security at risk."
Six out of every ten businesses are sold to owners' children. Since a portion of that is usually a gift, the sale isn't made at full market value, so it's important to break off a portion of the equity. "It's important that you don't put all your eggs in one basket, especially in industries that can be risky," says the accountant, tax specialist and financial planner.
A minority of entrepreneurs have large RRSPs or TFSAs but are also eligible for provincial and federal pension plans. Ask a specialist if capital gains transfers will decrease or eliminate any government pension payments. Some surplus shares programs, like the one at Agropur, are eligible for registered retirement savings plans and won't put any immediate pressure on your business.
Keep an eye on debt levels
McMahon says it's also important to keep in mind that business owners may be transferring the business, but the buyers are investing in it. Decisions need to be made, and if a business is already carrying a lot of debt, they can be incredibly tough. Everyone has different needs and the nest egg you'll need for a comfortable retirement can start climbing to three or even four times what you might have originally expected! "Everything depends on the owners making the transfer; their age, health and plans," says McMahon.
According to McMahon, some businesses are easily able to finance the retirement of the owners making the transfer. Others are in real financial difficulty and end up mortgaging a comfortable retirement. "It can really run the gamut," she says. There are several ways to spread out a purchase--payments made over several years, share purchase agreements, dividends, etc. Every combination comes with its own set of tax and financial pros and cons.
One thing is for sure, you need a P-L-A-N! "For example, in some cases parents who are business owners can spread out the effect of capital gains over 10 years, which follows tax rules and minimizes a potentially heavy tax load," explains the tax specialist. She goes on to say that you shouldn't stop pursuing smart investment opportunities just because the business is in transition. "Just the opposite in fact; new owners usually have a lot of wind in their sails!"
Keywords for retirement savings
- Watch the company's debt
- Diversify sources of retirement income
- Plan out financial security for the business and for people on both ends of the transfer
- Prepare for retirement early
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