ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law

1. ESTATE PLANNING FOR FARMERS & RANCHERSColin SimmonsCounsel West Law

2. Integrate financial, legal and tax aspects with human or family considerations

3. It is easier to deal with legal and tax aspects of succession • Short term tax objectives can conflict with succession plan • A parent’s best interests are not always the same as the childrens’ best interests

4. OBJECTIVES INFARM SUCCESSIONPLANNING

5. 1. Security for Parents • Place to live for remainder of lives • Sufficient income

6. 2. Fairness for Children • Awareness and acceptance by all parties • Avoidance family disputes • Difficult because farm assets are usually worth more than non-farm assets • Communication among family members is essential

7. 3. Keeping the Farm in the Family • Farming child receives a viable operation • Farming child probably won’t be able to pay fair market value • Potential conflict between the objectives of the parents and the successors

8. 4. Eliminate or Minimize Tax • Proper tax planning results in payment of little or no tax • Rollovers for farm assets - inter vivos and on death • $500,000 capital gains exemption • Conservation easement • Right or things election on death • Taxation can be used to encourage farm families to begin to create a succession plan

9. 5. Avoid Unnecessary Professional or Advisor Fees • You can pay me now or you can pay me later • Advisors should communicate with each other • Someone should be the quarterback

10. Tax Consequences: • Taxable disposition for capital gains • Spousal rollover - s. 73(1) - automatic • Can elect out of the rollover • Adjusted Cost Base or Fair Market Value, nothing in between …. continued

11. Tax Consequences: • Spousal rollover - s. 73(1) - automatic • Use of implied or constructive trust • Married 40 years, all land has been acquired and held in the husband’s name • Interest in land transferred to wife during husband’s lifetime followed by subsequent disposition - potential for attribution of capital gain • If husband owned half interest as trustee for wife - she could use her Capital Gain Exemption (CGE)

12. Tax Consequences: • Spousal rollover - s. 73(1) - automatic • Use of implied or constructive trust • Implied and constructive trusts have been found to exist in matrimonial property cases but there but not dealt with in tax cases • Property not transferred into spouses name and subsequent disposition of beneficial interest - no attribution of capital gain

13. Tax Consequences: • Rollover to child - s. 73(3) • Qualifications • Land is in Canada • Transfer to a child of the taxpayer • Property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis • Different for pre and post June 1987 . . . . continued

14. Tax Consequences: • Rollover to child - s. 73(3) • Transfer for no consideration - rollover • Can’t elect out of this rollover • Consideration paid between Adjusted Cost Base and Fair Market Value is proceeds of disposition for tax purposes and becomes the Adjusted Cost Base • Consideration must be provided to use CGE

15. Tax Consequences: • GST is normally applicable on transfer of land, except when • Purchaser is registered for GST at the time of the transaction, the vendor does not have to collect GST • All or substantially all of the assets of the vendor are being sold to a GST registrant • A parcel of land is being transferred to a family member for that person’s personal use and enjoyment

16. Canada Revenue Agency Policy There is no GST collected when interest in land is transferred to a family member for no consideration and the family member is not deriving income from the property. e.g. Land put into Joint Tenancy THIS IS ADMINISTRATIVE POLICY

17. Issues • AMT • CNIL • ABIL • Pre-86 capital losses • Clawback of Old Age Security • Capital Gain Reserve • Valuation of FMV and ACB of land

18. Transfer of Farm Assets other than Land

19. Transfer of Farm Assets other than Land • Inventory • No rollover or CGE • Income • Rights or things on death - still may be tax on death if tax is being deferred • Deferred income problems • Strategy to transfer livestock to corporation using s. 85 of the Income Tax Act • Use land and CGE to bring debt into corporation

20. Transfer of Farm Assets other than Land • Depreciable Property • Rollover to children but no CGE except for buildings • Strategy to rollover depreciables and transfer land at FMV to avoid recapture • Deal with debt

21. Transfer of Farm Assets other than Land • Shares in the Stock of a Family Farm Corporation • Rollover and CGE • All or substantially all of the assets of corporation have to be farm assets • Corporation may have to be purified to be eligible to be rolled over or to use the capital gains exemption • Different qualifications for CGE and rollover

22. Transfer of Farm Assets other than Land • Interest in a Family Farm Partnership • Rollover or CGE • Capital asset for capital gains purposes • All assets relate to value • Clauses to preserve the partnership on the death of a partner …. continued

23. Shareholder Agreements • Provide for remaining shareholder to continue business while the other shareholder is paid for equity on: • Death • Disability • Voluntary withdrawal • Divorce • Buy-sell provisions are different for non-farm businesses due to high capital and low income of farms

24. Shareholder Agreements • Shotgun clauses don’t really work on farms because shareholders often cannot afford to pay fair market value for the other’s shares • Payout during lifetime • Structured payout over time • Put-call options

25. Shareholder Agreements • Payout on death - life insurance • Avoid application of revised stop-loss rules • Take advantage of rollovers to spouses and children • Use capital gains exemption when available • Capital dividend declared on the shares of the farming child who uses proceeds to purchase shares from other shareholders • Can be used to payout non-farming children • Farming child takes over farm

26. WILLS

27. WILLS 1. Young farm family • Equally to all survivors • Land left until youngest child attains a certain age • Other assets as each child reaches a certain age

28. WILLS 2. Mature farm family • If no children farm, use city will • If children farm, succession plan must be created first and then will drafted to fit plan

29. Process to Determine Fairness • Mom and Dad must first agree with each other on initial plan • Plan should be discussed with each child individually • Family meeting should then be held to discuss the plan • Perhaps several meetings

30. Process to Determine Fairness • Family should consult professionals to learn about available alternatives • Family should meet again to decide on alternatives • Professionals should then be asked to put plan into effect

31. Fairness Tools • Non-farm assets • Shareholders loans • Acreages • Payment by farming child • Farm assets that aren’t necessary for the farm operation • Life insurance

32. Colin SimmonsCounsel West LawCalgary, AlbertaPhone: 403-252-1162