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ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law

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ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law. Integrate financial, legal and tax aspects with human or family considerations. It is easier to deal with legal and tax aspects of succession Short term tax objectives can conflict with succession plan

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Presentation Transcript
slide3
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
1 security for parents
1. Security for Parents
  • Place to live for remainder of lives
  • Sufficient income
2 fairness for children
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
3 keeping the farm in the family
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
4 eliminate or minimize tax
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
5 avoid unnecessary professional or advisor fees
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
tax consequences
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

tax consequences11
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)
tax consequences12
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
tax consequences13
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

tax consequences14
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
tax consequences15
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
canada revenue agency policy

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

issues
Issues
  • AMT
  • CNIL
  • ABIL
  • Pre-86 capital losses
  • Clawback of Old Age Security
  • Capital Gain Reserve
  • Valuation of FMV and ACB of land
transfer of farm assets other than land19
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
transfer of farm assets other than land20
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
transfer of farm assets other than land21
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
transfer of farm assets other than land22
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

slide23
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
slide24
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
slide25
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
wills27
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
wills28
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
process to determine fairness
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
process to determine fairness30
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
slide31
Fairness Tools
  • Non-farm assets
  • Shareholders loans
  • Acreages
  • Payment by farming child
  • Farm assets that aren’t necessary for the farm operation
  • Life insurance
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