Agriculture Estate Planning

1. Agriculture Estate Planning Dean Gallimore, CA.CBV KPMG LLP

2. Transitioning Your Farm“…the final test of greatness is the ability of the business owner to let go…”

3. A good succession plan takes 10 to 15 years! “Why do we want the farm to pass to the next generation?” “Who’s going to take over?” “How do we afford to retire?”

4. Succession planning is a continuous process to transfer knowledge, skills, labour, management, control and ownership between the generations.

5. Transfer of labour occurs first and is straightforward. Transfer of management and decision-making is more difficult. It involves letting go of control.

6. Finally, the transfer of ownership of the assets involves the actual purchase or gifting of the farm assets from one generation to the next.

7. Successors won’t feel secure until the parents transfer voting control. The “surprise” return of a once-retired business owner is frightfully common.

8. Business Planning must include written, up-to-date Wills, insurance policies, open talks about the “what ifs” like illness, injury, exit, cohabitating, marriage, separation, divorce

9. Retirement plans must include financial expectations, retirement housing, and fair treatment of the off-farm children. The Succession Plan is communicated to family.

10. Tax and Related Issues Farm Estate and Sale Planning

11. OUTLINE • Inheritance & Gift Tax – Exist? • General Farm Rollover Rules • Tax Planning Tips & Traps • Selling out – Managing the Tax

12. Is there an Inheritance Tax? • In Canada there is not currently an inheritance tax • Probate fees in some provinces act similar (Not Alberta) • The deemed sale of properties on death (unless left to spouse acts like an inheritance tax) • The U.S. does have an inheritance tax

13. Is there a Gift Tax in Canada? • None in Canada (does exist in U.S.) • However, before you act, consider rule in Tax Act that treats a gift as a sale for income tax purposes

14. Is there a Gift Tax In Canada? • Example • Gift of $10,000 cash to a child • Gift of $10,000 of shares in Royal Bank (cost of $1000) to a child • Tax as a result of cash gift is nil • Tax on gift of Royal Bank shares could be as high as $1,755 and is payable by the parent • No limits on the amount of gifts in a year (In U.S. smaller gifts can be made subject to an annual limit)

15. Rollovers for Farm Property • Generally all farm property (except inventory) can be transferred to a child if certain conditions are met either during the farmers lifetime or on death without triggering the tax as if the property had been sold

16. Rollovers for Farm Property - conditions • Child must be resident in Canada • Property was, before transfer used principally in the business of farming • The farmer, spouse or a child was actively engaged on a regular and continuous basis in the farming business

17. Rollovers for Farm Property - Issues • Rental of farmland on a crop-share or cash basis does not constitute carrying on a farming business – consider historic use • Can be left to a non-farming child as long as one of the appropriate people involved (Mom, Dad or sibling) • Inventory does not rollover without tax during lifetime but can on death as a Right or Thing • Shares of a family farm corporation do qualify for rollover, but is the company on side as a family farm corporation?

18. Capital Gain Exemption • Special exemption for sales of qualifying farm land and buildings (not equipment or inventory) or shares of qualifying farm companies • Limited to $750,000 per person lifetime (each spouse has $750,000) • Can use during lifetime or on death

19. Capital Gain Exemption - Issues • Should a farmer use now in case government takes it away? • Impact on Old Age Security, Senior’s benefit, Child tax benefit • Consider alternative minimum tax • Is the exemption available to you and does the farm asset qualify?

20. Estate Freeze Concept • An estate freeze is an estate planning strategy used to minimize income taxes on death • Focuses on locking in value of an asset at a point in time and passing on future growth to the next generation • Some estate freezes are relatively straightforward such as selling or gifting an asset to a child – but many have immediate tax consequences • In the case of incorporated business, can be effective without any current tax cost

21. Estate Freeze Example • Mr. A owns 100% of shares of Aco • Aco value is $1,000,000 (but expected to increase) • If qualifies for capital gain exemption, tax on death could be $50,000 (if not could be $195,000) • If value doubles (Mr. A takes no action) tax exposure could increase to as high as $390,000

22. Estate Freeze Example • An estate freeze would involve Mr. A exchanging his shares for new shares - fixed value equal to today’s value ($1,000,000) • New growth common shares might go to children • Result is Mr. A has “frozen” his value in the company and capped his exposure to tax on death • As well, shares could be bought back from him to fund his retirement – possibly $35,000 per year tax free (if no other income) • Could consider using capital gain exemption at same time

23. Unrelated Farm Company Planning Point WATCH FOR THE TAINTED COMPANY TRAP

24. Tainted Company Trap • Many farmers aware that shares of a farm company rollover to a child on death (or during lifetime) • Tax rules very complex – if more than 10% of assets of company are not farm assets (eg investments), then company is offside • If offside, tax is paid on full value of company shares (even the value of the farm assets!!)

25. Tainted Company Trap Possible Solution • Divide company into two pieces so farm assets are in one company (qualifies for rollover) and non-farming assets are in another company (won’t rollover but at least won’t taint assets in farming company) • Can be done tax-free in most circumstances