Somewhere between loading trucks and getting ready for seeding on his family’s farm near Fort MacLeod, Alta., Stephen Vandervalk stops midway through our conversation, breathes deeply and tilts his head. “I can’t even imagine trying to operate without a corporation,” he says. “How could we compete to buy land at 35 to 45 per cent (personal tax rate) versus 12.5 (corporate tax rate)?”
Today, more than a fifth of all farms in this country are incorporated. In 2016, an Agri-Food Management Institute study found 21 per cent of the surveyed farms were family-owned corporations, and another study by AMI and Farm Management Canada found that of the 604 representative farms of all types, regions, sectors, age groups and sizes in their research, 46 per cent were family-owned corporations.
In hard numbers, the 2016 federal ag census counted 43,457 family farm corporations (plus 5,135 non-family corporations), operating on over 50 million acres.
Like many progressive farms, Vandervalk Farms became a limited company back in the 1980s, when Stephen’s father expanded and diversified to the point where it made financial sense to incorporate. As a rule of thumb, when family income — farm plus non-farm — reaches about $75,000, the tax advantages may merit investigating incorporation, according to OMAFRA’s factsheet on farm corporations. (If you are considering incorporating, read this first — it is a very good summary of advantages and disadvantages).
The higher the receipts, though, the higher the rate of incorporation. In 2011, more than 80 per cent of farms that were incorporated were worth over $2 million.
However, with the market volatility of the last decade and the small business tax rates on up to $500,000 of income, it can have an impact on even smaller farms, where incorporation allows farmers to make sales to take advantage of price spikes without having the tax implications tied to the timing of those sales.
Accountants often drive the move from sole proprietorships to corporations, mostly for tax reasons. By transferring a business to a corporation, you become the shareholder and employee of a separate taxable entity. And those tax rates are lower, significantly.
To get an idea of the extent of the income tax savings impact, consider some rough math: If there are about 30,000 incorporated farms in Canada, with each earning a net taxable income of $75,000, at a 20 per cent income tax rate versus 43 per cent, that’s nearly half a billion extra dollars being saved in taxes every year. Which is half a billion more dollars every year for those farms to reinvest in their operations and spend in rural areas.
Earnings in a company are initially taxed at a lower rate of tax than if they were earned personally. If the business makes more than the family needs, the excess can be retained in the company.
And farm corporations, like all farmers, have a special tax rule: They can use the cash method to report income for tax purposes. Calculating taxable income under the cash basis instead of accrual basis means only using actual cash from the sale of farm products in that year and deducting the cost of buying inventory, like fertilizer, feed or livestock, even if the inventory is still on hand at year-end.
Of course, there are also some disadvantages associated with incorporating, such as the initial cost of time and money to set one up, increased record-keeping, corporate tax returns and other government filings. The corporation must file tax and financial statements in addition to the shareholders individually filing, so the ongoing costs are usually higher.
Plus when setting up a corporation it’s important to consider the future. There’s the rollover provision where personally held shares can be transferred tax-free to children and grandchildren. “Personally owned land used by the company also qualifies for the rollover,” says Merle Good, former provincial tax specialist for the Alberta agricultural ministry and now private consultant.
And you need to be aware of the details. For example, if the farm residence is also transferred to the corporation, it may result in a taxable benefit for the family members living in the corporate-owned residence, and the loss of the principal residence exemption. You also need to be careful not to lose the family farm corporation status by holding more than 10 per cent of assets on a fair market basis as non-farm assets.
Yet we also know the real-life impacts of incorporating are significant and multi-pronged, going far beyond the different income tax rates.
After the last agricultural census showed sole proprietorships consistently being replaced by corporations, Doug Chorney, a farmer from East Selkirk, Man., and then president of Keystone Agricultural Producers and recently appointed assistant chief commissioner of the Canada Grain Commission, explained to the public that the vast majority were small businesses, and family owned.
He also explained how this structural change was pushing Canadian farmers to a new level of business understanding and skill. “Family farms are moving into a legal entity which provides certain managerial advantages,” he said.
Hold on. Does creating a separate formal business entity force farmers to manage differently, maybe even more professionally? Or does it lessen the drive that comes from having skin in the game every day?
Successful farms depend on having smart, strategic people, no matter what structure. However, being incorporated has forced farms to create accrual financial statements and operate under certain rules of engagement, which has jumpstarted more professional behaviour, such as having farm meetings.
Following are seven ways, beyond better income tax rates, that incorporation has jammed some farms into higher gear, and why it still takes a competent person behind the wheel no matter the type or size of the vehicle.
Fewer farm corps south of the border
The 2012 U.S. Census of Agriculture indicates that only 5.06 per cent of U.S. farms are corporate farms, mostly family farm corporations with 10 or fewer stockholders. Nine states have laws restricting corporate ability to own and operate on farmland, but they vary in how they define what a corporation is, with family farms mostly being exempt. The biggest difference is likely that in some states, personal taxes are sometimes less than corporate taxes.
Grain income deferral threatened
The federal government’s 2017 budget launched a public consultation until the end of May (conveniently at one of the busiest times of the year for crop producers) on the income tax deferral available to farmers holding deferred cash purchase tickets. Left over from the wheat board monopoly days, when wheat, oats, barley, rye, flax, canola, rapeseed are delivered to an elevator, the elevator can issue either a cash purchase ticket or deferred cash purchase tickets. These deferred tickets are payable in the year following when the grain was delivered, so farmers can include the amount of the ticket in taxable income in that following year.