Corporations do give farmers access to technical strategies that you simply can’t use in other management systems, including some sometimes-sophisticated strategies for separating the land from the business, for setting up voting and non-voting shares, and for determining exactly how and when shares will be transferred.
For our experts, however, the question is whether the same goals might be reached more simply, more safely, more flexibly and more cost effectively within conventional sole proprietorships and partnerships.
Lawyer George Sinker suggests that if you’re in a viable business and not planning to exit right away, creating a corporation can help with succession. “With a corporation we’re able to uti-
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lize estate freezes and secondary wills,” Sinker explains. “It’s easier to do the planning with a corporation in place.”
However, often for a smaller, couple-owned farm, a sole proprietorship allows them to split income and make a smooth and easy transfer of assets on death of one of them. The reality is that some of these small, single-generation operations don’t need a tax deferral. In those cases the extra-costs tax savings don’t cover the extra administration and cost of incorporating, says Sinker.
Sole proprietorships also allow for joint ownership of assets so you don’t pay probate taxes on the first death. That’s a whopping 1.5 per cent on values greater than $50,000. Plus, jointly held property of sole proprietorships is easily transferred between parties, Sinker adds, and it’s easier to will pieces of the farm that can then be rented back to the successor.
To accountant Geoff Garland, the crucial point is that your business strategy must align with your farm and your personal objectives, not just with a specific challenge, such as succession.
When farm corporations are formed, land is often kept separate, Garland says. Farmers and their advisory teams need to think carefully about the implications of incorporation on capital gains exemptions and on the flexibility they might need to transfer (or not transfer) land to the next generation.
Sometimes, Garland says, the best
outcome may be a combination of strategies. He remembers one farmer who transferred all his assets into a farm corporation to his two sons, yet he transferred the land separately to the boys in joint ownership outside the corporation. “It wasn’t the best tax outcome,” says Garland. “But he wanted to force his two sons to always farm together on the land he was passing down to them.” It certainly made it more difficult to break up.
Moore recommends you try to foresee future squabbles, which can get worse inside a corporation. With a farm corporation, he points out, the non-farming children may get shares in the farm while what they really want is money.
That forces the farming sibling to sell some corporate assets to buy them out, and it also means the non-farming siblings will have to pay heavy taxes on that money as it leaves the corporation.
If they had stayed in a sole proprietorship, Moore says, Mom and Dad could have crafted some kind of proportional relationships so the farming child could get off to a healthy start while the children not on the farm get the residue.
Moore says the difficulty is often in valuing fair estate planning, regardless of what business structure the farm is in. One way he uses is to give each child one share per year. Children who are actively farming on the home farm, however, get an additional two shares each year. After 10 years, the farming children have 30 shares each and the non-farming children have 10 shares.
This calculation allows for majority control by the farming child or children and it recognizes their contributions and commitment. It’s a way to evaluate numerically a farm estate and can be used for a sole proprietor’s will or gift, or shares in a farm corporation.
The point, he says, is that there are creative ways to use sole proprietorships to produce the succession plan you want. It doesn’t always need a corporation.
outcome may be a combination of strategies. He remembers one farmer who transferred all his assets into a farm corporation to his two sons, yet he transferred the land separately to the boys in joint ownership outside the corporation. “It wasn’t the best tax outcome,” says Garland. “But he wanted to force his two sons to always farm together on the land he was passing down to them.” It certainly made it more difficult to break up.
Moore recommends you try to foresee future squabbles, which can get worse inside a corporation. With a farm corporation, he points out, the non-farming children may get shares in the farm while what they really want is money.
That forces the farming sibling to sell some corporate assets to buy them out, and it also means the non-farming siblings will have to pay heavy taxes on that money as it leaves the corporation.
If they had stayed in a sole proprietorship, Moore says, Mom and Dad could have crafted some kind of proportional relationships so the farming child could get off to a healthy start while the children not on the farm get the residue.
Moore says the difficulty is often in valuing fair estate planning, regardless of what business structure the farm is in. One way he uses is to give each child one share per year. Children who are actively farming on the home farm, however, get an additional two shares each year. After 10 years, the farming children have 30 shares each and the non-farming children have 10 shares.
This calculation allows for majority control by the farming child or children and it recognizes their contributions and commitment. It’s a way to evaluate numerically a farm estate and can be used for a sole proprietor’s will or gift, or shares in a farm corporation.
The point, he says, is that there are creative ways to use sole proprietorships to produce the succession plan you want. It doesn’t always need a corporation.
