The last couple of years have been good to many producers with grain prices and strong yields, and many farm businesses are moving to incorporate for reasons that range from reducing their taxes to building reserves for those tougher years that are guaranteed to come along in the farm cycle.
This is why, when I sat down to write this column, I thought I should start by listing the top 10 reasons for establishing a farm corporation.
You’ll see my list here, but before you even look at it, there are some key points that I feel we really do need to agree on. First is that these items are in no real order. Each pertains to the individual’s or partners’ needs and objectives.
Read Also
Riding the tariff rollercoaster
Farmers are accustomed to roller-coaster years. But the current geopolitical windstorm is something else entirely. On his cattle operation near…
Also, please remember these two caveats:
Do not proceed until you have gathered all of your information together, both personal and business.
Please also seek out strong professional advice from your business team of accountants, lawyers and financial and general insurance agents. The key is to ensure everyone is in the know about your intentions. This way, you should receive the best advice for your situation.
Whether you are on the path to incorporation already, or whether you are simply thinking about the possibility, make sure you do understand what is going on and that you are comfortable asking any questions about your business.
This is a recommendation I’ve made in the first two columns in this series, so if it is starting to sound familar, it should. Your advisors want you to fully understand your options. Too many times I sit down with someone and they say after some discussion, “Now I understand.”
Taxation: The corporation pays taxes at a lower rate than the personal level. If you had a proprietorship and income of $200,000, your income taxes would be approximately $72,739 (Saskatchewan rates for 2008). The corporate rate would be 15.5 per cent federal plus 4.5 per cent provincial, and would generate approximately $32,000 in tax savings.
These federal and provincial rates for Saskatchewan farm corporations would also stay the same up to $400,000 of taxable income. By contrast, a sole proprietor will be moved into the highest personal category at much lower income levels, paying 44 per cent on income over $123,185.
These tax savings give the corporation more funds for debt payment and future operating expenses. The longer you can defer paying taxes, the greater the advantage.
The ability to pay a wage or dividend to the adult shareholders can also be a benefit to maximize child tax benefits and other credits. We usually recommend taking the first level of personal income. This is the lowest amount of tax payable and in most cases can be beneficial. Another option is to pay dividends if there are no other sources of income. This eliminates the CPP contributions.
Farm children who actually work on the farm should be paid a reasonable salary for their work. The first $9,000 is non-taxable and is an expense for the corporation. Proper documentation should be maintained and the funds should be deposited into the child’s account. After school and summer-time hours can accumulate, and this can be an excellent way to fund RESP’s and other schooling costs or a vehicle.
If you are taking funds from your (after personal income taxes) account, you need to make $1.30 to make a $1 at the first level, whereas the corporation will have an employment expense.
Income splitting: The corporation can pay a salary or a dividend and this can be an effective way to split income among the family. The key is to pay for actual work if a salary is paid. The shareholders can declare
a dividend over above their salaries and a separate amount for each class of shares. This is beneficial to the adult shareholders of a farm corporation as there is attribution for minor children.
Control of the company: The shares can be redeemed or transferred at a later date through the shareholders agreement. This document provides the rules of the game in the case of a dispute, divorce, death, disability or bankruptcy.
Please discuss the options with your lawyer prior to incorporation. Talk about what the future may bring, and about your longer-term goals. This is a way for non-farm children to share in the family farm business, preferably in a non-voting share class. We believe that this has to be clear in the shareholders agreement and the shareholders personal will.
We have seen situations where the assets listed in a will were actually held within a corporation. These assets are not owned by the individual, and careful estate planning would help to avoid this situation. A will is for assets in your name.
Creditor proofing: When the assets are transferred to a corporation, this becomes a separate legal entity. This can help limit creditor access to other non-corporate assets should something unforeseen happen. Each province has different provincial laws on asset transfer, but remember, if the creditors are already at the gate wanting to start collection actions, it may be too late to take advantage of these provisions.
Limited liability: Unlike a sole proprietor who is fully liable for the debts of the business, a shareholder is not responsible for debts or other liabilities incurred by the corporation. Of course, a shareholder who personally guarantees corporate debts is liable up to the amount guaranteed, and directors and officers can, in certain circumstances, be held liable for activities of the corporation. In general, however, your personal assets are protected from creditor claims and any lawsuits or other liabilities arising in the corporation.
Estate planning: By setting up an appropriate share structure, you can hold and control the corporation while any increase in values accrues to shares held by your children. This can help minimize any tax liability arising on your death. As well, there are special rules that pertain to farm property.
Never dies: Transferring your business assets to a corporation can significantly reduce probate tax payable on your death.
Ability to hang on to more dollars: By paying less tax through the corporation, the company has more dollars to operate with in the future.
Faster debt repayment: See taxation as the same applies. You are using the cheaper after-tax dollar to pay the corporate debt.
Capital gains exemption: If you sell the business in the future or pass it on to your children at death, you can make use of the $750,000 capital gains exemption. You can even lock in this benefit now, by stepping up your shares’ tax cost. CG
Don McCannell is a farm financial advisor and planner, and president of McCannell Financial Group based in Saskatoon.
Don can be reached at [email protected],or at 306-382-7777
