Farm adviser Carl Moore is blunt. “Most people don’t realize that forming a corporation is very similar to marriage,” says Moore. “It’s very easy to get into but the only way out is divorce.”
If you don’t think breaking up a farm corporation can be as messy as settling a divorce between feuding husbands and wives, Moore suggests you take a reality check. “Anybody thinking about incorporating their farms should talk to two or three families who have gotten out of a farm family corporation,” he says.
Read Also
How to take charge of animal health on your farm
Balancing animal health with farm profitability can be challenging. Adopting a proactive approach to animal care is one of the…
Why would you want to get out? After 30 or 40 years, many family corporations are failing what Moore coins the Christmas-dinner test. That test is simply whether the family can come together for a holiday meal. If they were operating their own businesses as sole proprietorships, they may be in competition, but they’d still get along.
For example, Moore says, imagine an incorporated family with a large asset base where one of the shareholders wants out. It should be relatively simple. They could write a cheque. But they could also fight about it, especially because it can be difficult to produce a completely objective assessment of what that person’s shares might be worth. As the strains increase inside the family, Moore finds, the temptation to fight instead of settle can be irresistible.
The actual process of dissolving a corporation is simple, says lawyer George Sinker. Your accountant files a federal or provincial tax return and ticks a box at the bottom and eventually you pay $25 and it’s done.
However, the execution is often more difficult, especially if the farm was successful. “There’s no quick windup of a successful corporation, especially if it’s more complex,” Sinker says.
Sinker is currently dealing with a very large farm corporation where the patriarch died. The corporation has continued and the family who inherited it is divesting assets out of the corporation, over several years. Otherwise, it would be a huge taxable sale.
The best plan, says Sinker, is to think the issue through before you start the corporation in the first place and to include windup provisions in the shareholders’ agreement.
Even then, it isn’t easy, because the tax implications can be massive.
Getting out of a corporation can be costly. “We always say that there’s a roll into a corporation on a tax-deferred basis but you can’t roll it out,” says accountant Geoff Garland.
The corporation pays taxes on increased capital gains and the person taking it out will pay income tax on the dividend. “You’ll be recognizing all the accrued gain on the value of the farm,” Garland says.
“One really bad thing about corporations usually revolves around land and large holdings,” says Garland. It’s more difficult to find a buyer of a huge incorporated farm than to sell it in pieces. Not having the ability to break up the assets into smaller lots can also result in not using all the capital exemptions available.
A lawyer can dissolve a corporation or you can take all the assets out and let it die a slow death. After a few years of not filing on behalf of the corporation, it’s considered dissolved.
Moore has also seen the problem with large farm corporations not being able to break up the assets into more salable lots. “An accountant and a lawyer will get you through these problems, but why do it?” he asks. “A sole proprietor doesn’t encounter any of these problems.”
Additionally, as soon as farm assets are put into a corporation, the number of buyers decreases, says Moore. “There are many, many buyers who don’t want to buy a corporation, they just want the land.” CG
