Not that many decades ago, Canadian farmers were wondering if they should incorporate their farms or keep on running their businesses as sole proprietorships. Now farmers are asking, ‘how many corporations should we have?”
As incorporated farmers make more sophisticated strategic plans, many are adding more than one corporation to their family portfolio. Alongside farm operating corporations, several farm businesses have added landholding corporations to the mix — creating new companies to hold the land farmed by their operating corporation.
This practice is common across the country and used by all types of farmers.
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If you’re farming with just one corporation, are you missing a tax trick?
In Edmonton, Stuart Person, a farm tax expert and national leader of MNP’s crop services, says his firm recommends landholding companies to several of their farm clients, for a variety of reasons.
On the east coast, too, tax planning specialist Jennifer Dunn in Charlottetown works with a lot of BDO Canada farm clients taking such steps.
Adding a landholding corporation isn’t the right structure for every farm operation, so before you make a decision for your farm, do consult tax and business experts. But having the right corporate structure in place can reduce taxes and add other business benefits.
If you’re in one of the following situations, it might be wise for you too.
Paying for new land
It’s harder to pay for land than it used to be. Even farmers who might once have been able to buy land with the cash in their savings accounts likely need a loan to buy land at current prices. The reason high land prices can drive demand for landholding companies is that, as Person says, “in order to pay for that land, you have to have after-tax money to make the principal payments.”
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Canadian small business taxes are significantly lower than personal income taxes. With a federal small business tax rate of 9 per cent, and provincial rates ranging from zero (Manitoba) to 3.2 per cent (Ontario and Quebec), the total tax rate for a Canadian small business (with $500,000 or less of business income) is between nine and 12.2 per cent.
Personal taxes vary from province to province and depend on your tax bracket, but marginal rates range from 20.05 per cent (the lowest combined federal and provincial rate, in Ontario) to 53.53 (the highest combined rate, in Ontario and Quebec). In almost every province and tax bracket, personal taxes are more than twice as high as small business taxes.
Higher rates mean you need much higher after-tax income to make land payments. Someone earning $100,000 in Saskatchewan, with a 33 per cent marginal tax rate, needs an extra $29,851 in income to make a $20,000 land payment (that’s $20,000 for the payment, plus $9,851 for the increased taxes). A Saskatchewan farm company paying 10 per cent tax only needs an extra $22,222 to make the same payment ($20,000 for the payment and $2,222 for the additional tax).
Rental income earned in a landholding corporation can be used to make after-tax land payments in a landholding corporation.
Planning for the future
Many established farmers want to develop succession plans that will allow one or two of their kids to keep farming while non-farming kids also inherit some financial assets. Unfortunately, not all farmers own significant financial assets outside of their farming corporation.
Leaving shares in the farm operating company to kids who live off farm can create conflict in the next generation. How involved will the non-farming kids be? Will they have decision-making ability? If the non-farming kids want a cash payout, can the farm survive?
Holding some or all of the family farmland in a landholding company, rather than in the farm operating company, provides a lower-conflict solution.
“It’s a way to keep all the land together,” Person says.
With a landholding company in place, farming children can inherit the farm operating company, and non-farming children (and farming children, as the parents wish) can inherit shares in a landholding company. This provides non-farming children with a share of the family assets. When the farm operating company pays rent to the landholding company, shareholders can receive dividends.
Instead of owning specific pieces of land, the siblings will own shares in the company. This can make it more difficult for non-farming children to sell their share of the farmland. With the right corporate setup, Person says, “you need all the kids to agree to sell the land, so that the brother or sister who is farming can keep farming.”
Using a landholding company as part of a succession plan can help to keep the farm operating while still offering non-farming children a long-term income stream. “You’ve gifted an asset to your children that they really cannot turn into cash,” Person says. However, the non-farming child will receive regular dividends, and potentially sell their shares in the land company to the farming child or another sibling.
Planning even further into the future
Maybe your farm’s future looks secure, with two or three of the children who grew up on the farm planning to run the business together.
Even where relations and business plans appear to be strong, creating a holding company for all or some of the farmland may be a good idea. First, “it avoids the siblings having to split up the farm company at a later date, which can become very complex and expensive,” Dunn says.
And even if these siblings farm well together for decades, “those children, they will have children,” Dunn points out. It might be more difficult for cousins to farm together than siblings. And there may be more non-farming kids in future generations. Setting up a future that will allow for more flexibility can give the next generation more room to make their own creative succession plans.
Protecting farm assets
Nobody wants to think about a worst-case scenario, but accidents happen, and sometimes farmers wind up on the wrong side of legal decisions. Legal settlements can be expensive. In some cases, holding land in a corporation that is separate from the farm operating corporation may keep land from becoming part of a settlement.
A landholding corporation doesn’t guarantee that land can be kept out of a lawsuit, but it might help. “It adds another layer of creditor protection, reducing the exposure risk on the land assets,” Person says.
Dunn has seen a lot of farmers in Prince Edward Island use this strategy. Many potato farmers also run trucking businesses, she says. “They’ll incorporate that trucking business separately for liability reasons. It’s about being proactive and thinking about what could happen.”
Reducing taxes on land sales
Maybe your great-granddaughter won’t want to farm. Or maybe you own a quarter section of land that’s really inconvenient to get to, and you think you might want to sell it someday.
It can be more difficult to sell small parcels of land that are owned by a farm operating company.
First, there’s the tax issue. Since changes in the 2024 federal budget took effect, corporations are taxed on two-thirds of the capital gain from the sale of assets (up from 50 per cent before the change). If the farm shareholders want to access some of the land from that sale for non-farm use, they’ll pay taxes on the money coming out of the company (typically through dividends or salary).
If the land that is sold is held by a landholding corporation, the owners of the corporation can sell their shares to the land buyer. The shares will have increased in value if the price of the land has increased since incorporation, but individuals can use their Lifetime Capital Gains Exemption to lower their tax bill. In the 2024 federal budget, this exemption increased to $1.25 million for owners of qualified farm property.
Making land sales more flexible
If you’re winding down a farm, and your farmland is held by an operating company, it may be more difficult to sell. “Most of the time,” Person says, “buyers just want to buy the land. If you have that land in a separate company, you can turn around and sell that company to the buyer.”
Dunn points out that if buyers aren’t interested in legal or administrative hassles, they may offer a lower price for land held by an operating company.
This logic can also apply to just one piece of land. Person says he often sees farmers creating new companies just to hold small land parcels they might want to sell off one day. “They’ll set up a whole new company just to hold one quarter of land.”
One of Person’s clients, he says, owns land near an urban centre, and may one day want to sell to developers. This farmer has several separate landholding companies, each holding small pieces of land. This structure would make it very simple for the owner to sell off one piece at a time.
What if it’s already mine?
Maybe you already own land personally — that is, you own farmland in your name rather than in the name of your farm corporation. If the land is paid for, the issues around raising after-tax dollars to make mortgage payments don’t apply for you. You can sell this land without worrying about shares, and still take advantage of your personal Lifetime Capital Gains Exemption. You may be receiving rent payments as income and using some of that income to pay the property taxes. As an individual, you’ll be paying higher tax rates, but you also have the cash in hand to use as you please.
In this case, there would be minimal benefits to creating a landholding corporation. You would have the costs and hassle of setting up the corporation, but limited benefits.
One potential reason to do this, if you’re very pessimistic and your land has increased substantially in value, might be to take the opportunity to use up some of your Lifetime Capital Gains Exemption now, in case you expect changes in the future that might increase your taxes. If you’re thinking of transferring land into a corporation, “Understand any HST or land transfer tax issues that may arise with the transfer of land,” Dunn says.
It’s not all upside
There are some downsides associated with adding corporations to your filing cabinet. Of course, Dunn says, “there’s the additional administrative cost and complexity of setting up and maintaining several corporations.”
There’s also the Lifetime Capital Gains Exemption. Only individuals have access to that tax break — not companies. If land held by a company is sold, that company is going to be paying capital gains tax on the sale.
And here’s a note about renting out land that is held by a corporation. Rental income from renting to a third party (someone not directly related to you) will be taxed as “passive” income (versus active farming income), which is taxed at a much higher rate than the small business tax rate.
Don’t let taxes rule your life
Taxes are not always the most important factor when you’re making business decisions. And always keep in mind that even the best tax professionals are always going to be focused on… well… taxes.
“We have to look at tax holistically, so it’s not always the tax tail wagging the dog,” Dunn says. “Oftentimes as a tax professional I’m looking at a transaction solely from a tax perspective. However, I can’t lose sight of the family’s overall goals.”
Sometimes, she adds, the best tax recommendations are not the best fit for a family situation. Dunn has a timely example of this. “I was advising a farm family prior to the change in the capital gains inclusion rate rule.” This is the change that increased the share of capital gains over $250,000 that individuals pay tax on from 50 percent to 66.67 percent after June 25, 2024.
“It would’ve been to their advantage to enter into a transaction with their grandson prior to the change,” Dunn says. As a professional who enjoys helping her clients lower their tax bill, Dunn still sounds a little disappointed when she explains that the grandparents just weren’t emotionally ready to hand over more assets to their grandson, even though it meant higher taxes later.
“I tried to convince them,” she says. But in the end, they decided to wait. “I had to respect that,” she says.
Tax experts might be hyper-focused on tax, but, please, consult them if you’re thinking of making changes to your farm structure.
This is definitely an area where spending a few thousand dollars to get good advice up front can be a money saver in the end.
Missteps can result in increased tax bills of thousands of dollars, if not millions. And only professionals with training and experience, like Person and Dunn, can clearly navigate the CRA’s maze of farm tax rules around terms like “qualifying farm property,” “actively farming,” or “passive income.”
Person enjoys helping farmers understand how these complicated tax details can have an impact on their profitability. “That’s why I focused on the ag niche,” he says. “It’s so specialized, it has its own section of the ITA!” (that’s The Income Tax Act, for those of us who don’t live and breathe this stuff.)
Dunn also loves the complexity of the topic, because it enables her to help her farm clients pay the least amount of tax possible. And not just because, as she says, “It keeps me in business.”
