Four children in their late 20s and early 30s, all want to be part of this family farm and aerial spraying business.
The Parsonage family transferred ownership before operational management. The parents had used some of their capital gains exemption earlier when buying out of partnership, and about that time created a trust containing the farm corporation’s shares. Each child now bought the farm’s common shares that were held in the trust, getting young farmer loans to cover part of the cost of these shares, and using some of everyone’s capital gains exemption. Now the farm corporation has some additional working capital, plus a multi-skilled young team all striving toward the same vision.
The next step is to transfer management of both the farm and aerial spraying business to the next generation.
Sometimes, we hear, succeeding a farm business can be storybook simple. The parents roll the ownership of the farm to one child while they switch their own attention to travel or to a hobby. Occasionally Mom and Dad can be spotted back on the farm helping out during harvest, but often with the hint of a frown that shows how much they’re actually enjoying their new independence.
Other times, succession is hard work. There are structures to create, timelines to be met and miscommunication to deal with, not to mention the all-too-real risk of emotional upheaval around every corner.
These are the farms where the farm advisers get called in and they start drawing those three overlapping circles — ownership, business and family. The messy part, the advisers always say, is right in the middle where the three circles overlap.
Harold Parsonage knows that overlap. Time and again, he has lived and worked inside it. First, for instance, he and his brother had a farming and feedlot partnership, although they split it up when BSE wreaked its havoc on cattle markets.
After that dust settled, Harold followed his passion for flying. He started an aerial spraying business and cropping operation with his wife Jody about 50 miles southwest of Portage la Prairie, Man. But then Harold’s father delayed any succession planning on the family farm, which led first to uncertainty and then to some tension once the early signs of dementia set in and it all needed to be sorted out in a rush.
Harold, after all that, was determined to do things differently. He promised himself he wouldn’t put his children in such a position, so he made sure he started the succession process sooner rather than later. His clear goal was to have an ownership transfer plan in place before health issues could be expected to have an impact.
That’s how, in January 2014, Harold came to propose a plan to his four children, and it’s how, 10 months later the paperwork was signed.
“The whole thing was Harold’s idea. Once the kids were on board, it happened fairly quickly, after a few discussions of the plan and implications,” recalls Jennie Parsonage, who has helped her dad co-ordinate the family’s succession process.
After earning a degree in economics from the Royal Military College in Kingston, Ont. and serving as a logistics officer with the military, coming back to the farm and helping co-ordinate the family’s succession planning began to look achievable to Jennie.
Soon, she transferred to the Reserve Force so she could remain in Manitoba and take on the task.
It turns out, in fact, that it’s the kind of role that can improve the chances of success for almost any farm succession.
Al Scholz, farm adviser and executive director for Saskatchewan Institute of Agrologists even calls the appointment of a planning co-ordinator “one of the primary success factors” for farm families.
A planning co-ordinator is usually a family member delegated to make things happen. The co-ordinator’s job is to stay focused on the goal, and to keep pushing the rest of the family forward.
The co-ordinator also collects the information that the advisers require so it’s consistent. “It doesn’t require any experience to be the planning co-ordinator,” says Scholz. “In fact, common sense is all that is needed… and a desire to be part of the solution.”
The Parsonages were able to leverage some Growing Forward 2 funding to cover about half of the financial costs of the actual consulting and professional services. However, that doesn’t include their family’s investment in time and energy to get this done.
“One of the biggest costs has been the time required for discussion, research, and advisers,” says Jennie.
The Parsonage succession also required some business smarts and preplanning, however. In 2006, Harold established and controlled the Harold Parsonage Family Trust that owned all of the 100 common shares in Parsonage Farms Ltd. At the time, the beneficiaries of the trust were Harold, Jody and their offspring.
Eight years later, the kids had finished post-secondary education and all indicated a desire to be part of the family farm. So in 2014, to transfer ownership to the children, the trust sold each sibling 24.75 shares at fair market value and transferred the remaining share to Harold.
The children each got partial financing for the purchase price of the shares, which included a promissory note to Harold and Jody, forgivable on death.
Then, the trust distributed the capital gains realized on the sale of the shares to Harold, Jody and each of the four children, who were able to each use a portion of their lifetime capital gains exemption (LCGE). The limit on gains arising from sales of qualified farm property, qualified fishing property or Qualified Small Business Corporation Shares (QSBC) after March 18, 2007 and before 2014 was $375,000 or half of an LCGE of $750,000.
The good news for farm succession is that recently this has increased significantly and now the lifetime capital gains exemption is $1 million for Qualified Farm Property, which can include sales of farmland, quota, and shares of a farm corporation.
“Also of interest to some people is that even if they had used all of their old exemption (for example when it was $800,000) they still have this ‘new’ $200,000 available,” says Lisa Kemp, partner with BDO Canada.
Harold and Jody were able to use the proceeds of the sale of shares to purchase the home quarter and another half section from Harold’s parents, ensuring access to a core portion of the operation. The remaining cash was split four ways and put back into the farm as shareholder loans from each kid, providing cash inflow to the farm.
It’s complicated but an ingenious way to succeed ownership, defer taxes and allow for growth. Their accountant had never seen a plan like this but couldn’t see any reason why it wouldn’t work and he got the nod of approval from a tax lawyer colleague. The Parsonages were willing to share it with Country Guide to push the thinking a little further about succession structures and to motivate other farmers to look for creative solutions for treating children fairly and avoiding the potentially massive tax burden of selling the farm.
Meanwhile, the Parsonage children got approved for loans and the family began a series of discussions with their lawyer to come up with a unanimous shareholders’ agreement. This document addresses what-if situations, such as anyone wanting out of the farm, death of a shareholder, marital separations and the transfer of shares to the next generation.
“A key clause is a formula that limits the value of the shares if any sibling decides they want out in the first 20 years, with the shares eventually reaching an unrestricted value,” says Jennie.
Harold developed a plan for how they could transfer ownership, and then asked his children if they were interested. “The clear plan and early ownership opportunity helped to cement the interest and the plans of the kids to continue farming,” says Jennie.
But there was also more to it. “Transferring ownership first was seen as a motivating factor for the next generation to become more involved in operational and management control,” says Jennie. “Plus it facilitated an injection of capital into the farm.”
Jennie and her common-law spouse (Patrick) now farm with his family close to where she grew up. They also have three children, so currently she only helps with Parsonage Farms Ltd.’s year-end books, plus filing corporate taxes and personal taxes for the family and occasionally doing some grain hauling.
At 59 years old, Harold is still very involved in day-to-day operations of the 1,800-acre farm, growing canola, wheat, soybeans and oats. He’s also the chief pilot of Air Greenway Ltd., their aerial spraying company that last year sprayed 40,000 acres using two Thrush S2Rs and a Cessna AgWagon.
The only bump they’ve run into is a common one. It’s the generational divide on work ethic, where Dad is a workaholic while the younger generation wants some time away from the farm to be with their children. Getting Dad to slow down and find hobbies not related to the farm can be difficult, and he sometimes feels that the kids aren’t putting in long enough hours.
Although Harold still does the majority of grain hauling and is still involved in all decisions, he’s slowly letting Sally (26 years old) and Riley (28 years old) make some final production decisions, including the daily prioritization of work. And all the children are involved in major financial decisions.
Harold has already transferred management control for large decisions — financing, crop rotation, marketing — to his children, while still providing his opinion and experience in these areas. “He doesn’t veto even if he disagrees with the kids’ ultimate decision,” says Jennie.
Harold, Riley and Sally work full time on the family businesses and an additional person steps in during spray season and harvest. Often, that extra work is filled by a combination of Sally’s common-law spouse Jeff, brother Dory (one of the owners and an engineer and pilot in Edmonton), Jennie or another cousin. Also, Dory’s wife Adria Grewal, oversees the advertising and website for Air Greenway Ltd.
Riley, who has a diploma in agriculture as well as his aerial application licence, does the machinery repairs, equipment management and maintenance, and he works with Sally to make crop production decisions. His wife Rachelle, works off farm and often feeds the crew at harvest time.
Sally has completed an agricultural degree in agronomy and did some post-graduate work before deciding to farm full time. She co-ordinates input purchases and is becoming more adept at running the administrative side of the farm. During spraying, Sally is both ground crew and the contact person for clients, but as the business grows, she is focusing more on liaison and planning with clients, providing the pilots with GPS maps of the fields, and co-ordinating chemical. Sally and Riley also end up being the catch-all for all required tasks when non-farming children aren’t there.
Last spring, Jeff decided he’d like to be more involved in the farm and left his job to be part of the ground crew during spraying and a combine driver during harvest, as well as helping with maintenance and repairs and overseeing the computer/technology for the farm. This January, he returned to school to become a qualified aircraft mechanic engineer.
Acres sprayed per year have been steadily increasing with the addition of Riley as a second pilot and larger planes. However, the family must think about further expansion to be able to financially accommodate everyone.
Currently the spraying part of their operation is more profitable than growing crops so the cash flows for buying larger planes often look better than buying land, which has increased in value dramatically in the last decade. Having said that, the farm is always looking for more land to buy or rent.
With so many family members involved, they try to involve all of the shareholders before making large financial decisionm like debt repayments, land purchases, new rental agreements, large equipment purchases, and even to some extent, marketing decisions.
With one shareholder in Alberta and everyone busy with young families, it’s not always possible to have an in-person meeting in a timely manner, so they get together when Dory is home and often engage via a group chat dedicated to farm business on WhatsApp (a free messaging app available for Android and other smartphones).
Hiring an adviser to lead succession planning with all of the children and their spouses helped non-farm background spouses better understand the farm, and it highlighted everyone’s expectations. “Working with Backswath Management helped us to better understand everyone’s perceptions, values, interests, and goals, including personal, family and business,” says Jennie.
Their adviser, Gavin Betker from Morden, Man., says it certainly helped that all of the siblings are fairly laid back, so flexibility and harmony are not often an issue in decision-making. Also, Dad and Mom (Jody) mostly stayed quiet and listened during these discussions. Although Jody has a career off farm, she does have a vested interest in the ability of her shareholders’ loan to provide a future retirement income. “She (Mom) also tends to stay removed from actual succession discussions and decisions, but is always listening,” says Jennie.
An emerging challenge is for the siblings to come forward with their ideas, have some discussion, and then drive them through implementation. As they move away from the intensity of succession, this stalling out is starting to happen more. “We need to have more productive annual or semi-annual meetings, with agendas, notes taken, actions assigned, minutes distributed and subsequent followup,” Jennie says. “I think this could help maintain momentum.”
They’re fairly unique in that the non-farming children own equal shares in the farm as the farming children, says Betker. As a result, there has been quite a bit of discussion about how to fairly compensate the farming children for their labour in a manner that is somewhat tax efficient and doesn’t drain all growth out of the farm. At the same time, they need to recognize the investment the non-farming children have in the farm and ensure an acceptable rate of return on those funds.
Recently, the group did establish baseline personal compensation amounts for Riley and Sally that the farm will always be responsible for paying. After that, profits will be retained in the corporation up to an agreed-on rate of return for shareholders, while in good years with excess profits, bonuses would be paid to Sally and Riley and kept in their shareholder loans.
So far, this arrangement is satisfactory, but there’s the risk that in very profitable years, the two of them will be bumped into higher marginal tax rates.
Everyone was open with their career goals during their planning session with Betker. So far, they’ve managed to work their personal goals into the business models, now or at some point in the future. Given their broad range of complementary skill sets, interests and backgrounds, it was relatively simple to allocate roles and responsibilities in a way that made sense.
But having seen the success that structured thinking can bring, Jennie says, an organizational chart and job descriptions are in their future.