The road to farm succession can have many twists and turns. And every farm is unique, so it can be easy to lose your way in all the options, or to fall into somebody else’s cookie-cutter solution.
Yet being true to your own business and family needs should always come first, as the Brousseau family from St. Paul, Alta., has learned.
Ironically, once the Brousseaus stopped trying to force their family into a corporation that was being recommended as a way to make it easier for them to pass on the farm, their goals started becoming a lot more achievable.
Nicole and Richard Brousseau started farming with Nicole’s parents 12 years ago, working on the farm on the weekends and buying their own dairy quota to expand the herd. The amount of quota was too small to support them, however, so the young couple had full-time jobs working with Lakeland College’s Vermilion campus dairy herd.
Not surprisingly, there was a lot of driving and living out of suitcases.
A few years into this arrangement, an on-farm rental house became available, so they quit their jobs and moved home. The young family — now complete with small children — rented the home from Nikki’s parents, Bertrand and Yvonne Poulin, and Richard got a job in a nearby seed cleaning plant in St. Paul, with both of them helping on the farm.
Like the majority of farms in Canada, the Poulins and the Brousseaus operated as sole proprietorships, although both businesses operated from the same farmyard.
In December 2007, Richard took over the management of the farm, and after a month of overlapping jobs, quit his off-farm work. Bertrand meanwhile was able to focus on his sideline grain trucking business. The family wrote a 10-year agreement, with the young couple supplying their management and work in exchange for use of the infrastructure.
The farm was full of optimism and the energy of succession.
The young couple dug into the work, setting five-year production goals that they went on to meet in three years. “You have to keep growing to keep up with inflation, otherwise you go backwards,” says Richard.
Today they milk 55 cows in a double-7 herringbone parlour and grow 600 acres of pulses, grains and oilseeds plus 300 acres of hay. Since moving back to the farm, milk production has doubled.
By living frugally (including the parents helping with cheap rent and living right where they worked) the young couple slowly invested in more quota as they went along.
The arrangement meant Nicole’s parents finally had help, although they remained reluctant to make or even discuss change, including transferring land ownership.
Implementing change that the younger generation wanted to make was awkward and increasingly difficult.
When it came to discussing succession, the conversations became heavy with emotion.
However, they were able to agree on something more concrete. In 2014, after the young couple put hearts and minds into blueprints, they built a new pack barn. “Richard walked the barn a thousand times before we even poured any concrete,” says Nicole. The resulting facility works perfectly as planned and the same year they built it, the Brousseaus were named Alberta’s Outstanding Young Farmers.
Yet despite these successes, the farm still did not have a succession plan.
It wasn’t for lack of trying. Over the years, the young couple created multiple proposals on how to transfer ownership, trying to establish a long-term vision for the farm and retirement plans for Nicole’s parents.
Coming up with proposals was not working, and it was draining the farm of energy, thought and time. “We put so much time and effort into continually making proposals, and it was emotionally tiring to keep hearing ‘No,’” says Nicole.
The stumbling block was that Nicole’s parents didn’t want to fully retire. Instead, they wanted to do less work and have more freedom to come and go as they pleased, which Richard and Nicole were fine with as long as the structure of the farm and the income stream reflected the new roles.
Also significant, the older generation didn’t want to move from the home farm and had difficulty seeing a future for themselves beyond farming. “Dad was born and will die in that house,” says Nicole.
Normally in the past, too, the father would be physically worn out and ready to turn over the farm by about 50 years old.Plus in those days women rarely took over the farm.
“I think it would have been more accepted if it was Richard’s family’s farm, and his mom and dad, because he would have been the son taking over and not the son-in-law,” says Nicole.
With all these factors in play, progress was at a standstill.
“Eventually,” Nicole says, “I was the one who had to stand up and say, ‘Enough!’ It was hard, but I felt relieved.”
Until the roles and responsibilities were clear, they knew they couldn’t move forward with ownership transfer.
The family went to succession seminars and met with four different succession coaches to find solutions. Most experts suggested incorporating, but the Poulins weren’t comfortable using this ownership structure.
For many farmers, a corporation simply overcomplicates a situation that already has a lot of moving parts. “In very simple terms, a sole proprietorship tallies up income, expenses including depreciation, adjusts for such things as inventory and purchased inputs, and files income tax. End of annual exercise,” says Woodstock, Ont. farm financial adviser Carl Moore.
Moore adds that incorporation potentially exposes the farm to changes in complex corporate tax law as well.
“Only a very few accountants or tax lawyers are capable of interpreting these clauses and laws and fitting them to your farming corporation,” says Moore. “Filing of income tax is the very tip of the iceberg. The real costs to shareholders come with keeping the corporation compliant with tax law changes and finding ways to transfer ownership to other family members while still allowing the business to operate profitably and with a minimum of family friction.”
More importantly for the Poulin-Brousseau family, creating a corporation would make their business relationship permanent, which raised questions for the young couple when the four of them were still having difficulties making decisions together.
“We knew we’d be legally locking ourselves into that situation and it wasn’t good. Why would we do that?” says Nicole. “It would put us in a bad position.”
But time was running out. In April 2016 their standing 10-year agreement would be over and despite their efforts and many proposals, the families hadn’t made headway. “There was no discussion, our workload was growing, and there was no plan for the future,” says Richard.
They had to come up with a way for the Brousseaus to protect themselves and not make their parents feel like they were cornered and forced into change.
And then a solution dawned on them. Instead of putting the whole farm and all four of them into a corporation, the Poulins could keep their sole proprietorship and retain full ownership of land, buildings, and their share of the quota, which they would then rent to the Brousseaus’ sole proprietorship for a 12- month period.
Creating two separate businesses set out boundaries and allowed everyone to trial the new arrangement without a permanent joint commitment.
The idea had come to Nicole and Richard once they asked themselves what was going to make their parents truly happy. “They wanted to stay in the home on the yard site; that’s what makes them happy and we want them to be happy,” says Richard. “But how could the corporation own the rest of the farm without the house when it’s tied to it, right in the middle of everything?”
The two-business proposal took the emotions out of the situation while transitioning all the farm management decisions to the younger generation.
Most importantly, though, it’s kept their family relationships strong.
Because the rent is equal to an annual payment, they’d lose a year of building equity, but for the Brousseaus it’s still a smart move. If, after a year it doesn’t work out, they can always take their quota and move.
In every business agreement, you need to know how to exit as well as enter, says Richard.
Estate planning with a farm corporation involves allocating shares, and for some people, that can be a more difficult concept to grasp, involving an inheritance of paper versus land. With a sole proprietorship, you give (either now or in your will) whatever tax-paid assets you wish to any or all family members with no tax owing and immediate ownership to the beneficiary.
“Transferring assets is very easy in a sole proprietorship, with very few restrictions or tax implications,” says Moore. “Once you wish to pass on farm asset… just do it.”
For income tax reasons, the Brousseaus did create their own corporation, Moo-Lait Farms Ltd., with immediate tax savings so they can buy assets with lower tax dollars.
But before you jump into forming a farm corporation to save income taxes, make sure you understand the whole value comparison, warns Moore. Figuring out tax implications is more complicated than comparing a one-year rate.
Indeed, Moore fears many advisers may not account for a reasonable draw for living and contributions to RRSP and other pensions and off-farm investments that will provide retirement income and ease transfer of assets to family members in the future.
And sole proprietorships can manage taxes too, with spousal income splitting, and with family members setting up separate sole proprietorships to reduce total taxes.
Although an Ontario agriculture ministry’s fact sheet says farm corporations pay when farm income reaches about $75,000, Moore says with these considerations it’s much higher. “Only if taxable income for the family SP business is over perhaps a consistent $200,000 should a corporation even be discussed,” he says.
Moore also says taxes paid over any person’s entire lifetime and estate disposition are exactly the same. Only the timing of payment is different. Plus you need to consider the costs of corporation administration.
“My response is to not rob the bank in the first place,” says Moore, pointing to legal and accounting fees.
For the Brousseaus and Poulins, having two separate businesses created needed boundaries, letting both generations get a taste for fully transferred responsibility, with a written legal agreement that commenced on the first of this year for a one-year term.
Although they’ve had a few bumps, overall the agreement has worked well.
With this approach, both generations can try the new arrangement on a trial basis, with no pressure and no having to answer to each other. Also, the older generation is learning how to slow down and get away from the farm. “My parents now have the freedom, yet don’t have the emotional burden of selling their farm,” says Nicole.
The hardest part has been sticking to their new roles. For example, if Bertrand runs the baler, he gets paid, so, says Nicole, she and Richard must sometimes say, “Thanks but we’ll ask for your help if we need it.”
Still, the younger couple is enjoying making their own decisions, and son-in-law Richard is behind the wheel, instead of being a third wheel.
The younger generation is also seeing what it’s like to live on a separate property five minutes away from the barn. Although not as convenient, it’s teaching them to prioritize time with their young family.
The agreement is a way for both couples to see what can be tweaked for a more permanent plan. For example, they didn’t consider the income tax consequences of rental income versus having farm expenses to deduct against her parents income.
All the parties understand if it doesn’t work out after the year, the young couple can take their quota and buy a farm somewhere else. Although, they’d have to give up the effort and equity they have in the new barn, that value is nothing compared to family. “It’s just concrete, wood and steel,” says Richard, who grew up witnessing some emotional succession problems with his own farming family. “Business should not wreck relationships. It’s absolutely not worth it.”
In retrospect, they’re all proud of how they’ve been able to maintain a strong, loving relationship. Nicole says one of the keys to working together was keeping the discussion about the farm business on the farm. No one ever complained or picked sides with outside family members.
Soon they’ll be back at the drawing table but hope this time, they’ve all at least tested the waters and discovered their priorities. Maybe they’ll buy out the Poulins or maybe create a longer-term rental agreement for the remainder of Bertrand’s life. Or the young couple may have to look for a new location.
They’re also keeping in mind that it won’t be long until the next generation is ready to potentially farm (Nicole and Richard’s children are 13, 11 and 9). To ensure the farm is appealing, the Brousseaus want to keep their operation progressive.
They want a farm full of opportunities and options, no matter what the business structure.