Farm advisor Ted Clysdale has farming friends with a common problem. What isn’t common, he says, is a possible solution.
Clysdale’s friends have three children entering their teen years, and the parents are struggling to find ways to double or triple their farm income so the children can potentially join the family business.
Instead of expanding the on-farm income, however, Clysdale has advised them to consider other savings vehicles, including RRSPs and RESPs.
To begin with, because the farmer didn’t invest everything back into farm assets, the younger generation can buy into the business with less debt. Investing some income to outside savings also gives the older generation a separate next egg to retire on without decreasing the current income potential of the farm.
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The same philosophy can also work with education savings. Mortgage rates are low. Over the last 20 years, the average Canadian mutual fund made about 10 per cent, says Clysdale. “With interest rates like they are today, you should consider setting up a double goal for your farm with the younger generation in mind.”
Many farm families pay their children for the work they do on the farm and then invest some of that into an RESP on their behalf.
The farmer must write a cheque, get the child to physically cash it, and then dump some directly into the RESP. The kids have to actually work on the farm (a job description is a good idea). The farmer also needs to keep proper track of the payment in the farm’s financial accounts.
Other strategies can apply to specific cases. For instance, children can lend money to an incorporated farm and contribute to their RESP with interest earned.
Talk to your accountant and financial planner about the best strategy for your farm, Clysdale advises. “When I have a client who has $400,000 in retirement savings, it makes it so much easier to create a succession plan.”
