Others would rather be outside working with cattle or at conferences learning the latest disease management techniques. 

If you’re not in the first category, your banker might know more about your farm financial indicators than you do. 

There are such long lists of financial indicators available it can be hard to know where to start. And once you calculate a financial ratio, how do you know if yours is “good”? 

If you don’t calculate these three financial ratios, your banker will. So, why not start by doing the math at home and taking them along to your next meeting?

Why financial indicators matter

Rising land prices have pulled up many farmers’ net worth statements. 

“There is not an equity issue out in farm country. Most operators are holding land that has appreciated well,” says Craig Macfie, founder of consulting firm Spring CFO (link to www.springcfo.com). Macfie has seen all kinds of farm financial statements through his consulting work, as an accountant, as a past CFO for Monette Farms and through his experience as a farmer in Crystal Springs, Sask.

But lenders care about more than net worth. Lenders want to know if your assets are generating profits, and if you’re able to repay loans. 

In some banks, Macfie says, “the bank credit department is God, and your bank relationship manager is the Pope.” That is, the banker you meet with doesn’t typically have authority to make lending decisions without support from someone in the credit department. 

When you need a loan, Macfie says, “You need the Pope on your side, advocating for you.” Your bank manager can tell the credit department what a strategic farmer you are, but the credit department is still going to want to see the numbers. 

Your financial indicators will have to carry the day. 

The lenders’ perspective

Macfie suggests three key financial indicators can show your farm’s ability to repay loans. 

Roxane Lieverse is an executive vice president and the head of agricultural banking with Rabobank in Canada. When asked which financial indicators are important for lenders, she lists the same three indicators. 

The financial indicators these two professionals see as highly relevant to bankers are:

1. Working capital to expense ratio
2. Debt service coverage ratio
3. Debt to equity ratio

Together, these three indicators show lenders your farm’s recent financial performance and your farm’s ability to repay loans. 

1. Working capital to expense ratio 

What it measures: The working capital to expense ratio measures your farm’s ability to stay in business through the next production season. 

“It shows the actual working capital available for a producer to put in their crop, whatever it is they’re growing or producing,” Lieverse says.

How to calculate it:

First, calculate your working capital:

Working Capital = Current Assets – Current Liabilities

Where current assets equal assets that can be converted to cash within one year (e.g., bank accounts, inventory, prepaid expenses) and current liabilities that must be paid within a year (e.g., accounts payable, operating loans, rent payments, credit card debt, taxes).

Working Capital to Expense Ratio = Working Capital / Annual Operating Expenses

Some financial analysts use these same measures to calculate the Current Ratio, which compares current assets to current liabilities. 

Current Ratio = Current Assets / Current Liabilities

The current ratio can be used to measure short-term viability, but Lieverse and Macfie both find comparing working capital to annual expenses more intuitive. 

A “good” ratio for you depends on your strategy. 

If working capital is equal to annual farm expenses, your ratio is 1:1. “Your farm can finance next year’s crop,” Macfie says.

Many farms’ ratio is less than one. 

“Some farms put all of their working capital into more land and machinery, and that’s how they grow.” These farmers are using cash-on-hand to finance expansion, whether it’s land, machinery or equipment. “That works,” Macfie says, “until it doesn’t.”

If the working capital to expense ratio is too low, the farm will be short on cash, perhaps to the point of financing short-term inputs with expensive retail credit. 

“Once you maximize retail credit, there’s really no options besides refinancing or selling land,” Macfie says.

The safest approach is to keep your working capital to expense ratio well above 1:1. But this plan may not keep your money working hard enough. Maybe some capital could replace depreciated assets or repay high interest loans.

Macfie visualizes this ratio as a teeter-totter, with managers balancing cash on hand against re-investments. “The hard part is that balance.”

What does Macfie advise? “The easy advice is 50 percent,” Macfie says, noting that the ideal situation will always vary from farm to farm according to your strategy and your industry.

2. Debt service coverage ratio (DSCR)

What it measures: “Bankers are concerned that you can repay your debts,” Macfie says. “Why would you loan more money to someone who hasn’t shown recently that they can service debt? If your three- or five-year history doesn’t show you can service more debt, why would I give you more debt?”

The debt service coverage ratio compares your recent annual income to the size of your debt. 

How to calculate it:

DSCR = Income / Debt Service

Where income equals farm revenues (after taxes) minus operating expenses (excluding interest), plus off-farm income. Debt service equals payments on short-term and long-term loans, including principal and interest.

What is a good ratio? If your debt service coverage ratio is 1:1 or higher, you have enough income to pay your debt. A higher DSCR indicates higher profitability relative to debt.

Lieverse would like to see a ratio a little higher than 1:1. “Ideally above 1.25, but it’s very heavily dependent on the industry.” 

Rising interest rates will increase your debt costs, decreasing your DSCR. You could raise your DSCR by restructuring or paying down debt. 

A manager focused strictly on DSCR might turn down growth opportunities that require debt. The ideal ratio is the number that fits your strategy.

3. Debt to equity ratio (DER)

What it measures: The first two indicators on this list are more important to banks, says Lieverse, as they’re more relevant to day-to-day operations. The DER shows your long-term viability. “If there was a profitability concern, long-term, how could the producer sustain themselves?”  

How to calculate it:

DER = Total Liabilities / Total Shareholders Equity

Where total liabilities equals all short- and long-term debt and total shareholders equity equals total assets minus total liabilities.

Corporate balance sheets usually show long-term assets such as land and buildings at purchase price (book value). Updating asset values to current fair market prices makes the results more realistic (and probably more comforting). 

What is a good ratio? A low DER indicates a farm with flexibility to borrow money if opportunities arise. A farm with a high DER may have taken on debt to buy more land or may be in a financially vulnerable position.

While long-term customers may have some leeway, Macfie says, “Banks don’t care if you’re sitting on a bunch of land equity if the farm hasn’t been profitable in a few years.” 

You could raise your DER by selling land or equipment to repay loans. But unless downsizing is part of a long-term strategy, it may not be the ideal solution for you or your lender.

Take action to control financial indicators

Many aspects of farm financials are outside your control. If you find yourself with less-then-perfect ratios, here are four steps to take:

1. Develop good working relationships: “You can’t control the weather, but you can control having a good relationship with your banker and your accountant,” Macfie says. 
2. Timely financial statements: Your financial indicators may not be great, but they can still be timely. “You can control getting your bookkeeping to the accountant on time, so they can get it to the banker on time,” Macfie says.
3. Check your corporate year end: Ratios change depending on where you are in your annual production cycle. For example, if you’re a grain farmer with a July 31 year end, “the bank is testing your balance sheet at the worst time of year.” Your Working Capital to Expense ratio will be low, since your current assets are still out in the field. Re-calculate that ratio on October 31, when your barley is in the bin. 
4. Cut costs: If most of your financial indicators are grim, it’s time to look at your operation. “There are efficiencies to be found across the board on land, machinery, labour, agronomy and other operating expenses,” Macfie says. “Keep looking.”

Looking to the future

Lieverse describes herself as a “disruptive agricultural banking leader.” But even innovative bankers still calculate ratios. 

“Banking has a bit of tradition to it,” she says.

Most of Lieverse’s clients are operational experts. “I very seldom stop at an operation where a producer doesn’t know their costs of inputs down to the acre and cannot articulate soil health with a degree of expertise.”

But some farmers have become experts in these areas at the expense of “soft side” business aspects. “Many farms have struggled in operational items related to finance and HR.”

When rising land prices create strong balance sheets, Lieverse says, “you can make mistakes and not really be forced to learn from them.” This probably won’t always be the case. “We’re going into a commodity cycle where margins are tightening. What are you doing to future-proof the farm?”

“Financial ratios are great because they tell us how the farm has done,” Lieverse says. “But what I’m equally interested in is hearing from producers about what they’re going to do. Financial ratios are about looking in the rearview mirror. But I know that operators are driving looking out the window ahead.”

The post A guide to farm financial ratios appeared first on Country Guide.

Well, the tide is going out in primary producer agriculture. Who will be left with clothes on?

Is the shifting tide due to the highest cost of production ever? The changing policy discussions? The geopolitical factors that come with trade wars? Or just the fact that weather events are becoming more common?

Whatever it is, there’s definitely a shift.

Growing up I never realized how much agriculture was trailing other industries in terms of financial acumen. We could once obtain loans with looseleaf net worth statements and personal tax returns. The words “accrual,” “debt service” or “working capital” were not words frequently thrown around, much less understood by most famers. 

In my early years agriculture was not profitable, and land was traded for property taxes. 

How things have changed.

As 2025 progresses, indicators of change have appeared. Banks are tightening up on reporting and covenants. Farms are starting to see cracks in their financial foundations. Even agricultural educational institutions are taking notice. 

A colleague of mine once commented that he had to be careful when discussing financial acumen with farmers during his presentations as it was a “touchy” subject. Well, guess what? Touchy doesn’t pay the bills.

As farmers move into a new reality of financial requirements, let’s break down the non-negotiables when it comes to running your business.

Accrual financial statements

For the first time, this spring I had a conversation with a lender who refused a restructure due to lack of historical accrual reporting. 

It was almost a breath of fresh air. 

For years the industry has been trying to push producers towards understanding and using accrual reporting over cash. Accrual allows the farm to identify if it’s profitable, not just if there’s money in the bank to pay the next bill. This is not to say that cash doesn’t have a place in key performance indicators, it just cannot be the only conversation.

Our partners to the south have been trying to push this standard for 30 years. Ever since the 1980s agriculture crisis, U.S. regulators and standards boards made it a key objective. But they have made little headway. 

I would like to think that Canada is closer but let’s say its efforts are the “best of the worst.” Over half of the primary producer industry has still not adopted accrual reporting and does not know if they are profitable year over year.

Call it the Holy Grail, but a true business requires accrual information throughout the year. Many of the farms we consult for now have internal controllers, monthly accrual reporting and know exactly where they stand in terms of profitability. 

This is how you can make decisions with no emotion, just data.

Budgets and projections

Budgeting is more of a spectrum than a destination. 

There are many factors that need to be considered when preparing a true projection that most fail to execute. The key areas of focus should be the following:

• Cost of production: The need to identify a farm’s true cost of production has never been greater. To move a step further you need to identify both an accrual and a cash number to appropriately market your product. One requires amortization (yes, this is a true cost as you are losing equity in your machines at a rapid pace per hour); the other needs debt payments as they are a cash drain and, depending on your leverage model, may be material. Overall, you need to identify a marketing plan that shows a sustainable return per bushel and per acre.
• Monthly burn rate: Without a monthly cash flow (preferably planned over an eighteen-month period) your ability to market falls only on price. For most farms, cash flow, logistics and many other factors go into when and how you market your products — even more so on livestock operations where you don’t have steady cash flow throughout the year. Knowing your monthly cash out-flows will help you make longer-term decisions.
• Capital planning: The time to decide on equipment and infrastructure is not when the salesperson sits down for a coffee. Most progressive farms create capital plans years in advance and stick to them. In the past, operations bought equipment in good years and then held tight when times got tough. This doesn’t allow for any future strategy or plan; it is purely emotional buying. Know what you can afford, when machinery requires replacement and how this affects your profitability and banking.

Key performance indicators

It still amazes me how many producers have never read a commitment letter from their lenders. 

On many farms, financial institutions are the only thing between them affording to put a crop in and calling the auctioneers. Agriculture is an equity rich-cash poor business and, as such, the ability to understand your key banking and internal ratios is more important than ever.

Following are the three indicators every operator should know at any point in their day:

• Working capital: How much cash you have available to cover future costs. This could be working capital cash in a bank account or grain in the bin that can be easily converted to cash. Working capital is calculated by your current short-term assets less your obligations due over the next year. This ratio determines how easily you can make sales and procurement decisions and whether you can take the family out for dinner on a Sunday night.
• Debt service: The indicator of whether you can make enough cash to pay your debt. For non-farm individuals this would be your employment income compared to your mortgage and car loans. For farms, this is whether over a three-to-five-year period the farm creates enough cash to cover the current debt obligations. This determines whether your banker will give you more money or shut the tap off.
• Debt to tangible net worth: Are your assets larger than the debt you maintain? This is the least important indicator with your lenders, but often a covenant, nonetheless. This indicates whether you have left enough of your personal wealth in the business in comparison to the bank’s risk. This often only becomes a broader conversation if land values decline or if you are slowly taking large amounts of cash out to buy personal assets.

Every time agriculture enters a down cycle the industry pushes primary producers into positive change.

It is an interesting trend as it follows the concept that good times create soft people, and hard times create hard people. 

Whether 2025 continues to be the year where we see the industry force change, only time will tell. But as an individual who speaks with a significant number of farms every year, I sometimes hope for short-term pain to force a long-term change.

The post Shifting tides bring change to agriculture  appeared first on Country Guide.

A retirement plan should be part of the conversation when creating a succession plan. The emphasis of succession planning is typically on transferring the business to the next generation. There is often little consideration for the outgoing generation and the lifestyle they’ll need to finance post-retirement.

Incorporating a retirement plan into a succession plan requires looking at the mechanisms of the farm transfer from the perspective of the retiring farmer. How do they want to retire and how does that fit into the succession plan?

The lifestyle you want

A retirement plan considers both financial and lifestyle aspects. It outlines the desired lifestyle and how it will be financed. Lifestyle considerations include leisure activities, how involved the outgoing farmer will continue to be in the business and the retiree’s living arrangements. The financial component considers any funds the retiree has saved (i.e., RRSPs, RRIFs, CPP, life savings, etc.) and if there are any supplemental funds from the farm operation. These considerations should be part of succession plan legal documents.

A farmer doesn’t have to retire cold turkey. In fact, it’s often best to gradually transition management and control from one generation to the next. Offering a managerial role to the next generation allows a farmer to take a step back and see where they can delegate responsibility. It can be difficult to pass on these management roles, but it’s important that the next generation is more involved. It allows the farmer to slow down but still provide guidance and input on bigger decisions.

Lifestyle depends on the financial stability of the operation and whether there are multiple families pulling income from the farm. It may not be possible for a farmer to step away if their labour helps the farm remain financially viable.

We recommend incorporating the transition of managerial roles into a partnership or shareholders’ agreement with specific milestones, such as the reduction of equity of the outgoing generation below a certain threshold or at a specific time. For example, a farmer may be required to resign as an officer of a farm corporation after 500,000 of their special shares are redeemed.

The finances you’ll need

Many farmers put their life savings into the farm. Passing the farm to the next generation — whether by sale, gift or some other method — means they will most likely require money from the farm to fund their retirement.

A shareholders’ agreement can stipulate how the retiree would be paid from the farm corporation while allowing the farm corporation to remain financially stable. Options include wages, redemption of special shares, or dividends.

Wages are paid to the farmer through payroll and taxed as employment income. The retiree may exchange their common shares for special shares as part of reorganizing the farm corporation during the succession process. The retiree may redeem a quantity of special shares to live off each year. The retiree may be paid by dividends each year, or dividends can be paid out with either common shares or special shares. Tax implications should be considered to determine the best method. We also recommend adding an adjustment clause tying the payment amounts to inflation to ensure the retiree’s purchasing power does not decrease over time.

From a legal perspective, it is important for the retiree to negotiate releases from personal guarantees to any financial institutions. They should also obtain security over assets to ensure financial protection. And they’ll want to ensure there is sufficient equity and cash flow in the operation to fund the lifestyle they plan to have.

A shareholder or partnership agreement should contemplate a reversal of the succession plan if the next generation mismanages the operation. This may seem like a harsh outcome, but so is living on less because the retiree failed to ensure their financial security in retirement.

A retirement plan is a critical part of succession planning, but it’s often minimized during the process. Lifestyle costs need to be within what the farm operation can support and still allow for growth. Ultimately, the goal is to ensure that the incoming generation can survive on the farm’s revenue and that the outgoing generation’s retirement lifestyle does not distress the farm’s financial situation. Everyone must agree on the retirement plan, or it could mean that the scope of the operation needs to change and other assets sold off to support the plan. Once these factors are determined, draft and implement a retirement plan that includes milestones for gradual succession.

– Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ontario, with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For full details, please view their biographies at mckenzielake.com.

The post Planning for retirement: Lifestyle versus finances appeared first on Country Guide.

Country Guide associate editor, April Stewart, sat down with Evan Shout, a.k.a. the Farmer Coach, for his thoughts and top tips on how farmers can prepare to make decisions not only for the coming year but for the next decade. Below is an excerpt from the podcast (edited for clarity).

Country Guide: As we both know, farming is a complex business full of daily decisions, the results of which can mean the difference between a good year and a bad. What does this mean for farmers planning for 2025 and beyond?

Evan Shout: We’ve got to come to terms with the fact that agriculture is not like it used to be. Financial decisions are not small. We’re dealing with multi-million-dollar decisions and not just one or two, but hundreds throughout the year, if not daily. It’s become so complex that farms are starting to struggle with all the financial decisions coming at them and all of a sudden, those gut-check feelings aren’t doing the job anymore.

So now what? We’ve had to create systems, processes and get advisors — all these things that we maybe didn’t use in the past. Before we were “rugged individualists,” but now we know we need help.

• RELATED: 6 signs it’s time to change farm advisors

CG: What are some of the biggest changes you’re seeing?

ES: I think the biggest thing, especially on the farm finance side, is that we’re starting to see a lot more farms take that next step into becoming a true business, whether that’s hiring people to put those processes in place or doing it ourselves.

And with larger-scale businesses, you’re expected to communicate and have regular meetings. Family farms never had to do this and that’s where I’m starting to see big changes. They’re bringing their kids into meetings with the accountants and the lawyers and getting them involved early.

A driving force behind those meetings is succession. That process isn’t starting when the kids are 40 anymore. It’s starting when the kids are 17.

One last big change is the number of roles and responsibilities on a farm. Again, this is driven by succession and farms scaling up in size. Succession plans are starting so early, and they have to start having discussions on things like who has what skills already, or who’s doing what job, and so they need the kid to do something else. Maybe you need them to get a business degree or a mechanic degree or something outside of the norm, because that’s the skill set the business requires. And since things are happening earlier, these conversations are also happening because Dad doesn’t want the kid to come back and take his job just like that.

CG: What would be your top advice for someone to consider before they get to the “tomorrow is the day I take over” step?

ES: Focus on looking for a hand up, not a handout. Because of current real estate evaluations, land literally made farms much wealthier over the last 10 to 15 years. In my eyes, the next generation has to get good at farming, where the last generation, if you could hold on to the land, you probably made quite a bit of money.

The biggest thing the next generation has to concentrate on is becoming farmers and business owners, because if they’re looking for real estate to take them to that next level it’s probably not going to happen at the same rate as it did for their parents.

CG: What about skills? Are there certain skills current or new farmers should focus on that would help sustain or grow their operations? Do these skills change based on farm size or sector?

ES: It’s important to know the key concepts such as ratios, profitability metrics, cost of production. It doesn’t matter what size you are, it’s all at scale. You’re still looking to make so much per acre, so much per head or so much per litre. The metrics don’t change. And from an operation standpoint, there’s still roles, responsibilities and processes. If you can get the core business competencies down, they’re going to apply no matter what size your farm is.

Listen to the rest of the conversation at the Country Guide podcast page.

The post Planning for 2025 and beyond appeared first on Country Guide.

Despite this historic handoff from one generation to the next, the Investment Planning Counsel reveals that few Canadians have discussed their investment plans with the beneficiaries. Perhaps even more concerning, research from LawPRO has found that 56 per cent of Canadians don’t have a signed will.

These are the kinds of statistics that get a lot of farm families feeling a bit smug. After all, they’ve already signed their wills. The lawyer did them years ago. So the farm is safe and everything is looked after.

Isn’t it?

Well, it’s worth taking a hard look, says Brent Dekoning, associate advisor with Lorkovic Wealth Management of RBC Dominion Securities. “It’s not uncommon to meet with farm families… who have wills that are 10 to 15 years old,” he says.

Estate planning has gotten more complicated — and the value of Canadian farms climbs ever higher — so your estate plan is more important than ever.

“Estate planning was much simpler 10 to 20 years ago when there wasn’t as much wealth,” Dekoning says. “There’s a lot more wealth than there has been in the past, and there are some unique planning strategies that are only available to farm families.”

Regular changes to the laws and tax code might mean that the will you created is no longer effective. Trends in estate planning have changed, too.

Whether you put off creating a will or have a will but haven’t updated it in a while, these five trends are a reason to call the pros to make sure the provisions in your will align with your estate planning goals.

Trend #1: Changes to Trust Laws

In the past, an estate plan might have included the creation of trusts that allowed a second taxpayer such as a spouse to benefit from a lower tax rate.

Trusts were taxed at graduated tax rates and offered exemptions from alternative minimum tax, as well as the ability to tax income distributed through the trust at graduated rates, and to have the trust, not the beneficiaries, pay the tax. Trusts also allowed all unrealized capital gains to be deferred until the death of the last surviving income beneficiary.

The government changed the taxation of trusts in 2016, removing the pass-along tax benefits and taxing beneficiaries at the top marginal tax rate rather than graduated tax rates, according to Kurt Oelschlagel, accountant and national agriculture tax leader with BDO Canada.

“They (trusts) are not as useful anymore given the change in the tax rules,” Oelschlagel says. “When the tax laws changed, there was no grandfathering, which means people need to change their wills because of those changes.”

All estate plans created before 2016 that included a trust for tax purposes should be reviewed.

Trend #2: The Inclusion of Multiple Will Strategies

If the idea of creating a single will feels overwhelming, your reaction to creating two wills might be a resounding no. However, a multiple will strategy could reduce your tax burden and help keep a portion of your estate out of probate, a process that validates the appointment of an executor and is required before changes are made to asset ownership.

As the name suggests, a multiple will strategy involves creating two wills: one for personal assets — including shares of a corporation — that do not require probate, and a second to bequeath assets administered by third parties such as real estate, bank accounts and other investments that are subject to probate.

“As soon as one of the assets in your will triggers probate, it pulls all of your other assets in,” Dekoning explains. “For lots of farmers… creating a separate will to deal with their corporate shares avoids probate, which, in Ontario, (has a fee of) 0.5 per cent on the first $50,000 in assets and 1.5 per cent on assets above $50,000.”

If your farm corporation has $10 million in value, a 1.5 percent probate tax would cost the estate $150,000. By comparison, the cost to get a second will is under $2,000, Dekoning says.

The use of multiple wills is not recommended — or even allowed — nationwide. It’s common in Ontario and British Columbia but in Alberta, where probate fees are low, it is not commonplace and Nova Scotia added a clause in its probate legislation that rendered the multiple will strategy ineffective. Talk to your accountant and lawyer to see if makes sense to prepare multiple wills based on your location.

Trend #3: New Tax on Split Income

Establishing a corporation allows farmers to add family members as shareholders. Under previous tax on split income (or, TOSI) rules, shareholders with the highest salaries could shift — or split — some of their income to shareholders, like a spouse, with lower incomes to reduce their tax liability.

The federal government changed TOSI rules in 2018 and limited — and often eliminated — the tax benefits on split incomes. Under the new rules, all income, including dividends and shareholder benefits, income received through partnerships or trusts, interest income, and income from capital gains, that is split with family shareholders is taxed at the highest individual tax rates.

There are some important exclusions, including a provision that states capital gains incurred due to taxpayer death shall be excluded from TOSI, that could affect estate planning.

“We’re seeing that if we plan the estate properly, maybe we can avoid that tax for the next generation, particularly for someone who is not active in the farm,” Oelschlagel says.

With tax codes and trends changing all the time, your estate plan needs to change, too. An outdated (or non-existent) will only increases the odds that your final wishes might not be carried out as planned.

Oelschlagel recommends reviewing your estate plans every three to five years (or every time you experience major changes such as the addition or loss of a family member or acquiring land or other major assets), explaining, “Whenever tax rules change, we need to look at the (estate plan) to make it more tax efficient.”

Trend #4: Increases in Land Values

Farmers often leave the farm assets, including land, to a farming heir while leaving life insurance, retirement savings and other investments to a non-farming heir, aiming for an equitable split based on the estimated value of those assets. Without an updated will, significant increases in the value of farmland might have created a lopsided division of assets.

The value of farmland has increased each year since 1993 with land ranging from less than $1,000 per acre in Saskatchewan to more than $186,000 per acre on the south coast of British Columbia, according to the latest data from Farm Credit Canada.

In 2019, the value of Canadian farmland increased just 5.2 per cent — far lower than previous years when values increased as much as 22.1 per cent — but even the lower rate far outpaced the returns on traditional long-term fixed income investments, which a 2020 Edward Jones report estimated at less than 3.5 per cent for Canadian investors.

“If your plan isn’t updated and reviewed, you may leave a disproportionate value of your estate to some of your beneficiaries in relation to others,” warns Nate Martin, partner with the SmithValeriote Law Firm LLP in Elora, Ont. “While this plan may have been equitable 10 years ago, it’s possible that the increased value in the land has outpaced (the value) of the life insurance policy or the investment accounts.”

The trend of rising farmland values is among the top reasons Martin advises farmers to review their estate plans.

Trend #5: The Rise of Cryptocurrency

Digital currencies like bitcoin might not be very common — yet — but awareness is on the rise. In fact, the Bank of Canada found that 58 per cent of Canadians use bitcoin for investment purposes.

If your estate includes cryptocurrency, your estate plan should include information about the amount of bitcoin you hold and language that permits your fiduciaries to access and manage the digital investments. Similar to cash assets, cryptocurrency is taxable in Canada and must be included in your estate plan.

In addition to leaving instructions about who should receive cryptocurrency, it’s essential to provide details, including passwords and the whereabouts of the private key needed to access the assets.

The post Five new trends in estate planning appeared first on Country Guide.

We spoke with several families over the course of a few months for this article and found farming families faced the same challenges everyone else did. They confronted feelings of anxiety, panic and uncertainty, and all without the usual support of friends and co-workers.

For this segment of our Country Guide series, names will be withheld. We felt we needed to do this for farmers to talk to us about the very private nature of their family relationships and how the COVID-19 pandemic has had an impact on them.

Throughout our conversations, one common story was that many children who had planned to return to university instead remained on the farm, where they showed a renewed interest in the ag industry. This also translated to more help at home than farmers were used to, which filled a critical role during spring planting.

Another theme was how many successors stepped up to the plate. Although years ahead of the transition they anticipated, they were eager to help their family farms through the ever-changing challenges presented by the pandemic.

At one agribusiness in central Ontario, a son who was home from university found himself without his spring job at a golf course. At the same time, after a brief shutdown to re-evaluate a safe opening and move product to an e-commerce offering, his father needed help. They had worked together on and off over the years, but never in a full-time capacity.

One day, the son told his mother how much he enjoyed working with his “old man.” Although the golf course eventually did call him to come to work there, he declined the opportunity in favour of continuing to work in the family business, and it turned out great for both father and son.

“There are days when he has his moments and I have my moments, but thankfully he is like his mother and pretty even keeled. I have the temper once in a while! But overall, I think it has worked out well,” the father says. “He works independently, and I love that. I don’t have to tell him what to do.” Although it is a little uncertain whether or not this will stick as a full-time career option for the son, who is currently taking college courses online for music, the father is thankful for the time together this past spring and summer and the opportunity to appreciate the maturity in his son.

As he told us, “These blessings come to us in funny ways, don’t they?”

Resiliency is built in different ways, and for other families we spoke with, desperation prompted their child’s involvement. “No one expected spring break to be as long as it was,” says one farmer in northern Ontario. “My son came home when his college first shut down this spring and he’s still here!”

He is one of thousands of college and university students who found themselves re-adjusting to life back on the home farm after leaving it years earlier. The challenges of those adaptations were felt by both sides. Farming parents were scrambling to secure their workforce and deal with challenging weather conditions, while their kids were struggling to stay motivated for online learning.

Or, in some cases, they had their programs halted altogether. “It sucked!” his son shared with me. “At no point was it part of my plan to come back here.”

While some kids stepped up to help their parents out, others, such as this young man, struggled with the idea of being back in the field. When he began his second year of college, in fall 2019, he had felt that he was starting to make a path for himself. His vision did not involve farming; he was training instead to be a mechanical engineer.

“Lifestyle up here is not for me; it never has been,” he confided. His parents perceived him as an obvious solution to their lack of help and struggled with his lack of desire to do so. “We had no help and a limited timeline,” the father shared. After some strong words, the son did join in the fields to help with planting. “We got it done, reluctantly, but he did help me out,” but they also learned something. “Both of us were relieved though when our help arrived a couple weeks later,” the father chuckles.

Another family we spoke with inspired us with the resiliency of their daughter, who jumped ahead years in their farm transition plan when her mother’s health became jeopardized by working in the fields. Everyone noticed the strength of leadership demonstrated by their daughter, who stepped up without hesitation.

“It felt easier than I think we all expected it to be,” her father says. “She dug right in and figured out how to get things done, and she did a great job.”

This daughter quickly learned the accounting program and took over the bookkeeping from her mother and became responsible for co-ordinating seed and fertilizer deliveries, also previously handled by mom. While remaining quite modest, the daughter did not see her actions as extraordinary. “It was fine with me. I knew why mom could not be out there and I got it. I didn’t expect this now, but it was always the plan and I am okay with it.”

There was also a distinct impact on wives and daughters that other family members noticed too. Often, they seemed to take this time harder than their male counterparts.

When we pressed further to help understand why, it revealed some commonalities among mothers. They wanted to be the “fixer” of problems as they arose in the family, or they were quite often the ones running around to try and comply with ever-changing government regulations surrounding protective equipment.

“My wife had to go to six different stores, in the early days when we weren’t even supposed to be going out, just to find enough wipes for the new workers to have their own supplies,” one southwestern Ontario farmer told us. “And guess what? The next day, we found out they each needed to have a certain number of masks available to them at all times. My wife was so upset because it was almost impossible for her to find anything on the shelves these days.

“Day after day, she was leaving the house to help with purchasing items to keep our farm operational. She did it, but the risk weighed heavily on her; going out and about so often.”

For another family, their daughter and only active farming child decided it wasn’t worth the risk for her to continue working in proximity to others while pregnant. The mother bore that burden too, as she understood her daughter’s fears but also had to watch her husband struggle with the additional workload.

“Of course, my husband understood her decision, but we were really stuck,” she recalled. “It challenged us to focus on the health of our daughter and future grandchild while really struggling with how we would get the job done.” Although their planting season went longer into the spring than planned, they were able to complete it with the help of some neighbours.

Resilient families took on new meaning during this time. It wasn’t just about weathering the pandemic together but turning adversity into opportunity and strengthening the bonds between family members. We could be prouder of the families we spoke to, who offered raw honesty about the challenges and opportunities their families faced.

But guess what? They faced them together. They grew stronger, they learned from one another, and this pandemic did not shake their resiliency.

Darrell Wade is a certified family enterprise adviser and a CAFA-certified farm advisor. He is the founder of Farm Life Financial Planning Group and can be reached directly at darrell@farmlifefinancial.ca.

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This is very topical currently because of concerns that lower grain prices will lead to lower land prices, potentially putting those who bought high-priced land in financial difficulty.

Debt/Equity

Traditionally people used the Debt/Equity ratio as a measure of financial risk. If this ratio is equal to 1.0, it means your debt is equal to your equity. The higher the ratio, the higher your “leverage” and the higher your risk of losing the farm if you can’t pay down debt. The problem is that what it is telling you is whether you have enough assets to cover your debts if you fail. Lenders like it because they want to know their loans are secure if they have to sell your assets. That’s a little late for useful management information!

• More ‘Finance metrics you may not have thought of’ with Larry Martin and Heather Brown: Operating efficiency and Diagnosing operating inefficiency

Debt/EBITDA

More useful for management is Debt/EBITDA, i.e. debt to operating earnings. If your Debt/EBITDA is 5.0, and if you use all your operating earnings to pay principal on your debt, it will take five years to pay it off. During that time you will not use any of your annual operating earnings to pay interest, make new investment, pay taxes or pay yourself.

The higher the ratio, the higher the financial risk, because your operations are linked to your debt. Start with the proposition that if you buy an asset such as a farm or a major piece of equipment, there are only three possible ways to pay for it, i.e. 1. From the earnings it generates for the farm; or 2. You either sell it or have it eat into the farm’s equity; or 3. Your rich uncle dies and leaves you a nice inheritance! There are no other choices. Most people don’t have the third and don’t like the second: forced sales are not fun.

Using Debt/EBITDA

Using Debt/EBITDA can help mitigate getting into financial difficulty, starting with understanding benchmarks. For non-farm businesses, most lenders like to keep this ratio under 3.5:1. Agricultural lenders usually go higher: Canadian tax-filer data puts the average for Canadian farms at 5:1. Our experience is that 6:1 is a useful limit for farms that are expanding.

This is where understanding the interaction between the balance sheet and operations becomes useful. Our earlier columns pointed out that successful farms aim for operating efficiency of 35 per cent or more. If a farm has 22 per cent operating efficiency and Debt/EBITDA of 8:1, it is going to be very difficult for it to pay off its debt. There is almost no chance it could make any major new investment.

The ratios tell us that two things need focus here. One is to reduce debt as quickly as possible and, certainly, not take on more debt. The other is to improve operating efficiency from 22 per cent so debt can be paid down more quickly.

The reason lenders go further in agriculture is that farms often have “off-balance sheet” equity because they are carrying land and/or quota at cost instead of market price. Therefore, they pay attention to the Debt/Equity ratio because it gives them a good picture of their security. However, managers need to worry about avoiding financial difficulty. Equity can only pay down debt if it is turned into cash!

Another useful feature of this ratio is that it can help guide growth plans. Some of the most successful operations with whom we are familiar have Debt/EBITDA around 2.5 to 3.0 on average over time. However, it may jump up to 5 or 6:1 when a new major investment is made such as a farm expansion. But it goes down to less than 2.5:1 as that debt is paid off before the next investment is made.

Well-managed farms that are growing manage their growth by ensuring that each major expansion is on the way to being paid for before the next one is made. If the ratio gets much above 6:1, then the farm is facing tremendous risk of a series of low-price years, a major policy change, and/or a series of production problems that reduces yield or price.

On a final note, in calculating the ratio we use an average of three years of EBITDA to take out market fluctuations and we tend to use bank debt instead of total liabilities for the calculation. Usually, bank debt is the most important because banks usually have first mortgages and care mainly about repayment of their debt. In this case, bank debt is the financial risk.

Larry Martin is co-owner and lead instructor in AME’s management training courses. Heather Broughton is co-owner and president of AME.

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Setting up a rational way to deal with these situations ahead has some upfront costs and requires some serious conversations. However, those costs are nothing compared to the headaches and costs of working out something after a major life change.

Life insurance is one tool to build strategies to solve these problems. “The No. 1 benefit of (life) insurance is liquidity,” says Rob Knight, investment adviser and director at HollisWealth Steward Group in Cambridge, Ont.

At death, life insurance payouts are generally used to cover debt, tax liability, funeral costs, and of course, to support a family. For family farms, life insurance can also be used to equalize inheritance, and if it’s done within a corporation, create a tax-friendly liquid investment.

The premiums are personal expenses, unless the insurance is to cover a loan required by a financial institution as security or if the farm is incorporated. The corporation can pay the premiums for the insurance policy with money earned at the lower corporate tax rate instead of personal income tax rate. At death, the payouts are tax free for the corporation and the proceeds can be moved out tax free through the corporation’s capital dividend account (CDA).

• More ‘financial strategies’ on Country Guide: Family farm corporations on the rise

The premiums can be significant and it’s imperative to have a good shareholder’s agreement for your corporation. A shareholder’s agreement helps navigate through death, divorce and disagreement. “It’s much easier to divide something up before you pile it up on the table,” says Knight.

Knight estimates only about half of the incorporated farms he works with have shareholder’s agreements, and of those, only about one-quarter include life insurance to fund them.

That’s partly because whole life insurance is costly. But it’s also because it’s complicated. Finding the right policy for you can be challenging. Generally, the younger the person, the cheaper it is to insure them. Trying to get life insurance once someone is sick or old can be costly or even impossible.

Although there are only five major insurance companies in the country, they have a multitude of policies and values, sold by a myriad of smaller companies. Each insurance company has its own sweet spot at any given time, says Knight. This sweet spot will change from time to time as these companies try to acquire different demographics.

“You should definitely go through an insurance broker,” Knight says.

Strategy 1: Farm corporation buys insurance

Basically, there are three parties to an insurance plan; the owner, the beneficiary and the person(s) whose life is insured. The corporation is both the owner and the beneficiary of the policy, and the farmers are the ones insured.

The income tax corporate rate is 16 per cent, compared to top-line personal rate of 46 per cent. So compared to paying for it personally, having the farm corporation pay the premiums can save about 30 per cent of cash flow.

However, those premiums still have to be an amount your corporation can sustain even in bad years. If you need to back out of a policy, it’s really not a good investment. Make sure you can afford the premiums for the duration.

If the plan is to sell or wind up the company in the future, there may be negative tax consequences on a future transfer of a life insurance policy out of the corporation. Also, corporately owned life insurance policies are vulnerable to the corporation’s creditors.

“Insurance rewards patience and consistency,” says Knight.

At death, the corporation is the beneficiary and gets this tax-free insurance payout. Then the money goes out of a notional account, called a capital dividend account (CDA) to the individual as stated in a shareholder’s agreement.

Whole life insurance policies can also be leveraged. Banks will loan up to 90 per cent of a whole life insurance policy’s value, with interest-only payments. Those interest payments for farm expansions or purchases are a tax-deductible expense for your corporation.

Strategy 2: Expand CDA

CDA accounts are a channel for money (not just insurance payouts) to come out of a corporation tax-free. “The CDA is a very useful account when you’ve got other corporate capital to liquidate,” says Knight.

One strategy Knight uses to inflate the CDA is to borrow against the insurance policy to buy more insurance. The larger the policy, the bigger the CDA amount allowed.

For example, let’s say you have a $1-million insurance policy and you go to the bank and get a loan (using the policy as collateral) to double the value of the policy to $2 million. At death, the corporation gets $2 million tax free and pays back the debt. The amount left of the insurance payout is at least the original policy value. In the process, the CDA credit has doubled, allowing for $1 million more capital to be taken out of the corporation tax free.

What happens if Canada Revenue Agency changes the rules? Even if it does change the legislation, Knight says CRA has never applied new rules to old dates, so it won’t likely affect already established life insurance policies.

Strategy 3: Equalize estates

Buying insurance on individuals can multiply the value of the investment in order to cover any tax liability or as a way to get money out of the corporation tax free. It’s also an affordable way to equalize inheritance for non-farming heirs.

If there isn’t insurance or other investments, the farm either has to pay siblings out over time, sell other assets, or give land to the rest of the family. For agriculture, land ownership can roll to children or spouse without being taxed.

However, Knight has seen some land inheritance conflicts arise recently with the big increase in land prices. The non-farming siblings want to sell their land for seven, eight or even 10 times the value that it was worth when it was given to them years ago. You can hardly blame them. However, the increase in prices means the farming sibling can’t afford to buy it, yet it’s needed for their operation.

Strategy 4: Cover debt

If your corporation is in growth mode, you might need insurance to cover debt payments at death or to pay out individuals.

For this, many businesses with shorter horizons will buy term insurance. Knight uses the example of three friends setting up a business which they intend to sell in 10 years. Term insurance is cheaper than whole life or universal insurance for businesses that require life insurance for shorter terms to cover loans or buyouts. “Ten to 15 years is the breaking point,” says Knight.

Multi-generational family farms by their nature are longer-term enterprises, so Knight generally recommends whole or universal life insurance. There’s an upper age limit to term insurance, he explains, and it won’t cover a permanent problem, such as the funding of an estate bequest or tax liability.

“Farms that are growing accumulate debt. Farms that are not growing accumulate capital,” says Knight.

Strategy 5: Shelter extra capital

“Another reason to buy insurance is to shelter redundant capital,” says Knight. A corporation may have too much capital. Maybe their children don’t want to farm so they don’t expand, or they don’t want to service debt or are nearing retirement.

The return on investment for whole insurance is not as appealing as trading equities, it ties up your money for a long time and only your beneficiaries get the big payout. However, it’s 100 per cent guaranteed and does multiply.

As well, if you’re afraid that your money won’t last to the end of your life, whole life policies can be borrowed against to use while you are alive.

Permanent life insurance can help diversify investments for farmers who want low-risk investments and have a large portion or all of their capital tied up in the farm. If the farm is incorporated, it can be a tax-efficient investment.

The post Life insurance strategies appeared first on Country Guide.

“It’s just the way the world is working,” says Lance Stockbrugger, a chartered accountant, consultant and farmer cropping 4,000 acres in east-central Saskatchewan. “Having all the required financial data at the fingertips of everyone on the farm who needs it makes capturing better deals and negotiating for grain contracts, parts or equipment easier without the need to always second-guess yourself.”

Just like in the field, however, it’s one thing to have the data. It can be quite another thing to put that data to its best use. And also like in the field, while it’s true the data can make you a better manager, it won’t happen instantly or all on its own.

• More Country Guide: Editorial: Our farm advisers can do better

Stockbrugger, like any other farmer, knows how the “busy work” on the farm can eat into your time, and it’s no surprise to find that bills, receipts and everything else sits day after day in the office waiting to be entered into the system.

That’s the way it used to be — or, in many cases, the way it still is.

Now, farm apps are emerging that enable the capture of data, receipts, bills and so on, at the time the transaction occurs.

FCC’s real-time app is AgExpert Mobile, says Matthew Van Dijk, senior specialist for management software at Farm Credit Canada. “This smartphone app can capture a picture of receipts in real time and sync back to the home or business desktop computer at the push of a button.”

AgExpert Mobile is the travelling companion to FCC’s flagship farm accounting program AgExpert Analyst, a widely adopted program that has been around for 30-plus years.

Some 2,000 farmers are already using AgExpert Mobile, but FCC says it expects that over time, virtually every smartphone owner who uses AgExpert Analyst will become an AgExpert Mobile user too.

This app, and others like it, takes a photo of the receipt or other document. This (a) captures a copy of the document and stores it in the cloud, prevent- ing that all-too-common occurrence of the “lost” receipt, and (b) then with a few taps or swipes allows the information to be marked as an expense or income and to note the supplier, the type and the amount of the transaction.

“At this time, the taxes have to be assigned at the desktop location,” says Van Dijk. “In future, there will be even more functionality added to the app, but for now, if operators use this type of real-time capture of transactional data, they are giving themselves a huge advantage in terms of knowing the whole story of their financial data.”

Security is an obvious question when an app transmits confidential data. “The app does the data capture, and at a tap from the user, will send its data to the cloud,” says Van Dijk. “The cloud then transmits or sends the data down to the office computer. There is no transmission of data the other way from the home computer to the app.”

Van Dijk says the risks associated with this type of data collection and transmission is far less than, say, credit card data that might be stored on a company server where it can be hacked, as recently happened with The Home Depot in Canada and the U.S.

Van Dijk also says that FCC does not collect or mine any data stored on the app.

“I’m an accountant so it’s hard to shake off my natural caution toward financial data,” says Stockbrugger. “It is important to put some controls on who can enter the data, who can read it or view it.”

Farmers also need to keep in mind the potential benefits of real-time accounting, Stockbrugger says.

With real-time accounting, buying decisions can be made remotely based on, for instance, the most accurate cost of production. This year’s cost of production can also be compared to previous years. “Maybe it’s just me, but I like as much detail as possible,” says Stockbrugger. “Dollars per unit or per acre, not just dollars.

“I still see far too many farmers trying to figure out a cost of production or other details in the supplier’s office,” Stockbrugger says. “If you don’t know this, you can’t figure out where your profits are, or are not. You can’t make an informed decision about what you should be pre-selling before seeding or at harvest and so on. In order to mitigate risk, this is crucial financial information, and real-time financial management tools make it even easier to have this available even in the busy season — which runs from April through to November in many cases.”

Stockbrugger has embraced cloud storage for other aspects of farm management besides just the financial data. “I have all the farm grain contracts stored in the cloud,” says Stockbrugger. “I can be swathing canola and I can look at my canola contracts and make decisions at that moment based on what I’m seeing in the crop I’m harvesting. I can lock in prices and make other decisions right from my smartphone sitting in the swather.”

Stockbrugger and his brother Lane also log their field operations in real time. “We find keeping spray records and other field operation records invaluable,” says Stockbrugger. “One of us can look at a field, or be in the field with an agronomist, and pull up the data and make determinations and decisions right then and there. Talk about a time saver.”

Embracing real-time financial management means having a smartphone and an app to facilitate data recording and syncing with the home office.

How many farmers across Canada actually have a smartphone? “Our latest survey in 2014 showed that 76 per cent of Canadian agriculture producers own a smartphone,” says Van Dijk. “As well, over half own a tablet. Of those producers, 35 per cent use ag-related apps, and a third regularly use banking apps.”

These numbers showed a considerable increase over FCC’s last survey in 2011, when 29 per cent reported having a smartphone and only six per cent a tablet. On top of that startling increase in technology adoption, the survey also demonstrated that Canadian farmers are more willing to try new technologies sooner. In 2011, only 16 per cent of producers felt they would be the first of their peers to try new technology. By 2014 that number had jumped to 26 per cent.

“What this tells FCC, and other businesses that supply farmers, is that their appetite for new technologies is growing,” says Van Dijk. “Farmers are now finding value in new technology and are moving more and more to working with devices and online services.”

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As it turns out, it’s the same question that many farmers are asking themselves, although in a very different context. How can I be sure that my farm corporation is the best design for my farm and my family? Can I really be sure its fine print isn’t hiding a time bomb that we’re going to deeply regret in future?

Canada’s 2011 Census of Agriculture clearly showed that family farm corporations are on the rise at the expense of sole proprietorships. However, the census also found that the trend is linked to gross farm receipts; the higher the receipts, the higher the rate of incorporation.

Many farmers have turned their operations into corporations as the next step in a natural progression that had already seen them evolve from sole proprietorships into partnerships, says Robert Berry, partner in the Miller Thomson law firm at Guelph, Ont.

In the past 25 years too, the rate of incorporation has been hastened by taxes, Berry says. “And transfer driven… but that’s also affected by tax.”

That isn’t to say accountants and succession planners suddenly discovered corporate advantages overnight. Berry says he has been helping a steady stream of clients incorporate for the last 20 years, so it hasn’t really been tied to the boom and bust cycles that come with fluctuating commodity markets.

• More Country Guide: Are Canadian farmers ready for the succession challenge?

But there’s no question that there’s been a surge, and these complex business structures have now become commonplace enough to be almost predictable.

“Generally, we’re seeing a transfer of operating assets into corporations, but land and buildings, or at least the main residence and a garage, stay in the name of the original holders of the property,” Berry says. “Since I started 40 years ago, the main issue is still the same; giving up title to the property creates emotional issues and concerns, so they leave the farm property in the name of a parent.”

No one adopts change, especially change which causes “issues” unless there is good reason. In good years, the incorporation trend can be explained by its tax savings. As for the bad years, some speculate that farmers may be looking for a means of limiting liability. But Berry says that although one of the advantages of incorporating is often said to be limiting liability, he sees more reliance on insurance to achieve that goal.

But this brings us to the crux. From Berry’s perspective, it’s accountants who are driving the bus on the corporate trend.

Mona Brown farms and practises law in Carman, Man., and says understanding how corporate farms are run will likely become even more difficult. She’s seeing more farmers willingly adopt very complex business structures, especially young incoming farmers willing to skip sole proprietorship and partnerships entirely.

“The young generation is very, very comfortable with incorporation, with tax planning, and with paying for tax planning because it is really smart,” says Brown. “I’m not saying the older generation wasn’t, but these farmers are savvier with these mechanisms, and they read more.”

Brown says it’s exciting for her to work with such savvy newcomers who think a little more outside the box. When they come to her, she says she finds the trend is to adopt one of three popular structures.

One of the most common scenarios is to join them with an established farm corporation. Whether it is his family or hers, a family trust is a great way to allocate growth in the company to farm kids looking to take over the corporate family farm.

In most of the cases that she sees, Brown says a trust has already been established as part of the original incorporation process. When she builds such a business structure herself, she likes to create a corporate operations company (OpCo) for managing equipment, livestock, and quotas in addition to a corporate land holding company (LandCo) which is only responsible for land.

“We have them as two separate companies, with the shares all owned by the family trust,” Brown explains. “The family trust gives us the ability to get income or capital to other family members without changing the decision-making.”

In other words, those who control the trust, control the corporation, and when it’s time to pass the farm on to the next generation, parents only have to hand over their trust shares.

The next most common structure that Brown sees for passing on the family farm is to set up three companies. One corporation is established for the parents, another one for the children, and then the two corporations work together as a joint venture. “In the joint venture, they combine their equipment and labour, and gradually the parents’ company stops buying and the kids’ company keeps buying.”

Since a privately controlled Canadian Corporation (CCPC) is considered a small business as long as it generates no more than $500,000, this allows large operations to take advantage of small business rules, Brown says.

But unlike having a family trust, there are fewer succession options. “This doesn’t leave us the flexibility the first structure does for using multiple capital gains exemptions,” Brown says. “There’s more in the estate planning side if you have a family trust, but you don’t get three small-business limits.”

Finally, one of the most popular ways she structures incorporations actually reaches back to a more familiar structure in the beginning. Brown says she encourages her young clients by starting first with a spousal partnership. Not only does it act as a two-year trial period, it allows her to sell partnership interests into the corporation rather than actual assets, inventory, and equipment: “so, you get the value out of the company using your capital gains exemption.”

“It works something like two people carrying a shopping bag together,” Brown explains. If you take your grain or equipment out of that shopping bag, you can’t use the capital gains exemption. Instead a husband hands one handle of the shopping bag to the new corporation at 9. A continuation agreement between the corporation and the wife is drawn up, enabling the shopping bag to continue moving forward without the husband. At 10, the wife hands her handle of the shopping bag to the corporation, automatically dissolving the partnership. “Now they have all their assets in the corporation and the value of their handles is owed to them by the company as a shareholder loan.”

Brown says ever since 1985, when the capital gains exemption first came out, this has been a popular choice.

The ability to discuss, compare and deploy such a wide range of strategies is why Brown says she is so encouraged by the upcoming generation of farm owners. Whether they’re taking over the family business or starting out on their own, they are not leery of incorporating when it suits their operation, and they are not afraid to plan well into the future.

As far as Brown is concerned, fortune will favour those who think furthest forward. “Farmers have such ability to succession plan, they have the best rules, it’s amazing. Clients should not have to pay a bunch of capital gains tax,” Brown says. “But if they don’t plan early, they’re likely to pay more tax.”

Meanwhile, Lance Stockbrugger is one of the chartered accountants that Berry says is part of the reason for the growing number of incorporations. Stockbrugger also farms in LeRoy, Sask., and he points as well to recent farm profitability: “Now that we’re seeing more value, there are things we can do to protect that value.”

Part of that value has been realized from agricultural business activities. But not all of it. Increasing off-farm income also has significant impact on most modern farms’ money management strategies.

Corporate farms have an operational advantage in claiming only the annual earnings needed for personal living costs as income, leaving unused value for future business expenses and corporate taxation. Where off-farm income covers all personal expenses, incorporation can appear particularly attractive.

Incorporating also allows for converting taxable income into “active business income” payable to farm corporate shareholders as dividends, and enables the spread of the tax burden to spouses, parents, children over 18, or even non-farming relatives.

Information about farm corporations isn’t exactly easy to find, and at the coffee shop, direct ownership of shares forms the basis of many legendary tales of family fallout, which is why Stockbrugger always recommends a family trust be added where multiple parties are involved.

“You might not ever need a trust. A simple basic share structure might be just fine, but how do you know?” Stockbrugger asks. “The ‘simple’ corporations cost more money in the long run.”

From what he has seen, direct ownership of corporate capital works for some long-established partnerships that are quickly approaching retirement, but Stockbrugger says it’s a mistake to try to save money up front by keeping a corporation simple. A trust that has to be added to an established corporation is 10 times more expensive than paying for one to be built into a corporation at startup.

“If it’s complicated to you, it is probably a good structure,” Stockbrugger says. “The more things you can build into it now, the more it will help in the long term.”

This article first appeared as, “A trust for your corporation,” in the October 2014 issue of Country Guide

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