Farming in Canada is one of the oldest industries and still continues to play an integral economic role, domestically and beyond. Between traditional farming, food and beverage processing, ag-tech innovation and more, the industry contributed about $143.8 billion, or approximately 7%, to Canada GDP in 20221.
The sector has a lot more potential, given that farmers in Canada and around the world will need to increase food production by 60% between now and 2050 to meet demand2. At one time people thought the lack of technology would be the biggest challenge to growth, but the sector is embracing innovation. The biggest threat? A lack of succession planning from family-owned farms.
According to Statistics Canada3, 60.5% of farm operators were older than 55 in 2021, a number that’s been trending higher over the past few decades. But at a time when food scarcity is a growing concern, few have a plan to transition their business. As many as 88% of farmers say they have no written succession strategies in place4.
Preparing for the next generation
While succession planning doesn’t just involve families anymore – farmers might give their kids part of the business and sell the rest, while others are working with employees to take over operations – many people still do want to transfer their operations to the next generation because of a shared passion and pride. In the ag sector, the transition normally takes place in three stages – the transfer of labour, the transfer of management and the transfer of ownership.
“At BMO, we strive to engage with our clients and successors at appropriate times during the transition journey. We encourage inclusion of successors in the banking conversations at various stages, and welcome an open dialogue as the business transitions; tailoring our approach accordingly.” says Chris Costain, Director, Agriculture Industry Sectors at BMO.
Taking tax into account
As you develop your succession plan, it’s critical to consider how all family members – whether they’re taking over the farm operations or benefitting from the sale of assets – may be impacted from a tax perspective.
While there are several agribusiness-specific strategies that can help protect your business and family, there are two key tax considerations when contemplating farm succession: The Lifetime Capital Gains Deduction and the Intergenerational Rollover.
The eligibility requirements are not identical for both tax incentives, although in many situations both are available to potentially decrease or defer tax on transfers of qualifying farm property.
Lifetime Capital Gains Deduction
As a Canadian farm owner, you can use the Lifetime Capital Gains Deduction – nearly $1 million in 2023 – to shelter capital gains on the sale or transfer of land used in a Canadian farming business or an interest in a family farm business owned through a corporation or partnership. The deduction is reduced if the person has already used it for past claims.
Whether you qualify for this tax deduction will depend on several factors, including whether you are actively engaged in the business of farming and whether you’re earning more from income sources other than farming.
If you qualify, there are many ways to maximize its benefits. One strategy is called crystallization. It allows you to immediately trigger the Lifetime Capital Gains Deduction without the farm ownership changing hands. This increases the property’s tax cost base, reducing any potential capital gain on a future sale or transfer of the farm.
This approach is often combined with an estate freeze, which transfers future growth of the farming business to (younger) family members and locks in the current value of the farm so that when you pass away, your estate only pays capital gains taxes on the accrued gain at the time of the freeze. Any gains post-freeze are eventually taxed in the new owner’s (child’s) hands.
Intergenerational Rollover
With the Intergenerational Rollover, you and your family can, in theory, defer paying capital gains tax on qualifying transfers of the farm indefinitely. This strategy lets you pass down the family farm to your Canadian resident children or grandchildren on a tax-deferred basis either during your lifetime or when you pass away.
Your kids will inherit your tax cost base, which means they’ll be the ones responsible for eventually paying the tax unless they also qualify for this deferral strategy. But if they want the proceeds from a sale, versus having their own children take over the farm, then a potentially hefty bill (assuming the capital gains deduction isn’t available) will come due.
These are complicated strategies, so it’s important to work with a tax expert who can advise on the tax implications specific to your family situation, including the Alternative Minimum Tax (AMT). It’s important to understand the recent proposed changes to the AMT which could reduce the benefit of the capital gains deduction.
The family farm continues to serve an important role in the Canadian economy and, as such, receives special status under Canada’s tax law. However, planning for family farm succession requires consultation with professional advisors, as the tax rules are extremely technical and complex.
With farms remaining a cornerstone of the Canadian economy, it’s important that families take proper care in passing them down to the next generation. Talk to a professional who can walk you through these unique succession planning complexities.
1https://agriculture.canada.ca/en/sector/overview
2https://www.un.org/en/chronicle/article/feeding-world sustainably#:~:text=According%20to%20estimates%20compiled%20by,toll%20on%20our%20natural%20resources.
3https://www150.statcan.gc.ca/n1/daily-quotidien/220511/dq220511a-eng.htm
4https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210024401
