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A look at Statistics Canada figures regarding the demographics of farmers reveals some trends which will continue to shape the Canadian agriculture industry.
Farm consolidation: In 1991, there were 280,043 farms in Canada. However, by 2011, that number had dropped to 205,730. Connected to this trend is the average farm size. Between 1991 and 2011, the average farm size increased from 598 to 778 acres while the number of farm operators decreased from 390,875 to 293.925, a 24.8% decline.
Age of a Farmer: Statistics Canada notes that between 1991 and 2011, the number of farm operators under 55 years of age decreased from 265,495 to 152,015 while the number of farm operators older than 55 increased from 125,380 to 141,920.
While improvements to farm practices and equipment have allowed farmers to work well past traditional retirement age, these trends of consolidation and increased age point to a significant turnover in farm assets in the years ahead.
While the transition of any family business has potential pitfalls, there is no doubt that dealing with a family farm carries emotional attachments. For these reasons, a detailed farm succession plan with input from professional advisors will be a valuable tool so as to meet the family’s needs and to allow for an orderly, and peaceful, transition.
For those in Ontario, the Ontario Ministry of Agriculture, Food and Rural Affairs has published comprehensive information regarding the components of a farm succession plan.
A key component of that plan will be the transfer of ownership of the farm’s real estate and assets. The goals of the family, tax considerations, and structure of the farm before and after the transition will all be factors to consider during the planning process.
If the farm is to be transferred from a sole proprietor to another sole proprietor, an asset purchase agreement covering the farm’s implements, inventory, and land can be drafted to transfer ownership to the incoming generation. Generally, this method allows the outgoing sole proprietor to use the one-time capital gains tax exemption of $800,000. If the farm is to be transferred from a partnership composed of spouses then the one-time capital gains tax exemption of $800,000 per spouse is doubled for a total of $1.6 million in exempt capital gains arising from the transfer of the farm.
If the farm is already incorporated, the incoming generation may instead consider purchasing the shares of the farm corporation from the outgoing generation. Similar to the asset purchase, the outgoing generation may still use the $800,000 per spouse of capital gains exemption on the proceeds of the sale of the shares. Additionally, this transaction is often considered simpler than an asset purchase as it avoids the need to valuate and transfer each asset, although valuation of shares may still be necessary.
A process known as an “estate freeze” may also be used to transfer assets. Through this method, the outgoing generation would transfer the assets of the farm to a corporation held by the incoming generation in exchange for fixed-value shares of that corporation. The current value of the assets transferred is “frozen” or “crystallized” through these shares. Depending on how the share structure and estate freeze is implemented, any future increase in the value of the transferred farm assets can belong to the incoming generation. The outgoing generation defers the taxes on the capital gain that would have been payable on a subsequent disposition of those assets, and instead will only be liable for any capital gains arising from the disposition of the fixed-value shares. Using this method in conjunction with the capital gains exemption previously described allows for a tax efficient transition.
Other provisions of the Income Tax Act may provide tax relief during either an inter vivos (between the living) or testamentary transfer. In an inter vivos transfer, the outgoing generation may be able to postpone tax on any taxable capital gain and any recapture of capital cost allowance until the child sells the property. Farmland, buildings, quota, shares in a family-farm corporation and interests in a family-farm partnership may qualify for this transfer. In a testamentary transfer, the estate of the outgoing generation may benefit from a tax-free transfer of the farm property to a child if certain conditions are met. This reduces the tax exposure arising from the disposition of the farmland and assets for which the estate of the deceased farmer is liable.
To finalize the transfer, changes to the will or any insurance, RRSP or pension beneficiary designations should also be made to complete the farm succession plan, ensure that the outgoing generation’s wishes and years of hard work are respected, and enable both the success of the incoming generation and continued strength of the farm.