Fed’s aim to reduce tax loopholes could create challenges for incorporated family farms
By Kaitlynn Anderson
Farms.com
With the federal government’s announcement of proposed taxation changes, farmers may want to visit their local MPs to express how agricultural operations could be affected before the October 2 deadline.
Despite the fact that this deadline falls during harvest season, Allan Sawiak, a partner with Kingston Ross Pasnak LLP in the area of taxation, still urges farmers to comment on the government’s proposal.
“It is important to note that most of the historical proposed changes from the Department of Finance have become law and therefore these proposals cannot be taken lightly,” Sawiak said in a letter on the CAFA website.
With the proposed reforms, announced in July, Finance Minister Bill Morneau wants to put an end to the taxation loopholes for individuals with incorporated businesses. These reforms are intended to ensure all Canadians are on a more equal playing field, according to a CBC News article.
But there could be some unintended consequences for farmers due to their business structures.
“There’s been a big increase in (the number of) professionals that have been using these structures,” Morneau said in a Toronto Sun article last month, referring to individuals with incorporated business structures who move some of their income to family members with lower tax rates.
The federal government refers to this practice of sharing revenue as income splitting.
Even though Morneau tends to mention professionals such as doctors and lawyers in interviews on the proposed changes, there are also many family farms that have incorporated business structures.
In fact, roughly one-quarter of Canadian farms (43,457 operations) are corporations, according to an article in the National Post.
And “after December 31, 2017, income splitting with your relatives will be subject to various restrictions,” Sawiak said, referring to farming operations.
“Splitting income with common relatives, such as your adult children and spouse, will be subject to a reasonableness test.”
This test will also be one of the many restrictions applied to any child’s Capital Gains Deduction (CGD).
A capital gain occurs when you calculate a profit after taking the price an investment (i.e. farmland) sold for, and subtracting what you paid for it. If you have a capital gain, you are eligible to claim a capital gains deduction in that tax year, according to the Turbo Tax website.
“Any portion of the gain that fails the reasonableness test will be penalized and subject to tax at the highest rate,” Sawiak said.
The reasonableness test determines the amount that would be paid to an unrelated individual for the same labour. Then, it is used to analyze any contributions from, and compensation received, by the relative being reviewed, according to Sawiak.
Combined with the other proposed restrictions, Sawiak believes that the changes will not only increase the amount of taxes paid by the family farm but will also make succession and estate planning more complex.
Interested in expressing your concerns on the federal government’s proposal? Find the contact information for your local MP here.