Farmers considering exiting supply-managed sectors should ask themselves several questions and seek advice from tax specialists
By Kate Ayers
Producers with quota may need to take extra steps to avoid significant income tax implications when selling their farm assets.
Bud Arnold, a senior tax manager for Baker Tilly in Elora, helps farmers navigate the sale of quota.
“Most supply management boards require that quota remain connected to a particular farm business,” he said.
“In some cases, these components can be separated within a related group, but it’s not usually possible to retain quota to provide a stream of lease income after selling the farm business.”
The process of selling the farm and quota may differ among producers, depending on if they sell the farm to someone within or outside the family.
“For farm transfers within the family, the entire farm is usually passed down to the succeeding farmer as a unit. If one component is left behind with the retiring farmer, it’s usually some or all the farmland,” Arnold said.
“This approach can provide the retiring farmer with an income stream from rent, if desired, and the flexibility to sell or mortgage that parcel of land to meet cash needs in retirement.”
Producers may have more options in the sale process if they are working with unrelated buyers.
“Sometimes a neighbour has the means and desire to increase his or her farm, and he or she would be happy to buy the entire operation,” Arnold said.
“Other times, the quota needs to be sold through the quota board’s auction process, and the land, buildings, and other farm assets would be sold piecemeal.”
The decision to sell the whole farm as one asset or to sell parts separately depends on the producer’s financial needs, market prices and regulatory requirements.
“Sometimes, the farmer wants a clean break to pay a debt, move away, or attend to a health concern. In these cases, selling the farm in its entirety is attractive,” Arnold said.
“Other times, the farmer wants to slow down gradually. Selling a piece of land one year, some quota another year, and another parcel of land with barns in another year allows for a gradual transition to retirement or his or her next life endeavour.
“This approach can defer more of the income tax that will become payable on sale into later years, which can be particularly helpful when the farmer has built up a lot of cash-basis tax deferrals over the years.”
Farmers should ask themselves a few key questions when considering the sale of their supply-managed operations, Arnold suggested. Producers should also discuss these topics with their business partners, if applicable.
The questions include
- Who do we want to take over our farm, or does that matter to us?
- When do we want to retire?
- How much income do we expect to need in different phases of retirement?
- How much are our farm assets worth?
- What limitations do the quota board place on our farm sale?
After farmers have addressed these questions, they should speak with their professional advisers or tax specialists.
“There is no justification for not seeking competent tax, legal and financial advice before making such a major financial decision,” Arnold said.
Such professionals can help producers lessen the risk and cost of potential tax consequences.
“In general terms, the increase in value of farm assets will be taxable to the farmer on sale, either as fully taxable recapture of tax depreciation deducted in past years or half-taxable capital gains,” Arnold said.
“Since 2016, farm quotas are treated in the same way as other depreciable assets and taxed in this way. Farmers should ask their tax advisers for an estimate of the income tax implications of a proposed farm sale.”
And income tax payments can often be lessened with a clear exit plan.
“This planning should begin as early as possible, because some planning techniques require two years or longer to be effective,” Arnold said.
“Tax planning techniques include spreading the tax on capital gains over several years and managing income levels between tax years.
“Individual vendors may also be able to claim the $1-million lifetime capital gains exemption on qualifying farm property, which can save about $250,000 of tax per person. These and other tax planning strategies are worth exploring!”
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