Succession Planning for Farms

Farm succession is a tricky exercise. Some children farm, others have moved away. Equipment is costly and has been skyrocketing lately. Taxes can be planned for but can be devastating if not properly looked after. Splitting up a farm between on-farm children can cause issues with economies of scale on input costs, equipment purchases and commodity risk diversification.

You might be surprised, but we understand farmers at BluePrint CPAs. We've grown up around them, we've helped them and we've seen their farms go from $1,000 per acre to over $20,000 per acre. We have helped farmers manage succession in cash crops, livestock and organic. There are some common themes that can be challenging to address. Keeping your farm in the family requires farm business planning, family harmony and farm succession, in addition to sound farm operations year-to-year.

"It's not what you take when you leave this world behind you. It's what you leave behind you when you go." - Randy Travis

Farm Business Planning

Farm succession has to go beyond tax planning and into ensuring that future generations have the financial flexibility and resources needed to properly operate and grow the farming business. Farm business planning requires analysis of future equipment purchases, financing considerations and farm strategy insofar as crop rotations, soil management, marketing, environmental stewardship and supply chains for inputs are concerned. Equipment sharing, risk management and leadership development are critical aspects of farm succession plans. We assist farmers with operating agreements, capital planning and farm forecasting as part of their overall farm succession and strategic planning processes.

Farm Human Resource Planning

Many modern farms are employing temporary foreign workers and local labour to help with various tasks throughout the growing season. The COVID-19 pandemic has introduced a new set of challenges for these farm operators and, yet again, has outsiders peaking in at farm operations. Ensuring that health and safety regulations are being met, training programs are adequate and labour regulations are being complied with is a time-consuming task. Between filing applications, managing travel, housing and disease containment and properly collecting and remitting payroll taxes, farmers have their work cut out for them. Many temporary foreign workers are grateful towards their employers and ensuring that your operation is leading a cutting edge practice is critical to your local reputation and the efficiency of your management practices.

Farm Financial Planning

Financial management for farms goes well beyond tax planning. Farmers have to be able to manage their cash flow, plan for capital purchases, access the right financing and measure profitability. There are many tools available to farmers to ensure that they have timely and high quality financial information to manage their farming operation. Moving financial management into "the cloud" is a great way to access outside advisors, bookkeepers and bankers and run a modernized financial function on your farm.

Family Harmony and Off-Farm Children

Let us paint a picture that perhaps you understand well. One child has stayed back on the farm and helps with chores everyday. He might never work hard enough or be a sound enough decision-maker to make mom and dad happy. But he gets his chores done and he doesn't ask for much more than what he's given. Another child wasn't interested in farm life and took off to University. Mom and dad helped and now he has gone on to a successful career in law. He comes home at holidays and loves family life, but forgets what it's like to get the crops sprayed as soon as the breeze has settled. He knows mom and dad have a lot on their plate and he respects his brother for staying back to help. Indeed, he's not sure what mom and dad would do without his younger brother.

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But there's a catch. Mom and dad are a bit harder on their farm child than they are on the child who can seem to do no wrong. Now a successful lawyer, he seems to have a new car every Christmas and always brings nice gifts. His little brother on the other hand doesn't have a tonne of cash but respects his brother for what he has accomplished. They're still great friends, but there are some matters that aren't discussed. What happens if dad gets sick? How is the off-farm sibling supposed get an inheritance? Or will he even get an inheritance?

Too often in farm families, the concept of family harmony isn't addressed early enough in succession planning. We help families preserve their relationships that competitiveness, financing and entitlements don't ruin Christmas supper. These issues require a subtle approach to mediation, consensus-building and conflict resolution. Left unaddressed, they can spiral out of control and jeopardize the family farm.

“You can't have the family farm without the family.” — Gilbert K Chesterton

Farm Succession Tax Planning

The Income Tax Act allows farmers to avoid income tax on the sale or transfer of their farm if it meets certain conditions. There are misconceptions in the ag community as to what those conditions are, but we're pleased to shed light on a few.

Transfers to Spouses and Children

In very specific scenarios, the Income Tax Act allows farms to be transferred to spouses and children without triggering income tax liabilities. The inter-generational transfer of farms between family members is important to Canadian society in terms of food security, the financial health of our ag sector and maintaining family control over farming operations. Working through the transfer provisions of the Income Tax Act is a detailed exercise that requires accurate tax accounting and analysis. This provision allows for the deferral of income tax, but does not eliminate tax liabilities altogether.

Farm Gain Exemption

Most farmers are aware of the $1m farm gain exemption but it's seldom well understood. There are specific criteria that must be met in the years leading up to a farm sale or transfer in order to qualify for the gain exemption. We help farmers access the gain exemption and help increase access to the exemption by farm family members, to the extent possible.

Rent Disguised as Sharecropping

Some rural bookkeeping practitioners have led their clients to believe that receiving rent-in-kind, or in bushels, is a sharecropping arrangement. While that's not necessarily false, nor is it necessarily adequate. The Department of Finance requires that a farm be "actively farmed" in order to qualify for a gain exemption (among many other conditions). Unfortunately, there's no clear definition for actively farmed. Sharecropping can be considered active farming; however, the nature of the sharecropping agreement must be assessed to determine its viability. Active farming requires that the landowner be engaged in the management of the farm. Rent is too passive and additional risks and rewards must be present in order to qualify for a farm gain exemption.

Managing Your Farm Estate

If you do intend to provide an inheritance to off-farm children, how do you plan on funding that inheritance? If you've waited too long to access affordable life insurance, then you may need to consider bank financing or farm sales. None of these options are the end of the world, but they often go against the goals and dreams of the operator that built the family farm. Don't wait on farm succession planning. You may view working with an accountant as favourable as getting a root canal, but the tax benefits can be significant and you'll sleep better knowing that your farming operation is being managed as a modern business that is as prepared as possible for an uncertain future.

Does your will properly reflect the handling of non-farm assets such as RRSPs, TFSAs and non-registered investments. Having sound legal counsel that offers full-service estate planning is valuable when you start considering factors such as failing health, family conflict and legal disputes. Nobody really wants to spend time thinking about these considerations, but proactive management does offer a certain peace-of-mind.

Comprehensive Farm Succession Management

In summary, farms are businesses like many others. Your ability to lead your farming business into the future with the best possible management practices will pave the way for successful transitions, tax minimization and sound farming operations. We believe that your farm succession plan has to go beyond taxes and into the operation of your farm after a transition. We might not own farms at BluePrint CPAs, but we do go to the grocery store and we understand how critical farms are too the functioning of our society.

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