In Bruce County alone, 62% of the land is dedicated to the agriculture industry with 63% of farms being family-owned. Over $255 million in gross sales annually is generated by 3,750 different farm operators.
Incorporating a family farm can most certainly bring real benefits to both the estate’s planning and to the taxation rate of the property. However, there are many legal and financial issues that must be reviewed before the family farm owner can choose to incorporate the property.
Anyone thinking of incorporating their farm should sit down with their lawyer and accountant and determine if their family farm is suited to becoming incorporated. While it is a complicated process there are financial advantages, such as, incorporation creates a new entity with which can property can be owned and money can be borrowed.
If the farm is sued or if there is a loss the amount to be paid is limited to the assets of the corporation and your personal assets are no longer at risk.Furthermore, it limits personal liability. If the farm is sued or if there is a loss the amount to be paid is limited to the assets of the corporation and your personal assets are no longer at risk.
It also allows for lower taxes. In Ontario there is a $400,000 small business tax incentive which is a tax deferment which allows you to leave money in the farm and it is only taxed when you take it out of the corporation. This allows more money to purchase new machinery and upgrade the farm.
If you incorporate there is share ownership, which is easier for estate planning. Incorporating also allows income splitting to various family members by giving shares or putting them on the corporation’s payroll. In estate planning it allows for the transfer to the next generation through shares over time and CMA facilitate tax planning.
Articles need to be filed to incorporate and the Minute Book needs to be maintained. The corporation will also have to file an income tax return each year.
There is increased bureaucracy, as you will have to file paperwork with the corporation. You would become an employee of the corporation and will have to make payroll remittances.
It is very important to determine if you have utilized the capital gain exemption that each farmer has and if you have not reached the $750,000 limit that could be an issue that would really be a disadvantage as to incorporate.
Incorporating has benefits, however the legal and financial issues should always be considered before making complex business decisions, especially incorporating a family farm. More detail to follow in a further article on the issue of capital gain exemption.