ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law.
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Transcript of ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law.
ESTATE PLANNING FOR ESTATE PLANNING FOR FARMERS & RANCHERSFARMERS & RANCHERS
Colin SimmonsColin SimmonsCounsel West LawCounsel West Law
Integrate financial, legal Integrate financial, legal and tax aspects with and tax aspects with human or family human or family considerationsconsiderations
It is easier to deal with legal and It is easier to deal with legal and tax aspects of successiontax aspects of succession
Short term tax objectives can Short term tax objectives can conflict with succession planconflict with succession plan
A parent’s best interests are not A parent’s best interests are not always the same as the childrens’ always the same as the childrens’ best interestsbest interests
OBJECTIVES INOBJECTIVES INFARM SUCCESSIONFARM SUCCESSION
PLANNINGPLANNING
1. Security for Parents1. Security for Parents
Place to live for remainder of livesPlace to live for remainder of lives
Sufficient incomeSufficient income
2. Fairness for Children2. Fairness for Children
Awareness and acceptance by all Awareness and acceptance by all partiesparties
Avoidance family disputesAvoidance family disputes Difficult because farm assets are Difficult because farm assets are
usually worth more than non-farm usually worth more than non-farm assetsassets
Communication among family Communication among family members is essentialmembers is essential
3. Keeping the Farm in the 3. Keeping the Farm in the FamilyFamily
Farming child receives a viable Farming child receives a viable operationoperation
Farming child probably won’t be able Farming child probably won’t be able to pay fair market valueto pay fair market value
Potential conflict between the Potential conflict between the objectives of the parents and the objectives of the parents and the successorssuccessors
4. Eliminate or Minimize 4. Eliminate or Minimize TaxTax
Proper tax planning results in payment of Proper tax planning results in payment of little or no taxlittle or no tax Rollovers for farm assets - inter vivos and on deathRollovers for farm assets - inter vivos and on death $500,000 capital gains exemption $500,000 capital gains exemption Conservation easementConservation easement Right or things election on deathRight or things election on death
Taxation can be used to encourage farm Taxation can be used to encourage farm families to begin to create a succession planfamilies to begin to create a succession plan
5. Avoid Unnecessary 5. Avoid Unnecessary Professional or Advisor Fees Professional or Advisor Fees
You can pay me now or you can pay You can pay me now or you can pay me laterme later
Advisors should communicate with Advisors should communicate with each othereach other
Someone should be the quarterbackSomeone should be the quarterback
Tax Consequences:Tax Consequences:
Taxable disposition for capital Taxable disposition for capital gainsgains
Spousal rollover - s. 73(1) - Spousal rollover - s. 73(1) - automaticautomatic Can elect out of the rolloverCan elect out of the rollover Adjusted Cost Base or Fair Market Adjusted Cost Base or Fair Market
Value, nothing in betweenValue, nothing in between
……. continued. continued
Tax Consequences:Tax Consequences: Spousal rollover - s. 73(1) - Spousal rollover - s. 73(1) -
automaticautomatic Use of implied or constructive trustUse of implied or constructive trust
Married 40 years, all land has been Married 40 years, all land has been acquired and held in the husband’s nameacquired and held in the husband’s name
Interest in land transferred to wife during Interest in land transferred to wife during husband’s lifetime followed by husband’s lifetime followed by subsequent disposition - potential for subsequent disposition - potential for attribution of capital gainattribution of capital gain
If husband owned half interest as trustee If husband owned half interest as trustee for wife - she could use her Capital Gain for wife - she could use her Capital Gain Exemption (CGE)Exemption (CGE)
Tax Consequences:Tax Consequences:
Spousal rollover - s. 73(1) - automaticSpousal rollover - s. 73(1) - automatic Use of implied or constructive trustUse of implied or constructive trust
Implied and constructive trusts have been Implied and constructive trusts have been found to exist in matrimonial property cases found to exist in matrimonial property cases but there but not dealt with in tax casesbut there but not dealt with in tax cases
Property not transferred into spouses name Property not transferred into spouses name and subsequent disposition of beneficial and subsequent disposition of beneficial interest - no attribution of capital gaininterest - no attribution of capital gain
Tax Consequences:Tax Consequences: Rollover to child - s. 73(3)Rollover to child - s. 73(3)
QualificationsQualifications Land is in CanadaLand is in Canada Transfer to a child of the taxpayerTransfer to a child of the taxpayer Property was, before the transfer, used Property was, before the transfer, used
principally in the business of farming in which principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged the taxpayer’s children was actively engaged on a regular and continuous basison a regular and continuous basis
Different for pre and post June 1987Different for pre and post June 1987
. . . . continued. . . . continued
Tax Consequences:Tax Consequences:
Rollover to child - s. 73(3)Rollover to child - s. 73(3) Transfer for no consideration - rolloverTransfer for no consideration - rollover
Can’t elect out of this rolloverCan’t elect out of this rollover Consideration paid between Adjusted Cost Consideration paid between Adjusted Cost
Base and Fair Market Value is proceeds of Base and Fair Market Value is proceeds of disposition for tax purposes and becomes the disposition for tax purposes and becomes the Adjusted Cost BaseAdjusted Cost Base
Consideration must be provided to use Consideration must be provided to use CGECGE
Tax Consequences:Tax Consequences: GST is normally applicable on transfer GST is normally applicable on transfer
of land, except whenof land, except when Purchaser is registered for GST at the Purchaser is registered for GST at the
time of the transaction, the vendor does time of the transaction, the vendor does not have to collect GSTnot have to collect GST
All or substantially all of the assets of the All or substantially all of the assets of the vendor are being sold to a GST registrantvendor are being sold to a GST registrant
A parcel of land is being transferred to a A parcel of land is being transferred to a family member for that person’s personal family member for that person’s personal use and enjoymentuse and enjoyment
Canada Revenue Agency Canada Revenue Agency PolicyPolicy
There is no GST collected when There is no GST collected when interest in land is transferred to a interest in land is transferred to a family member for no consideration family member for no consideration and the family member is not deriving and the family member is not deriving income from the property.income from the property.
e.g. Land put into Joint e.g. Land put into Joint TenancyTenancy
THIS IS ADMINISTRATIVE POLICYTHIS IS ADMINISTRATIVE POLICY
IssuesIssues
AMTAMT CNILCNIL ABIL ABIL Pre-86 capital lossesPre-86 capital losses Clawback of Old Age SecurityClawback of Old Age Security Capital Gain ReserveCapital Gain Reserve Valuation of FMV and ACB of landValuation of FMV and ACB of land
Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land
Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land
InventoryInventory No rollover or CGENo rollover or CGE IncomeIncome Rights or things on death - still may be tax Rights or things on death - still may be tax
on death if tax is being deferredon death if tax is being deferred Deferred income problemsDeferred income problems
Strategy to transfer livestock to corporation Strategy to transfer livestock to corporation using s. 85 of the using s. 85 of the Income Tax ActIncome Tax Act
Use land and CGE to bring debt into corporationUse land and CGE to bring debt into corporation
Depreciable PropertyDepreciable Property Rollover to children but no CGE except Rollover to children but no CGE except
for buildingsfor buildings Strategy to rollover depreciables and Strategy to rollover depreciables and
transfer land at FMV to avoid recapturetransfer land at FMV to avoid recapture Deal with debtDeal with debt
Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land
Shares in the Stock of a Family Farm Shares in the Stock of a Family Farm CorporationCorporation Rollover and CGERollover and CGE All or substantially all of the assets of All or substantially all of the assets of
corporation have to be farm assetscorporation have to be farm assets Corporation may have to be purified to be Corporation may have to be purified to be
eligible to be rolled over or to use the eligible to be rolled over or to use the capital gains exemptioncapital gains exemption
Different qualifications for CGE and Different qualifications for CGE and rolloverrollover
Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land
Interest in a Family Farm Interest in a Family Farm PartnershipPartnership Rollover or CGERollover or CGE Capital asset for capital gains purposesCapital asset for capital gains purposes All assets relate to valueAll assets relate to value Clauses to preserve the partnership on Clauses to preserve the partnership on
the death of a partnerthe death of a partner
……. continued. continued
Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land
Shareholder AgreementsShareholder Agreements Provide for remaining shareholder to Provide for remaining shareholder to
continue business while the other continue business while the other shareholder is paid for equity on:shareholder is paid for equity on:
DeathDeath DisabilityDisability Voluntary withdrawalVoluntary withdrawal DivorceDivorce
Buy-sell provisions are different for Buy-sell provisions are different for non-farm businesses due to high capital non-farm businesses due to high capital and low income of farmsand low income of farms
Shareholder AgreementsShareholder Agreements
Shotgun clauses don’t really work on Shotgun clauses don’t really work on farms because shareholders often farms because shareholders often cannot afford to pay fair market value cannot afford to pay fair market value for the other’s sharesfor the other’s shares
Payout during lifetimePayout during lifetime Structured payout over timeStructured payout over time Put-call optionsPut-call options
Shareholder AgreementsShareholder Agreements Payout on death - life insurancePayout on death - life insurance
Avoid application of revised stop-loss rulesAvoid application of revised stop-loss rules Take advantage of rollovers to spouses and Take advantage of rollovers to spouses and
childrenchildren Use capital gains exemption when Use capital gains exemption when
availableavailable Capital dividend declared on the shares of Capital dividend declared on the shares of
the farming child who uses proceeds to the farming child who uses proceeds to purchase shares from other shareholderspurchase shares from other shareholders
Can be used to payout non-farming Can be used to payout non-farming childrenchildren
Farming child takes over farmFarming child takes over farm
WILLSWILLS
1. Young farm family1. Young farm family
Equally to all survivorsEqually to all survivors Land left until youngest child attains a Land left until youngest child attains a
certain agecertain age Other assets as each child reaches a Other assets as each child reaches a
certain agecertain age
WILLSWILLS
2. Mature farm family2. Mature farm family
If no children farm, use city willIf no children farm, use city will If children farm, succession plan must If children farm, succession plan must
be created first and then will drafted to be created first and then will drafted to fit planfit plan
WILLSWILLS
Process to Determine Process to Determine FairnessFairness
Mom and Dad must first agree with each Mom and Dad must first agree with each other on initial planother on initial plan
Plan should be discussed with each child Plan should be discussed with each child individuallyindividually
Family meeting should then be held to Family meeting should then be held to discuss the plandiscuss the plan
Perhaps several meetingsPerhaps several meetings
Process to Determine Process to Determine FairnessFairness
Family should consult professionals to Family should consult professionals to learn about available alternativeslearn about available alternatives
Family should meet again to decide on Family should meet again to decide on alternativesalternatives
Professionals should then be asked to Professionals should then be asked to put plan into effectput plan into effect
Fairness ToolsFairness Tools
Non-farm assetsNon-farm assets Shareholders loansShareholders loans AcreagesAcreages Payment by farming childPayment by farming child Farm assets that aren’t necessary for Farm assets that aren’t necessary for
the farm operationthe farm operation Life insuranceLife insurance
Colin SimmonsColin SimmonsCounsel West LawCounsel West Law
Calgary, AlbertaCalgary, AlbertaPhone: 403-252-1162Phone: 403-252-1162