Farmers’ concerns about the federal government’s proposed controversial tax reforms for private corporations haven’t fallen on deaf ears.
Finance Minister Bill Morneau says the reforms will be changed so as not to discourage farmers from saving for retirement, employing family members, or selling their operations to the next generation.
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“Our goal is not, and will not be, to change the ability to move a family business, a family farm, a fishing business from one generation to the next,” Morneau told reporters Sept. 28, after appearing before the House of Commons finance committee holding hearings on the changes Morneau and Prime Minister Justin Trudeau say are meant to eliminate tax breaks available for the richest and not the middle class.
“There may be technical fixes to make sure that we get that right.”
That’s welcome news to the Canadian Federation of Agriculture (CFA), one of many farm groups opposed to the proposed changes fearing they would result in higher tax bills for incorporated farmers and discourage farmers from selling their operations to their children.
“There has been a change in tone,” CFA president Ron Bonnett said in an interview Sept. 29.
Government officials have made similar points in meetings with the CFA, stating the intent is not to hurt agriculture, he said.
“Our message back is, ‘well, if that’s the case let’s make sure that we get it right,” Bonnett said.
“I think they realize that farmers are getting caught in a trap with these new proposals. But I think the thing is now that’s got to be followed up with real action to make sure the proposals are amended or farms are exempted from some of the provisions of these tax laws.”
CFA is working with accountancy firm MNP to provide the federal government with accurate numbers.
Ottawa’s proposals include restrictions on reducing taxes by “sprinkling” income to family members in lower tax brackets who don’t contribute to the company, limiting passive investments unrelated to the company, and converting regular corporate income to capital gains to be taxed at a lower rate.
The biggest issues for farmers are how the proposals impact farm succession planning and passive income, Bonnett said.
When the owners of an incorporated farm sell their operation to family members now they face a 25 per cent tax bill on the earnings, but under Ottawa’s reforms it would jump to 46 per cent, according to several accountancy firms, including MNP.
The government raised the issue in its discussion paper, asking for feedback to accommodate “genuine intergenerational business transfers while still protecting against potential abuses.”
If retiring farmers have to pay more tax, that means buying farmers will have to pay more adding to their debt, Bonnett said.
The government flagged passive investments, pointing out it gives corporations more pre-tax money to invest than wage earners. But most incorporated farmers reinvest their retained earnings into their operations.
While most of the proposed changes affect only corporations there are a couple of exceptions, Mike Poole with MNP in Brandon, Man., wrote in an email Sept. 27.
A person receiving income from a partnership may be subject to the expanded Tax on Split Income (TOSI) rules, he wrote. One example is if a parent was farming in a corporation and was making payments for custom work, or other services, to a partnership operated by their son and daughter-in-law. To be taxed at the highest marginal tax rates, the amount received by the partnership for the custom work would have to be considered unreasonable under the circumstances. There is also a risk that the unreasonable portion of the custom work expense deducted by the corporation could be denied.
Ottawa’s proposed changes would also affect the capital gain exemption of children inheriting farmland. Instead of being able to apply their lifetime capital gain exemption on the value the farmland gained from the time they were born until the time the land was sold, the exemption would only apply on the value gained after the child turned 18.
Premier Brian Pallister, a chartered financial consultant, who ran a business advising farmers on succession planning before re-entering politics, also opposes the Liberal proposals.
“This is poorly thought out,” he said in an interview Sept. 28. “This is destructive potentially to the family farm in the sense… it creates a disincentive for people to take risk and to enter into the farming life.
“I don’t see the case being made that the present rules are in any way unfair or inequitable.
“They’ve got to back off. They have no choice in my mind.”
Liberal MP Wayne Easter, who also chairs the House of Commons finance committee, says the government is getting the message.
“I think the government and the minister have made it clear there won’t be any unintended consequences to farms as a result of these proposals, therefore there will be corrections made,” he said in an interview Sept. 29.
Easter, a farmer, former president of the National Farmers Union and a former parliamentary secretary to the minister of agriculture, spoke out about the proposed changes early on.
“I think the objective of the government going to fair taxation is one that a great many people agree with,” Easter said. “However, when you do something like that there sometimes are unintended consequences and you’ve got to recognize that as well. That’s what consultations are all about. Consultations end on Oct. 2 and we’ll have to be watchful for what comes out after that. I know the minister has been out and about and across the country and before the committee. He has taken a lot of heat on this issue. He’s in a listening mode.”