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Still some potential pitfalls in proposed federal tax reforms

Accountant hopes effects are manageable

The federal government’s revised tax change proposals have got rid of the most egregious problems, but a few provisions could still cost farmers money.

That’s according to Mike Poole, a Brandon-based accountant with MNP, at a recent Keystone Agricultural Producers (KAP) advisory meeting.

“I think it’s relatively small and manageable,” Poole told reporters after speaking at the meeting here Nov. 2. “The biggest item is going to be that tax on split income.”

Poole also suspects the federal government, perhaps as early as the next budget, might make changes in how dividend income is converted to capital gain, although the change won’t interfere with parents selling family farms to their children. That was one of the unintended consequences of the first proposal, which triggered massive, widespread opposition from the entire small incorporated business sector, and especially farmers.

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Plan ahead

If it occurs, there are strategies to mitigate the impact, but they require advanced planning, Poole said later in a followup interview.

The biggest issue still in play is income splitting. Poole used an example of parents retiring from the farm and converting their common shares in the farm corporation to preferred shares to give them retirement income.

“We’re concerned right now that retirement stream could fall under the split income rules, which would then make all that retirement income subject to the top personal tax bracket on dividends, which would be in Manitoba about 46 per cent,” Poole said. “That could be a huge impact because if they’re thinking their tax rate is going to be much lower because they are drawing the money out over time now they have essentially reduced the value of that nest egg…”

A similar scenario could exist if preferred shares are issued as part of an estate plan to non-farming kids, he said. Any amount that goes to them could be deemed unreasonable by the Canada Revenue Agency and be subject to top personal tax.

“So we’re (MNP) bringing up these other items so that when they (government) do finalize the legislation we’re not going to get this retroactive effects happening,” Poole said.

“What happened was there were a lot of unintended consequences as a result of the (proposed) legislation. And that is something the minister of finance said — ‘there were items and results in there we just didn’t see.’”

Conversions

Given the 20 per cent, and growing, gap between the tax rate on dividend income and capital gains, Poole said he and other accountants have expected the federal government to stop the conversion of one to the other. And in fact it proposed doing just that with its most recent tax reforms.

The problem was it caught parents selling their farms to their children, making it more expensive tax-wise to sell to a family member than to an unrelated third party.

“If you went around our group at the firm level and you said, ‘what are you expecting coming put of the budget?’ my opinion would be we’re going to get something that’s more pointed at that income conversion into capital gains,” Poole said. “It might be me just being a pessimist, but I’d rather be a pessimist than surprised.

“I think they will shut the door completely on it.”

In an interview later he said if such a change is made the government could easily write the legislation so as to not affect farm sales to the owners’ children, or to add additional cost to a farm estate.

The incentive to convert dividend income to capital gain has evolved over time because the corporate small-business tax rate has been falling, while tax the rate on dividends has been rising, Poole said.

“Ten to 15 years ago when the dividend rate and capital gain rate were close enough together you’d never do this type of planning (conversion) because it just wouldn’t be worth it,” he said. “But when you get a 20 per cent differential now you have a huge incentive for taxpayers to use the income tax act as it is worded and achieve that type of a tax savings. I just don’t feel like they are going to allow that to continue. I hope I am wrong.”

If the federal government does shut down that conversion, there are ways for farmers to deal with it, including taking smaller amounts of money from the corporation over a longer period so the farmer is in a lower tax bracket. What’s left after paying the taxes can then be placed in a Tax Free Savings Account.

“With tax planning, time is your friend,” Poole said.

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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