Every year the debate continues, as farmers wonder whether they should incorporate the family farm or not,” says Merle Good, business development – tax strategies, with Alberta Agriculture and Rural Development. “The answer is not that simple, but I have found over the years it depends on a farmer’s answers to 10 questions.”
1. Do you always defer grain income into the next year through deferred grain tickets?
2. Do you hold physical inventory over to the next year regardless of the price?
4. At the end of the year, do you always buy crop and livestock inputs to reduce year-end income and the resulting income tax bill?
5. Do you have to borrow significant operating capital to purchase these inputs?
6. Do you have significant debts, and are your principal payments more than 10 per cent of your gross income?
7. Is your main debt on equipment and operating loans or land debt?
8. Is there going to be a second generation jointly operating the farm in the next three to five years?
9. Are you planning to sell your equipment and inventory and rent your land out within five years?
10. Regardless of the answers to the other questions… do you hate bookkeeping enough to pay more taxes than necessary?
After reviewing the answers to these questions it will soon become apparent whether incorporating your farm business is appropriate. Of course the present income tax rate for a farm company is 14 per cent on the first $500,000 of taxable income. This rate is very attractive, especially if the farm has significant debts as the principal payments are being made with 86-cent after-tax dollars.
“One recommendation I usually make, unless farmland has a significant debt attached to the title, is that an ‘operating company’ be formed with only equipment and inventory rolled into the corporation,” says Good. “One of the main disadvantages to a company is that once land is rolled into the corporation tax free, it cannot roll out tax free back to a shareholder.
“For farmers still wrestling with the question of incorporation, fill out these questions and take them to your accountant for your year-end review.”