If anyone knows how to keep financial and other documents in order, it’s Lacey Frizzell. Her consulting business helps farmers and businesses organize their financial information, then set up systems to keep it organized.

“Farmers are unique,” says Frizzell. “There’s a lot of information being thrown at us from a variety of sources, which makes it very hard to keep organized.”

WHY IT MATTERS: Tax season isn’t that far away. A good record keeping system can ease farmer headaches.

Don’t file it unless you really need to keep it, she advised.

Will anyone on your farm management team look at it again? Is it relevant for legal or financial reasons? “What is the purpose?” Frizzell asked.

Usually, the purpose is the Canada Revenue Agency (CRA).

Generally, the CRA requires businesses to keep records on hand for six years. That is, six years after the end of the last tax year they relate to. If your farm’s year-end is Dec. 31, as of January 2026, you should be storing records from as far back as your 2019 fiscal year. If your farm’s year-end is Oct. 31, by January 2026 you should still have records around from your 2018-19 fiscal year.

This covers most expenses and income, but paperwork related to capital purchases should be kept even longer. Keep receipts for anything that would be relevant if you sold or wound down your farm. This includes any land or equipment showing the book value (i.e., initial purchase price). Selling buildings, quota or any equipment you’ve been depreciating has tax consequences — and the CRA might ask for original purchase documents.

The bottom line: you don’t need to keep everything, but check with your accountant if you’re not sure.

Paper or pixels?

Once you’ve decided to keep that receipt, you have to decide if you’ll file it as paper or as a digital record. Both have downsides. If you choose a paper system, you’ll be printing out email attachments and bank transfer notifications. If you choose digital, you’ll be scanning many paper receipts.

Frizzell loves technology, but she uses a paper-based system. “I still recommend that people print everything because paper is still seemingly king,” she said.

First, she says, technology is never 100 per cent reliable. Hard drives fail. USB sticks get lost. Cloud services have storage limits and generally there is an annual fee associated with the service.

Your technology can also become obsolete. If you’re storing receipts through an online bookkeeping program, what if the software company goes out of business? If you change bookkeeping programs, will you still be able to view scanned invoices from past years? Will the records always be readily available and easy to locate?

“I would love to be more enthusiastic about digital record-keeping,” says Frizzell. “I’m just finding that there’s no live technology that you own as an individual, without paying a subscription.”

A third potential problem is the safety of your digital information. “Is your information being shared on someone else’s platform? I caution people on what information they want to share.” In a worst-case scenario, a hacker may have access to all your digital information.

If you do keep your records online, Frizzell recommends working with your local technology guru to set up appropriate firewalls and anti-virus programs.

Rules are for everyone

No matter where your records are stored, a good bookkeeping system has a set of standard operating procedures (SOPs) followed by everyone on the farm.

For example, make sure you know where originals are. “Ultimately there should be one central location where records are held,” Frizzell said. “Especially for audit purposes and recall.”

Some bookkeeping programs allow more than one person to upload scanned receipts and invoices straight into the software. This is convenient for employees picking up parts or materials; they can scan and upload their receipts before they come home from town. But where will you have them store the original paper copies?

With more than one person inputting information, bookkeeping can become messy. If one person uploads receipts from the local “Co-op” and another adds invoices from the “Coop,” your books could show two separate input providers. It’s important to set up standard procedures or make sure the bookkeeper has an eye on things.

It’s also important to have a backup plan for your bookkeeper. If something happens to them, can someone else access your financial records?

Your farm, your plan

The best system is the one that works for your farm and is kept up to date.

Accountants aren’t usually looking at your record-keeping (depending on the type of financial statements you need) but at your bookkeeping. Unless your financial records will be professionally audited, you’re keeping records to serve requests from the CRA and your own managerial needs.

Since nobody but your farm team needs to see a lot of the information, you have an opportunity to develop an system perfect for you.

Decide who needs access to the books and the bank accounts. This will be unique to every farm. Some farms have just one manager; some have several. Sometimes limiting access to accounts can safeguard your finances.

Some staff might need access to your filing system, maybe to check receipts or invoices. But, Frizzell says, “Not all employees need access to everything.” Some bookkeeping programs use password protection to restrict access to some information while still allowing staff to access specific files.

On some farms, several members of the management team might want to access the bookkeeping system. As a farm manager herself, Frizzell says, “I would strongly urge to see paper copies of invoices.”

Frizzell files her paper copies by date and by enterprise (for her, that means separating the cattle bills from the cropping bills). She also keeps separate files for invoices and receipts that they access more frequently.

Large farms might have a chief financial officer. Even small farms though typically have just one person in charge of financial record-keeping. Sometimes, a second person might be actually paying the bills. Frizzell prefers a “check and balance system.”

This could mean one person writes the cheques and a second person reviews them, or it could mean requiring two signatures on each cheque.

As online bill payment becomes more common, Frizzell recommends using an online cash management service that allows you to set up a two-person system for these payments. For example, one person can prepare e-transfers, a second person must approve them. (If you’re looking into this, search for “two to sign” accounts, or “dual sign” accounts.)

Check and balance systems protect farms against the rare, unhappy situation where one partner so desperately needs cash that they resort to “borrowing” from the farm. These systems can also help reduce simple errors. Who hasn’t typed 47 when they meant 74? “A lot of things are human driven, and as humans, we do make errors,” says Frizzell.

Keep it current

Your system is only useful if it’s up to date. For large farms, this could mean inputting information daily. Smaller farms might opt for monthly. If regular bookkeeping sessions are not for you, your system may need a simplifying redesign, or maybe it’s time to hire a bookkeeper.

There are cost savings and benefits to good records.

Accountants typically charge by the hour. They will need less time to calculate taxes if your financial records are well-maintained and reasonably error-free. The horrors of a CRA audit also increase exponentially if your records are hard to find or not available.

Frizzell has found some farmers reluctant to pay for bookkeeping when they know they could do it themselves. But bookkeepers can also take on tasks like developing environmental farm plans, or making sure vegetable production is up to Generally Accepted Accounting Practices (GAAP) standards.

If you want to learn to do your own bookkeeping (or train someone new) could you pay your current bookkeeper to train you? There are also courses available.

“Some of it is pretty simple,” Frizzell says, “but then there’s things that you need to figure out like what capital cost allowance depreciation class does the gravity wagon go in or that new tractor.”

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Corn followed soybeans lower, but was supported by strong export demand and possible export limits in Ukraine.

Wheat futures fell slightly, but were bolstered by an export tax in top-producer Russia.

The most-active soybean contract on the Chicago Board of Trade (CBOT) fell 31 cents to $13.85-3/4 per bushel, losing 2.2 per cent, its biggest drop since Oct. 12, 2020 (all figures US$).

CBOT corn slipped 5-1/2 cents to $5.26 per bushel, while wheat shed 3-1/4 cents to end at $6.72-1/4 per bushel.

Rains across much of Brazil’s growing regions bolstered parched crops, as the country slowly begins its soybean harvest, which could ease supply worries.

“Each week we go by, we’re picking up harvest in South America,” said Don Roose, president of U.S. Commodities.

Falling palm oil futures further weighed on soybeans, while the U.S. Department of Agriculture’s announcement of fresh export sales of 132,000 tonnes of soybeans to China for shipment in the 2021-22 marketing year did little to strengthen the market.

Despite the drop, there is still upside potential in soybeans, according to Dan Anderson, broker at ED+F Man Capital.

“If you look at the rally, the dips have been shallow and we tend to remain fairly bullish,” he said.

Corn fell after gaining early, as discussions in Ukraine about possible export limits offered support.

USDA reported private U.S. corn sales totaling 128,000 tonnes to Japan and 100,000 tonnes to Israel, both for shipment in the 2020-21 marketing year.

Top importer China bought a record 11.3 million tonnes of imported corn last year, according to General Administration of Customs data.

Wheat, too, benefited from China’s increased imports, with a record 8.38 million tonnes of wheat imported in 2020.

— Reporting for Reuters by Christopher Walljasper in Chicago; additional reporting by Gus Trompiz in Paris and Naveen Thukral in Singapore.

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Corn and soy futures also rose as tightening supplies, particularly of soybeans, and lingering concerns about South American crops amid dry early-season weather supported prices.

Chicago Board of Trade (CBOT) wheat posted its strongest weekly gain in nearly four months, while corn notched its fifth weekly gain in six weeks. Soybeans dipped slightly on the week in a second straight weekly decline.

Grain markets were propelled higher on Friday by surging wheat a day after USDA cut its supply outlook and as Russia considers imposing a wheat export tax and a grain export quota to help stabilize rising domestic food prices.

Russian officials are considering imposing a wheat export tax for the period of Feb. 15 to June 30, four sources familiar with discussions told Reuters Friday.

Sources familiar with government plans said the tax could be set at around 2,000 roubles (C$34.40) per tonne; one source said a tax of 25 euros (C$38.76) is also under consideration.

That source also said the government plans to introduce temporary quotas for overseas shipments of wheat, rye, barley and maize.

Meanwhile, Russia’s Sovecon agriculture consultancy downgraded its 2021 wheat crop forecast on Friday, citing the worst crop conditions in a decade.

“Global wheat stocks in that report were five million tonnes below trade expectations, U.S. stocks came down and there’s news about Russia wanting to put quotas and taxes on exports. Wheat is rightfully leading this market higher,” said Craig Turner, senior ag broker at Daniels Trading.

CBOT March wheat futures ended up 18 cents at $6.14-1/2 a bushel (all figures US$). A three-day rally has taken March futures up 7.8 per cent, the strongest such gain since July.

January soybean futures were up 7-3/4 cents at $11.60-1/2 a bushel, while March corn gained 2-1/4 cents to $4.23-1/2 a bushel.

Investors are monitoring South American corn and soy prospects following dry early-season weather in key production areas.

Widespread rains are expected in central and southern Brazil and northern Argentina next week, while a drier pattern envelops northern Brazil, according to meteorologists.

— Karl Plume reports on agriculture and ag commodities for Reuters from Chicago; additional reporting by Gus Trompiz in Paris and Naveen Thukral in Singapore.

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Bill Toews of Kane certainly was. The retired farmer says the total tax bill (municipal and education) on one of his quarter sections in the Rural Municipality of Roland jumped $1,004, up 30 per cent from last year to $4,351. That’s $27 an acre in taxes.

In 2016 the same quarter saw a 61 per cent increase in taxes relative to 2014. Toews wasn’t alone then and isn’t this year either.

“It’s not fair anymore,” Keystone Agricultural Producers (KAP) president Bill Campbell said in an interview Oct. 18 while combining barley on his farm near Minto.

“The bare land does not send kids to school. It’s the people… so why do we base my tax bill on land and yet somebody in town just pays on their house?”

Why it matters: Farmers are paying more than other taxpayers as farmland values rise and other properties, like houses, stagnate. This approach doesn’t fairly reflect the ability of farmers to pay, some say.

In 2016 farmland taxes jumped dramatically across most of the province. One Red River Valley farmer saw his taxes double. The unprecedented increases prompted some farmers in the rural municipality to delay paying their taxes in protest.

Shifting burden

Property taxes are driven by property values. As values increase so do the taxes. Famers are willing to pay their fair share, Toews said, but the burden, especially for school divisions in farming areas, has dramatically shifted to farmers because of rising land prices, and away from other property owners, creating inequity.

“I know for a fact that some residences have started to pay less education tax on property because of the assessed value of farmland, especially in the Red River Valley, because the land is so valuable,” Brad Curtis, superintendent of the Red River School Division headquartered in Morris, said in an interview Oct. 17.

“Farmland (values) the last 10 years have just jumped through the roof. The residential properties haven’t. You could see some houses paying less now than they did five years ago and see farmers paying two or three times as much.”

The assessed value of Toews’ quarter is up 37 per cent from last year. Coincidently, the education tax bill from the Red River School Division on that land is also up 37 per cent or $800.

Property taxes are based on two main components — the assessed value of property and the mill rate set by municipalities and school boards.

Farmland taxes vary with the value of land and the needs of the local municipality and school division. Total taxes on a quarter section of land in the Rural Municipality of Lorne owned by this reporter and a family member are up almost 13 per cent from 2017. While the education tax portion is up just seven per cent, municipal taxes went up 22 per cent.

The assessed value of the land was up 18 per cent.

Doing the math

How farmland taxes are determined.

The Manitoba government’s assessment branch determines the assessed value of farmland every two years based on its market value multiplied by a portioning factor assigned to that property class. Manitoba has 10 property classes, including farmland, residences, businesses, pipelines and railways.

The portioning factors for farmland and residences, are 26 and 45, respectively. So the assessed value of a quarter section of farmland with a market value of $1 million, is $260,000 ($1,000,000 X 25% = $260,000).

The amount of taxes on that property will be $260,000 multiplied by the mill rate.

Municipalities and school boards set their operating budgets and then adjust their mill rates to collect from taxpayers the money needed to cover those budgets.

It’s relative

Traditionally when property values jumped municipalities and school boards reduced their mill rates accordingly, but that doesn’t help farmers when the assessed value of farmland has skyrocketed relative to other property.

The Manitoba government ordered all school divisions to cap their tax increases to local taxpayers at two per cent, which the Red River School Division did. Still on that one quarter Toews’ education tax bill jumped 37 per cent, underscoring how the tax burden shifted to farmers.

While some argue that’s fair given higher land prices boosts farmers’ net worth, Campbell counters “it doesn’t reflect your ability to pay.”

Higher land values make farmers wealthier on paper, but to capitalize the land must be sold and then you’re no longer farming, he added.

KAP has suggested to restore fairness municipalities should reduce the portioning factor assigned to farmland. If municipalities won’t do it individually the province should order them to, KAP has said.

KAP delegates passed a resolution last November calling on the Manitoba government to fund education through personal and corporate income taxes and by taxing residences.

KAP members also passed a resolution asking the Manitoba government to remove the cap on its farmland education tax rebate program, which refunds 80 per cent of the education tax on farmland up to a maximum of $5,000.

In 2015 the cap cost farmers $7.5 million in rebates, then KAP president Dan Mazier told the meeting. He estimated the cap would cost farmers $10 million in 2016.

Farmer input needed

KAP is counting on a Manitoba government review of the public kindergarten to Grade 12 education system, to begin in 2019, to find a fairer tax system for farmers, Campbell said.

Asked for more details, a Manitoba government official emailed the following statement: “The K-12 review will include public consultation on a wide range of topics and Manitobans will be encouraged to voice their concerns and suggestions on how to improve the education system.”

Campbell said it’s important for farmers to take part in the consultations.

“We need to get people engaged because this is not going in the right direction,” he said.

“There seems to be almost an acceptance by urban people that this is all right and this is good. But as long as their taxes remain in line or reducing, they’re hidden from the realities of what is actually happening with the demands of our school divisions.”

As an interim measure KAP wants the Manitoba government to reduce the portioning factor assigned to farmland, Campbell said.

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All cattle producers are coming to terms with the significant tax influence over the past month. The healthy margins throughout 2017 caused a huge surge in feedlot demand during November and December. At the same time, the cow-calf producer held off on sales, waiting for the New Year. We now find larger-than-expected supplies coming onstream while feedlot operators are sharpening their pencils. Buyers are basing purchases on forward contracts for live cattle and the feeder market has some work to do.

In east-central Saskatchewan, a group of black medium-frame steers weighing 935 lbs. traded for $170; however, in central Alberta, medium-frame Simmental mixed steers weighing 958 lbs. traded for $184. Simmental steers weighing 835 lbs. traded for $176 in east-central Alberta.

Lighter weight categories under 700 lbs. traded $3-$5 below week-ago levels. Red mixed steers weighing 575 lbs. were quoted at $220 landed in southern Alberta feedlot, while larger-frame 600-lb. red mixed heifers were quoted at $193.

Alberta packers were buying fed cattle on a dressed basis in the range of $272-$276 delivered; this is down from last week’s price range of $275-$280. Live sales were quoted from $163 to $165. The U.S. fed cattle market traded at US$123 in Kansas, up $3 from last week. This should lend a supportive tone to the feeder complex. Alberta feedlot margins are in the range of $120-$140 per head, but operators are content with current numbers and don’t need to reload just yet.

— Jerry Klassen manages the Canadian office of Swiss-based grain trader GAP SA Grains and Produits Ltd. and is president and founder of Resilient Capital, specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204-504-8339.

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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.

Plan ahead

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

• Read more: Comment: A failure to communicate
• Read more: Comment: The loudest voices against tax reform are not neutral

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.

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The most evident is an impressive deluge of evidence-free rhetoric claiming that the proposals are an attack on everything from the middle class to maternity leave for female doctors to farmers and even mom-and-pop corner stores.

Far less visible, but probably much more important, are the number of economists and tax and accounting professionals who are taking the discussion paper seriously. Even those who may be strongly opposed to the tax tightening are offering detailed and constructive advice.

Still, almost absent in this debate are any voices defending the idea of tax fairness.

A newly formed Coalition for Small Business Tax Fairness penned a letter to Morneau opposing the tax reforms, claiming that “two-thirds of small-business owners earn less than $73,000 per year and half of those earn less than $33,000.” Magicians call this misdirection but in this case, let’s call it spin: the numbers are correct – they just have nothing to do with the debate at hand.

It’s unlikely that the modest earners identified by the small-business lobbyists will be affected at all by the proposed tax changes, although we still don’t know the details of the government’s proposals. We do know from the minister’s remarks that only individuals with a private company – a Canadian-controlled private corporation, or CCPC – have even a chance of being affected.

As my colleagues and I showed in a study published in the peer-reviewed Canadian Tax Journal last year, less than five per cent of taxpayers in the bottom half of the income spectrum – with incomes below $27,500 – even owned one of these private companies (based on 2011, the most recent year for which we had data). Among those in the bottom 90 per cent – with incomes below $68,800 – less than 10 per cent had a CCPC.

Now let’s look at the top earners – people the coalition and other critics would rather we forgot. Almost half of those in the top one per cent, with incomes above $163,300, owned a CCPC. And more than 70 per cent of those in the top 0.01 per cent, with incomes over $2,305,700, owned one.

Requiring millionaires who use their CCPCs for aggressive tax planning to pay more tax is certainly not an attack on the middle class or mom-and-pop corner stores.

The Coalition for Small Business Tax Fairness (and many other more strident voices) claims CCPC owners should also have the right to amass wealth in their private companies after paying only the 15 per cent CCPC tax rate, then pass that wealth to the “next generation” (their children) tax free.

But is it fair for CCPC owners to be able to multiply their lifetime $800,000-plus capital gains rollovers three or four or five times for just one business? That’s one of the practices that Morneau’s proposals seek to end. Shouldn’t one lifetime rollover be more than enough? Even one of these rollovers is a much richer tax break than people without a CCPC get. And if you do own a CCPC, you have to be rather rich to have substantial capital gains in the first place.

It’s valuable to compare the public discourse on tax-rate unfairness for the rich and the poor. In the case of private companies, a number of mostly high-income individuals face the prospect that their effective marginal income tax rate may increase from 15 per cent (if they successfully sprinkle dividends to family members who will not need to pay any income tax on those dividends) to a maximum of about 50 per cent – in line with what all other upper-income earners who don’t own CCPCs pay on their wages, salaries and self-employment incomes.

Some tax professionals are constructing examples in which they claim Morneau’s proposals would saddle small businesses with tax rates of 80 to 93 per cent. But these examples make the ridiculous assumption that CCPC owners would not rearrange their affairs – for example, by simply paying out their private company incomes to themselves as salaries, which would bring them back to the top tax rate of 50 per cent.

On the other hand, there are hundreds of thousands of low-income seniors who face marginal income tax rates of 75 to 100 per cent and even higher – the so-called poverty trap that has persisted for decades. Where are their voices? Who’s defending them?

Why are 100 per cent tax rates OK for low-income seniors, yet many among the top one per cent become apoplectic when the finance minister proposes to bring their tax rates back in line with that of every other high-income individual?

Of course, Morneau’s proposals are a work in progress. This is a complex area of tax law, so consultation is clearly important.

But the loudest voices are not neutral. They are the ones with the strongest vested interests – and their interests don’t necessarily accord with those of the people they claim to represent.

Michael Wolfson is an expert adviser with EvidenceNetwork.ca and a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa. He was a Canada Research Chair at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada.

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Finance Minister Bill Morneau’s tax reform has been a communication disaster. Various claims made about Ottawa’s intentions to revamp our tax system for small corporations have been ridiculous. Some claims are predicting a recession due to the changes proposed, while others are declaring the end of entrepreneurship as we know it. Just silly. We should all take a collective deep breath and figure out how changes will impact our economy. What needs to be underscored though is how Morneau’s vision for taxing small corporations will impact our agri-food sector.

• Read more: Proposed tax changes could hit family farms hard
• Read more: Succession planning at risk

Generally, the tax system is not really about pensions, legacy, and social programs. Yet for a family-owned business, it is, and there are thousands of them in agri-food. In farming, Canada now has more than 43,000 incorporated farms, compared to 23,000 incorporated farms in 2001. Despite the fact that we have fewer farms today, more of them have opted to convert their operations into a corporation to provide an incentive to the next generation to take over the farm.

Proposed changes on capital gains would make it more expensive for a current family member to acquire the farm than for a third party. This is a critical piece of a highly complicated puzzle. Keeping families and jobs in rural Canada is not an easy task, and many agricultural producers are using our tax system wisely to secure the future of their businesses. In food processing, retailing and in the food-service sector, countless family businesses are wondering how family values immeasurably embedded in anything the corporation does can survive the next generation.

Income sprinkling is another issue Morneau is attempting to address. Presently, corporations can hire family members who work for the enterprise which reduces the tax rate for everyone. Current rules about who can be compensated and at what level are ambiguous, at best. Morneau wants to change that, and for a good reason.

Several small corporations pay family members who do not necessarily work for the company to pay less taxes. This practice should stop, but family businesses are really a different breed. Defining tasks in a family-owned business can be difficult. Many of the contributions made by family members are ad hoc and not easily categorizable.

Recipes, tricks of the trade, family traditions, all matter a great deal to whatever a small food outlet is doing. It is nothing like an accountant, a doctor, or a dentist. A family business is like, well, a family. The enterprise survives daily by relying on favours and duties as assigned. On a family-owed farm, a restaurant or in a small food processor, job profiles are vague, at best.

This political nightmare began in July when Ottawa launched a consultative process on how best to address tax planning practices that it believes are being used to gain unfair tax advantages. Individuals set up corporations to pay less taxes in a variety of ways. Ottawa’s intentions are noble, but it is the bombastic tone used as a backdrop to promote the plan to Canadians that has been less than effective. Consultations end on October 2.

What has really caused many of the problems is the awful, condescending rhetoric coming out of Ottawa, labelling small-business owners as a group of cheats, greedy tax evaders trying to dodge the system by using loopholes. That was simply insulting.

The government anticipates that the new regulations will bring in barely $250 million a year. For those thinking that the Liberals are looking for ways to increase revenues for the government to pay for a ballooning deficit, they are wrong. This is really about politics, purely and simply.

Trudeau’s equalitarian agenda to serve the so-called middle class is motivating the government to implement these changes. The tax regime needs change as some small corporations are using current tax rules to save money unjustifiably. Most have been quite vocal in recent weeks, but their corporations will survive the changes.

However, the stakes are much higher in agri-food and farming. This is not about being unwilling to pay more taxes. Rather, it is about the viability of an entire economic sector. Our tax regime should differentiate and give our rural economy and family corporations some level of immunity. In fact, Ottawa should think of fiscal incentives the agri-food sector can use to grow.

Right now, it is not clear how this can be achieved. As Ottawa is attempting to bring more fairness to our fiscal landscape and fix what is largely an urban issue, it shouldn’t penalize our agri-food sector.

Despite Morneau’s disgraceful performance as a tax reform salesman, changes will most likely happen, to the despair of many. Changes to our tax system are obscure concepts for most Canadians who have never had a company.

Even Canadians with corporations would have a hard time understanding what is being proposed. The confusion that has led to the hysteria we are seeing today is really the government’s fault and no one else’s. When it comes to taxes, painting everyone with the same brush is unacceptable.

Ottawa will get its way in the end, but it should at the very least accommodate the unique intricacies of our agri-food sector.

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Since that unveiling of proposals, debate on the merits of each point has been impassioned. Debate has since polarized along ideological dogma. Canadian society must decide where they wish small business to be and what role it is to play in our future.

• Read more: Farm groups line up against feds’ tax proposal
• Editorial: The taxman cometh

Canada was built by entrepreneurs investing their ingenuity and physical effort to get ahead in a new nation. As a nation, we have done a complete “180” from that time. Today small businesses (many are incorporated) that make up 98 per cent of firms in Canada and 88 per cent of private employment growth nationwide have been called tax cheats and utilizing “loopholes” to circumvent taxes. This is a stark change over the past century.

We need to understand and appreciate that small business creates wealth for all Canadians while government recycles and redistributes it. Without small business we would have a shortage of wealth for government to redistribute. We should encourage wealth creation by small business for our collective well-being.

Proposals put forth would curb income splitting with family members of Canadian controlled private corporations (CCPC) and curb passive investments in CCPCs. There appear to be more CCPCs being formed in recent years due to an expanding economy and a widening tax rate between personal and the small-business rate.

The proposal to curb income splitting would require a family member to prove their worth to the CCPC before a dividend could be paid. A spouse who has an off-farm job may not qualify despite being a shareholder in the farm business. The decision will be left to CRA to determine if the dividend paid is “reasonable.” I cannot imagine who among us wishes to prove to CRA our family member actually did contribute to the business. If there are abuses let’s stop them while leaving legitimate businesses alone by limiting dividends by age of shareholder.

Completely absent in this debate is the recognition of risk in the management of a CCPC. Risk is priced into every market. It exists whether we recognize it or not. If a person is a higher risk to lend money to, the lender demands a higher interest rate. There must be a premium available for someone to take the risk of beginning a business; a chance to do well and earn more than would normally be available by working for a wage. If that premium is taxed away, (curbing passive investing) then the elevated risk is no longer worth the effort. Who then do we work for? This proposal is valuing risk at zero, an illogical situation.

To clarify the concept of passive investments in a CCPC, we need to understand that, if small business earns a profit there are choices a manager has for that profit. Either a wage could be paid to the manager/owner (they always get paid last and only if there is a profit), new equipment could be invested in or the profit could be retained in the company. Profit retained by the company would attract taxation at the small-business tax rate.

The after tax money is either paid out to shareholders as a dividend or invested passively for use in future to cover operating costs or any number of expenses that occur even if there is no profit (including maternity leave, medical insurance, vacation time, statutory holiday pay, sick time) none of which are part of the self-employed pay package.

Let us be clear: any wage or dividend paid out to an employee or shareholder faces that person’s marginal tax rate. Any passive investment income inside the CCPC faces the highest marginal tax rate which in Manitoba is 50.4 per cent.

Anyone with a personal taxable income below $202,800 would have every incentive to pay out dividends from a CCPC to avoid the high tax rate (50.4 per cent) inside the CCPC. Tax integration ensures passive income received within a CCPC and paid out to a shareholder will be taxed at the same rate as if received by that shareholder on investments held outside a CCPC.

Curbing passive investing in a CCPC is problematic as without surplus cash available, what happens in a poor year?

After a number of years and a profitable business, retained earnings may accumulate providing a source of funding for expansion or for the owner’s retirement. Changing the rules to affect retained earnings and the return on them after decades of planning is unfair to those retiring or nearing retirement and will cause many CCPCs to be collapsed.

The proposal to affect passive investing in a CCPC should be scrapped, or simply eliminate the small-business tax rate entirely.

There is a problem with income splitting by too many Canadians within the CCPC structure and that should be dealt with to ensure fairness in the tax system. Triple taxation of dividend capital passively invested (eliminating refundable dividend tax) is outrageous, punitive and entirely unnecessary. Tax law already provides strong incentive to pay out passive income from a CCPC.

The proposals as they stand make establishing a new corporation questionable from the outset, although new businesses would benefit from the corporate structure by limiting personal liability.

If a wage earner feels the self-employed incorporated business owner is the panacea they search for, then establish your own business. Go for it, and find out for yourself.

Terry Fehr is president of Meadowlark Honey. He lives near Gladstone, Manitoba.

The post Opinion: Proposed tax changes for corporations poorly structured appeared first on Manitoba Co-operator.

Manitoba’s minister of agriculture has already added his voice to the growing calls for Ottawa to reconsider the massive overhaul and Keystone Agricultural Producers is asking its members to participate in government consultations before the October 2 deadline.

“This is very concerning for us,” said Minister Ralph Eichler, speaking to the Manitoba Co-operator last week. “We see this as a next step in succession planning, not a way to try and beat the government out of tax dollars. It’s more of a way to ensure that the next generation of farmers will be able to take over and assume that farm.”

The proposed changes will make it more difficult to share farm income with spouses and children, discourage farms from renting out land and make it harder for farmers to sell land to their own children.

“We should be putting rules in there that make it easier for succession not more difficult,” said Keystone president Dan Mazier. “The average age of a farmer is 55 or 56 years old in Canada and in the next decade there is going to be billions of dollars’ worth of land and assets being transferred in some way, shape or form. So I think we need to get on and look at capital and tax structures and have that conversation, that’s a very healthy conversation, but that is not what this proposal is.”

• Read more: Farm groups line up against feds’ tax proposal

He added it’s frustrating to hear farmers be lumped into a category with tax cheats or the ultra-wealthy, rather than recognized as small-business owners using the tools available to them. Income sprinkling is no more a tax loophole than an education rebate, Mazier said, adding the tax code should be set up to help businesses overcome the challenges faced by their respective industry.

“They are calling this a loophole; that’s not right, we all live within the taxation system and run our businesses within it and have tools available,” he said. “There is a whole system set up, not for loopholes, but to incentivize farmers to spend more money, or invest back into your business… that’s how businesses are built.”

Eichler noted that as small-business owners, producers don’t have a lot of safety nets.

“As you know we don’t have maternity leave for farmwives, we don’t have unemployment (insurance) we can rely on, this is a business all of its own, a unique business, but one that feeds the world, so we can’t put them at risk and we’re very concerned about that particular proposal that’s being brought forward by the federal government,” said the minister.

Producers have also been critical of how the changes were introduced and when consultations are taking place. With the 75-day-long consultation period falling during farmers’ busiest time of year, Mazier said it has been challenging for producers to get out and have their voices heard.

“Getting clarification has been really difficult as well… just trying to get to the bottom of what these proposed changes would mean has been really difficult,” he added.

In its analysis, the Canadian Federation of Agriculture has said that “if these changes are implemented as proposed, farmers will face higher costs with fewer options to manage business risks, and the complexity of the proposals could lead to other unintended consequences” and that the “added uncertainty could discourage business investments right at a time when farmers are making plans to position their operations toward meeting the ambitious targets outlined in the 2017 Federal Budget, which identified agriculture as a key growth sector.”

Dozens of business organizations have raised concerns over the proposed changes, which would be the largest tax code revision since the 1970s, and the 42-member Coalition for Small Business Tax Fairness is pressuring the federal government to change course.

Eichler said that if those who drafted the proposal had a deeper understanding of agriculture and farm businesses, a better plan could have been brought forward.

“We need to have a clear understanding about the risks that are involved in running a family farm and whether they are incorporated or non-incorporated is really not important for the discussion — in my mind it’s about making sure they are sustainable long term in order to make sure that their family can come back to the family farm if they want,” he said. “They are proud of the fact the next generation may be able to take it over, but if this impact comes forward, it may limit the ability of the next generation to assume the family farm.”

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