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Farm Succession Planning Skewered by Proposed Tax Changes

21/09/2017


​​What has “fair” taxation of the “wealthy one percent” have to do with taxing the transition of the family farm to the next generation? Based on the recently proposed federal tax changes, apparently a great deal.

Now, the proposed legislation does not explicitly prohibit the transition of a family business to another family member. It just exacts additional tax for it when compared to selling to a third party – a toll for the privilege of keeping it all in the family. While it is possible that this is an oversight and an unintended consequence of the proposals, it seems all business transactions between relatives are viewed only as tax loopholes rather than commercial sales between business owners.

Consider Mom and Dad, owners of a corporate farm planning for their eventual estate. One of their children is able and willing to take over the farm; however, their three other children have chosen different career paths. Wishing to leave an inheritance to all four children, Mom and Dad need to receive some proceeds from the farm on the transfer to the farming child in order to fund their retirement as well as provide for estate equalization.

Ignoring any available portion of the lifetime capital gains exemption, current legislation would facilitate this in a manner that requires the family to pay tax on the capital gain at a rate of 24 percent (using Saskatchewan tax rates). This result would be the same as if the shares were sold to an unrelated party – a fair outcome when comparing a sale to a related party with a sale to an unrelated party.

Under the newly proposed legislation, the family would be subject to tax of up to 40 percent on the buy-out of the shares by the farming child – just because they are related. Tax on the sale to an arm’s length party would remain at the current 24 percent. It is also worth noting that under both current and proposed legislation, the capital gains exemption is of limited use when transferring shares within a family. It has never made sense that a true transition of a business to a child or sibling would be more restrictive than to a third party; but rather than fix those deficiencies, these proposals have taken them even further by potentially carving out all related party transfers as dividends.

There was concern from the federal Department of Finance some transitions of businesses were simply masked maneuvers aimed at achieving a capital gains rate of 24 percent versus a 40 percent dividend rate; yet there is already a section in the existing legislation in place to deal with transactions primarily motivated by tax rather than true commercial sales.

The automatic higher tax rate for transactions within a family will undoubtedly influence decision making in any transition and, in some cases, will cause a multi-generation business to be sold outside of the family. The proposed changes could impose an unfair toll on the family business and significantly impact middle-class families that make up the small business community.

For more information on how these proposed tax changes may impact your existing or future succession plan please contact Wayne Paproski, CPA, CA, or Shanna Hoffman, CPA, CA, at 306.790.7900.​