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Many people wonder when it’s the right time to incorporate their farm partnership. The answer to this lies within the following questions:
The reason to incorporate a farm can be different for each farm family; however one of the primary reasons is often to gain access to the small business deduction available in the corporation.
Is your farming inventory growing each year? If your farm partnership has growing inventory levels, and you are waiting to sell the inventory when the price is right, you will experience a large income spike in the year you sell the inventory. A growing inventory can indicate it is the right time to incorporate the farm partnership.
Expected level of Income
If your farm partnership’s income has been steadily rising due to more production capability, lower interest rates, lower principal balances, or improved efficiencies, now might be the ideal time to look at incorporating the farm partnership.
Often, farmers will defer their grain cheques into January of the following year, such that by the end of January, they already have a very high income for the calendar year. This leads farmers to defer the current year sales into the next year, which starts to cause a circular problem. When this is happening to your farm partnership, it might be the right time to look at incorporating the farm partnership.
If your family farm manages the current year income by purchasing next year’s inputs, buying cattle, or buying commodities, you are essentially creating a problem that will continue to snow-ball. A point will come when it makes more sense to incorporate the farm partnership rather than continuing on this pre-purchasing and cattle deferral philosophy.
Estate and Succession Planning
If you are like the majority of farmers, you would like to see your children take over the family farm, but you do not have a valid farm succession and estate plan in place. By engaging in the discussions about incorporating your farm partnership, you will begin to develop your estate planning goals and objectives. The corporation can be a great vehicle to use for succession planning.
Once it is clear that your overall tax burden and your family’s goals could be managed by the use of a corporation, there are a few more items to consider:
1. When is the right time to incorporate the farm?
Most advisors would prefer to use January 1 as the time to schedule an incorporation, as it is the beginning of a new year. You don’t have to attempt to manage the income until the date of incorporation. In addition, you can personally receive salaries during the year, which are deductible expenses to the company.
2. Should you transfer the land to the company?
The answer to the second question really lies in the details of your particular situation. For instance, in Alberta, if you have a large debt load on the land, by including the land in the company, it will be possible to pay the principal balance with $0.84 on the dollar of revenue rather than $0.61 on the dollar of revenue. Each of the provinces will have similar deferrals. This will help you grow your business and become debt free much sooner. The next detail involves your current family situation – if you have children, are they involved in the farming operations? If you have some children who farm and some who do not, would you plan on splitting the farmland between the two groups of children? If the land is in the company, adequate planning can help you meet your succession goals.
3. Should you transfer partnership assets or interests?
The last issue deals with the transfer of assets from the partnership or the transfer of your partnership interest. There are many times that the transfer of partnership interests would be preferred, however, the particular details of your situation must be considered when planning for your farm partnership incorporation.
This is a very detailed area, and with proper planning, you can move your farming operation from a partnership to a corporation with little pain and many benefits. Your particular situation should be discussed with a tax accountant who is well versed in agricultural tax issues.
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