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Selling Quota? Tax Rule Changes in Effect January 2017

26/10/2016


​This release was originally published in the Western Producer and has been reproduced with permission.

Changes to federal tax legislation directed at business will also have an impact on agricultural operations starting January 1, 2017. The supply managed farms that may buy and sell quota stand to see significant increases in their tax rates in the new year. What are your options as someone who owns quota in one of Canada’s supply managed sectors – dairy, turkey, eggs and meat poultry? Let’s take a look at what this change could mean for your farm.

Consider Selling Now Before the Rate Change​

As well as possible increases in the inclusion rate for capital gains, changes to taxation on the sale of quota may have serious implications for anyone considering succession planning or a sale in the next three to five years. However, unlike the possible inclusion rate increase, this change is not just a possibility; it is about to be passed by the majority Liberal government and will take effect for transactions on or after January 1, 2017.

No exclusions were included in the legislation changes spe​cific to agriculture or quota systems. That means that agricultural business will be paying the larger tax bill for sales occurring in the new year.

What Does this Mean for My farm?

Currently gains on the sale of quota realized in a corporation are taxed at the same rate as standard business income, to a maximum of about 27 per cent. With the new legislation in effect, rates on the capital gains portion could be set as high as 51 per cent.

The following example illustrates how the corporate tax will change and the total impact that change will have on the revenue from a $2 million gain:

 

Even when dividends are paid to shareholders, and the 31 per cent refundable tax amount is available, the bottom line is still a significant increase in the total tax burden from 2017 on.

One way to avoid this is to plan ahead and trigger a sale. You might even consider a transfer of quota without the money change hands immediately. If you are completing a succession plan for instance you may want to complete it in such a manner that you trigger the tax to be charged now instead of next year.

The sooner you meet with your tax advisor the more time everyone will have to crunch the numbers and look at various options. You don’t want to leave it until the last minute, as some options may no longer be available.

Ron Friesen, CPA, CA, is a Business Advisor, Taxation Services with MNP. He can be reached at 306.664.8324 or email [email protected]