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Premier Jean Charest’s recent pledge to increase the capital-gains tax exemption for farm owners in Quebec could be good news for agricultural producers. The measure would offer farmers a tax break in the tens of thousands of dollars when passing their operation onto their child. But while a greater tax break may benefit a farm business in the near future, the high value of farm assets, economic volatility and an increasingly complex business environment presents numerous obstacles for the next generation of owners. These challenges need to be addressed if farm transitions -- in any province -- are to be successful.
Simply put, changing economic circumstances in agriculture demand that more thought go into the process of transferring the family farm. Without examining the issues and soliciting input from all family members, agricultural producers could put the future of their farms at risk.
Of equal concern is the potential for family relationships to become strained as result of the process. In the majority of farm transfers, parents act as ‘the bank’ by providing the financing required for adult children to takeover. In such situations, it can be difficult for parents to relinquish control, which can lead to conflict that may impact not only the family, but the business.
The key is to use a transition methodology to develop a succession plan. Transition planning provides a forum for clear communication between parents and children. In cases where siblings will be taking over together, or where cousins will be joining in a consortium, for example, those parties need to be involved as well.
During the planning process, issues such as governance also need to be addressed. After many years of mom and dad calling the shots, how are brothers or cousins going to make the decisions moving forward? Outlining the governance process saves time, money and trouble down the line. Transition planning also provides an opportunity to analyze the viability of the business now and into the future, which is particularly important if the farm will be supporting two or more families instead of one.
A complete plan considers where the business is today, where you want it to be and how you are going to get there. It also allows you to address all aspects of the transition process including the development of estate plans for non-farming family members and to ensure you transfer assets in the most tax-efficient way.
Trying to grow a business while planning a transition can be overwhelming. But with facilitation and assistance – including professional agricultural tax advice as well as assistance from those who understand the complex issues underlying family transitions – the process can be relatively smooth. Also, a facilitator can help ensure that communication is clear and open and that everyone is heard and understood.
While a tax break is always nice, it’s just one piece of the puzzle. Before you can take advantage of it, I encourage every agricultural producer to step back and see if the transition plan currently in place meets the needs of the business, and the family at least five years before retirement. This period allows the current owners to capture as much wealth as they can before the transition, assess the effects of the transfer on the business and develop alternate solutions where necessary.
Special to The Globe and Mail.
Bob Tosh, BSc., PAg, is a farm management consultant with MNP LLP. As one of the largest chartered accountancy and business consulting firms in Canada, MNP provides customized accounting, consulting and taxation advice. Mr. Tosh is based in Saskatoon and assists primary agricultural producers, agri-business, government and other key agricultural agencies with strategic planing and operational issues.
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