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When purchasing the next piece of farm land, you have two options regarding the legal name you may use: either your individual name or the name of a corporation. When deciding who owns the land, it's important to consider what will be best for you today and – considering if / when they will take over your agriculture operation – for your children in the future. Because there are pros and cons to either option, making the right decision isn't always straightforward.
Purchasing Land Using a Personal Name
There are several benefits to purchasing land in a personal name which you may find attractive. First, there is more flexibility in how you may use personally-owed land throughout the succession planning process. You may also sell the land to your corporation in the future with no immediate tax bill. Finally, you need only pay tax on personally owned assets – land included – if they increase in value in the future.
Conversely, the purchase price of land normally requires a significant investment and you will face higher personal income tax costs when paying for land purchased outside of a corporation. The additional income required to make new debt payments or pay cash for the entire land purchase will almost certainly push you into a higher tax bracket. And, because you will be paying more in taxes, you will likely not be able to purchase as many pieces of land. If you are unable purchase the quantity of land required to meet your farming business needs, this could negatively influence future succession plans.
Purchasing Land in a Corporation
Because buying land in a corporation costs less in terms of corporate tax dollars, it preserves any available shareholder loans for other uses – such as retirement vacation property, weddings, education for your children, family vacation or gifting money to your non-farming children – with fewer tax consequences as part of your succession plan. Your farm can use land owned by the corporation as part of succession planning and defer the personal tax for multiple generations provided your family continues to operate the farm.
However, that's not to say corporate-owned farm land is a perfect option. If you have a desire to own the land personally in the future, the corporation will pay tax on the increased land value following the sale to you as an individual. Moreover, with potential increases to the transition cost, land owned through the corporation also changes your succession planning considerations. You'll also want to consider potential legislative changes increasing the capital gains exemption in the future; it will be easier to utilize if you own the land in your personal name. While it is still possible to use the capital gains exemption on the sale of farm company shares, that will require some different succession planning discussions.
Keeping and Eye to Transition
There are financial costs both to transitioning farmland to the next generation or selling to a non-family member. The primary difference between the two is that selling to family generally occurs under favourable terms – both with financing and tax. Selling to a non-family member will depend on the nature of the auction / asset sale along with the significant tax charges on the assets themselves. At the end of the day, extracting the proceeds of a land sale from a corporation requires specific planning, while a personal land sale usually requires less.
What's driving you?
If immediate tax costs are the primary concern influencing your ownership decision, you are likely best to consider purchasing land in the corporation. You may face costs to change ownership in the future, but that's a part of business. The cost will be much less than the personal tax you'll have to pay on the purchase.
If you're more focused on simplicity and flexibility in the future, purchasing land in your personal name and paying the tax bill today is your best option. And if you don't know what your main driver is (or your family can't agree), consider purchasing the land in your personal name. If you later need or want it owned corporately, your accountant can help you make that change.
John Guthrie, CPA, CA, is a Business Advisor with MNP. He works closely with primary producers, agri-businesses and manufacturers to help them maximize the value in their operation. To learn more about succession, tax and land considerations for your farming operation, contact John at 204-727-0661 or [email protected]
Related Topics:Agricultural Tax; Personal Tax; Farmers
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