Before you sell the farm seek tax and legal advice

If you’ve decided it’s time to sell the farm, there’s one thing Rob Strilchuk wants you to know: you’ve already done the hard part by making that decision. Now it’s time to talk to a professional.

A partner with MNP’s tax and agricultural services, Strilchuk has noticed a very small uptick in farm families wanting to sell up and move on. And regardless of the reason for that decision — retiring with no one to pass the farm on to, or a balance sheet that just isn’t balancing anymore after a few tough harvests — he says the key now is to stay calm, plan an orderly exit and, most of all, resist the urge to call the auction house and just be done with it.

Rob Strilchuk

“You don’t want to knee-jerk this decision,” says Strilchuk. “You’ve built up all of this wealth and farm business value over the years, so why not spend the time and effort to build a game plan to preserve as much of that value as you can.”

GIVE YOURSELF SOME RUNWAY

“If someone is planning on winding down an operation, the key is to have a projection of that ahead of time,” says Strilchuk. “At the very least have one or two years warning so you can plan ahead.”

But plan what, exactly? In short: how to keep as much income as possible from the sale of assets and defer income where possible to spread out the tax bill. Farms have lots of assets — land, buildings, machinery, tools, pre-sold and unsold grain, perhaps some livestock — all of which come with their own particular tax implications. Tax rules around income from selling livestock, for instance, differ from rules around selling land and Strilchuk says there are strategies farmers can employ to help minimize a big tax hit.

“I’ve heard people say, ‘I’m going to have to give Canada Revenue 50 per cent,'” he says. “But 50 per cent of what? Not all of (what’s sold) is considered income. Farmers may have some assets that do not fully attract tax, and the rate is significantly lower,” he says.

For example, everything can be rolled into a limited company. “You can leave the land out or roll it in,” says Strilchuk. “But a company is a useful tool for having an auction.” That’s because income from the sale of assets, like cattle and equipment, can be held by the company, where it is subject to a much lower tax rate.

“Another option, if the farm is already set up as a company, is that you can sell the whole company as a turnkey operation. This is happening more often,” he says, adding that there are a surprising number of buyers out there willing to pay well for an entire running farm — lock, stock and barrel.

“Another benefit of the option of selling company shares as a going concern, is to capture the use of the capital gains exemption,” says Strilchuk. “Shares of the capital stock of a family farm corporation can be sold and if you still have your capital gains exemption available, you may be able to offset a portion of the gain.”

His point is that it takes time to structure the farm business in such a way that any sale income is subject to the lowest tax rate possible, so if you’re thinking of getting out of farming, talk to an advisor first and give yourself the time.

WHAT ABOUT THE LAND?

Land is perhaps one of the most valuable, and emotional, assets on any farm and Strilchuk has seen a lot of farmers labour — literally and unnecessarily — under the misapprehension that unless acres are being actively farmed at the time of sale, they won’t qualify for rollover benefits or capital gains exemptions.

“People might be ready to move into town, but they stay farming because they think if they stop they’ll lose certain tax benefits,” says Strilchuk. “They won’t in many cases.”

The legal term is “qualified farm property.” Land with this designation is eligible for tax benefits, and somewhere along the line people got the idea that this meant the land had to be under their own plough at the time of sale to qualify.

“I want people to know that just because land is no longer being farmed, that doesn’t mean it’s no longer qualified farm property,” says Strilchuk. “The history of each separate property determines whether or not it’s eligible for rollover or capital gains rules.”

A single farm operation often has multiple land titles, and each one has to be put through a use test. “If you bought a piece of property 20 years ago, actively farmed it for 11 years and rented it out for the last nine years, it would still qualify for rollover,” says Strilchuk. “If it was the other way around and you farmed it for nine years and rented it for 11, it might qualify for capital gains exemption, but maybe not for the rollover to the next generation.

“The history of every actual property, each individual title, has to be gone over with an advisor to make that determination. But the point is that even though someone no longer farms, they can still have qualified farm property.”

Speaking at numerous winter meetings this season, Strilchuk was struck by how many farmers don’t know if their land is qualified farm property or not, and is greatly bothered by the idea that many farmers ready to retire or sell feel coerced to continue farming by a tax rule that’s widely misunderstood.

IT’S NEVER TOO LATE

If Strilchuk has one piece of advice for farmers who have decided to sell, it’s to seek competent tax and legal advice first rather than call the auctioneer or the real estate agent. “Even if they’ve already made that call, there may be some things we can do to help,” he says.

He has a second piece of advice, too: when the dust settles and all your hard assets have been turned into liquid ones, don’t rush into anything.

“The proceeds don’t have to be immediately invested in something else,” says Strilchuk. He acknowledges that selling the farm is huge emotional deal. Even if it’s the right decision, it’s not an easy one; you’ve earned the right to take some space and think about what comes next. “Let the smoke clear then consider solid investments.

“It upsets me so much when people come into large sums of money and they look to invest in something right away. I ask people to settle down, go to the lake, even park it in a GIC while you think about what to do with it,” he says. “You really need to sit down and think about that capital and how you want it to (work for) you and your family.” FF