Using a Corporation

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 A farm business can be carried on under any one of a number of alternative forms of organization; sole proprietorships, partnerships, joint ventures and corporations. While sole proprietorship is still the most common form of ownership, adopting a corporate structure can have many management, tax and estate planning benefits under certain conditions.
Key Strategies

Tax rates
Income tax rates for companies vary depending on the type and amount of income. The income tax rate on an Alberta company’s first $500,000 of active business income is about 12 per cent or $60,000. On the same $500,000 of business income, an individual Alberta resident would pay tax of approximately $240,000 (2016 tax rates).

On the surface, the corporate tax rate might seem to offer significant savings, but this savings is in fact only a deferral. Eventually, when funds are withdrawn as dividends, some additional personal tax will result. Currently, business income earned directly by a top-rate taxpayer results in almost the same total tax as when the income flows through a company and is paid out as a taxable dividend.

The real advantage is with respect to the portion of the earnings not paid out immediately by the company, and, therefore, the personal tax is deferred. This deferral is often for a very long time - in some cases, beyond the lifetime of the farmer.

A farmer has the option of moving personally-owned land into a company or holding it personally. If land is held personally, the operations of the farming business, including the inventory, can still be transferred to the corporation.

A farmer may want to keep the land out of the company to preserve flexibility of future distribution. In a situation where children want to take separate parcels and go their own way, it will be difficult to transfer land out of the corporation without a negative tax impact.

Land held personally can be rented by the corporation. Where the land is mortgaged, the rent could be used to pay the interest. The Canada Revenue Agency does not seem to require fair market value rent but would likely find rental losses a problem where rent was not charged at a reasonable value.

Since active income earned in a corporation is subject to a lower rate of tax, there will be additional after-tax cash available to service the principal portion of long-term debt on land inside a company.

Land with an accrued gain can be transferred to a corporation, and the "$750,000 capital gains exemption" to "lifetime capital gains exemption".

Farm houses and other buildings
Farmers have the option of owning their house personally or through a farming corporation. If the farmer owns the house personally, a reasonable portion of light, power, water, telephone and fire insurance is deductible as a farm expense. A reasonable portion of house repairs are also deductible. Capital cost allowance may also be taken on the dwelling in proportion to the business portion of the house.

Tips and Traps
If the decision is made to retain ownership of the farmhouse personally, any capital cost allowance claim on a farmhouse may disqualify it for the principal residence exemption (potentially on the entire house value).
Although the house is owned personally, expenses related to the house may be paid through the farming corporation. The proportion of the expense, such as utilities or property taxes relating to personal use, should be charged back to the shareholder. This can be done by way of a charge to the shareholder loan account, or as a wage to the shareholder or as a taxable benefit.

A farmer may also personally own farm buildings other than the principal residence. As an alternative to having the farming corporation pay rent to use the building, the corporation could pay insurance for the building on the farmer's behalf in lieu of rent. Technically, a rental statement would be required, but presumably the rent would be offset by the expenses (you also need to consider GST issues).

In certain situations, a company may build or make improvements on land owned by a farmer. A taxable benefit may arise even if a caveat indicates the company's ownership interest in these improvements. In addition, a potential legal issue exists as any permanent fixture on land is considered part of the land

Income Splitting
There is an opportunity to split income among family members by means of salaries and dividends and thus reduce total personal tax payable.

In setting up a corporation, draft the Articles of Incorporation carefully. It may be important to have individuals subscribe for different classes of shares to allow for future income splitting by distributing dividends to different shareholders. See section on Income Splitting with Corporations.

Estate Planning and Transfers
It is easier and less costly to transfer shares in a company than it is to transfer individual assets of a business.

Limited Liability
While shareholder liability is usually limited to the amount invested in the company, lenders usually require shareholders to personally guarantee loans. However, limited liability can be important if the company is found liable in a lawsuit.

Family Involvement
A properly structured company can allow family members to participate in the farm business and receive income while leaving the control of the business in the hands of one family member.
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For more information about the content of this document, contact Dean Dyck.
This document is maintained by Joel Bokenfohr.
This information published to the web on July 28, 2014.