CFFO: Taxation And Family Farm Succession

By Suzanne Armstrong

We know that farm succession planning and transfer of farming assets to the next generation of farmers continues to be a concern in Canada. According to the 2016 Census data, only 8.4% of farms have written succession plans. Those pushing for the importance of farm succession planning are concerned about the hurtles our current taxation system presents. Earlier this year, Private Members Bill C-274 was brought forward in an attempt to address some of the inequities in the system that favour selling farm assets to someone at “arms-length” rather than within the family. Although this bill did not pass, the issue has come up again as part of the Liberal government’s review of tax rules for private corporations.

According to the government, their aim is to reduce or eliminate loop holes which would allow wealthy individuals, through private corporations, to lower their tax rates. The government still wants to serve the needs of genuine businesses and to create a competitive advantage allowing and encouraging expansion and investment in business success.

Most concerning is that some of the proposed changes would likely make it more difficult for family farm succession planning. The government recognizes this concern and aims to consider “whether there are features of the current income tax system that have an inappropriate, adverse impact on genuine business transactions involving family members.” The government claims the challenge is being able to distinguish genuine family business succession from tax avoidance schemes.

Which farms are affected by these rules? The proposed changes would impact farmers who have incorporated their family farm businesses. Incorporation of family farms is increasing but not common practice. According to the new 2016 Census data, 51.7% of farms in Canada are still sole proprietorships, and 22.9% are partnerships, leaving 22.5% as family corporations and only 2.7% as non-family corporations. This trend is on the rise, with “the rate of incorporation among farm operations [up] from 19.8% in 2011 to 25.1% in 2016.” Interestingly, while incorporated farms are far more likely to have written succession plans, still only about 16% of them do.

How can tax law promote family farm succession while also preventing tax evasion? It seems to be a delicate balance to strike. Among the suggestions from government to determine “genuine transfer of a business” is “the intent of the new owner to continue the business as a going concern long after its purchase.” Instituting a time rule, such as five years, to demonstrate the intent of the new owner in order to benefit from special tax rules would help with this distinction.

However, expecting that “the vendor not participating in the management and operations of the business” act as a test for genuine transfer would not be appropriate in many family farm contexts. In reality, succession of family farm businesses from one generation to the next often happens gradually over many years and even over decades. This is in part because farmers start working in the business early and often don’t like to retire.

The taxation system has many implications for family farm businesses. It is important that any changes will work to smooth the road to better succession of family farm assets within and between farming families.

Suzanne Armstrong is Director of Research and Policy for the Christian Farmers Federation of Ontario. The CFFO Commentary represents the opinions of the writer and does not necessarily represent CFFO policy. The CFFO Commentary is heard weekly on CFCO Chatham, CKXFM Chatham, CKNX Wingham, and UCB Canada radio stations in Chatham, Belleville, Bancroft, Brockville and Kingston.