ESTATE PLANNING FOR ESTATE PLANNING FOR FARMERS & RANCHERSFARMERS & RANCHERS

Colin SimmonsColin SimmonsCounsel West LawCounsel West Law

Integrate financial, legal Integrate financial, legal and tax aspects with and tax aspects with human or family human or family considerationsconsiderations

It is easier to deal with legal and It is easier to deal with legal and tax aspects of successiontax aspects of succession

Short term tax objectives can Short term tax objectives can conflict with succession planconflict with succession plan

A parent’s best interests are not A parent’s best interests are not always the same as the childrens’ always the same as the childrens’ best interestsbest interests

OBJECTIVES INOBJECTIVES INFARM SUCCESSIONFARM SUCCESSION

PLANNINGPLANNING

1. Security for Parents1. Security for Parents

Place to live for remainder of livesPlace to live for remainder of lives

Sufficient incomeSufficient income

2. Fairness for Children2. Fairness for Children

Awareness and acceptance by all Awareness and acceptance by all partiesparties

Avoidance family disputesAvoidance family disputes Difficult because farm assets are Difficult because farm assets are

usually worth more than non-farm usually worth more than non-farm assetsassets

Communication among family Communication among family members is essentialmembers is essential

3. Keeping the Farm in the 3. Keeping the Farm in the FamilyFamily

Farming child receives a viable Farming child receives a viable operationoperation

Farming child probably won’t be able Farming child probably won’t be able to pay fair market valueto pay fair market value

Potential conflict between the Potential conflict between the objectives of the parents and the objectives of the parents and the successorssuccessors

4. Eliminate or Minimize 4. Eliminate or Minimize TaxTax

Proper tax planning results in payment of Proper tax planning results in payment of little or no taxlittle or no tax Rollovers for farm assets - inter vivos and on deathRollovers for farm assets - inter vivos and on death $500,000 capital gains exemption $500,000 capital gains exemption Conservation easementConservation easement Right or things election on deathRight or things election on death

Taxation can be used to encourage farm Taxation can be used to encourage farm families to begin to create a succession planfamilies to begin to create a succession plan

5. Avoid Unnecessary 5. Avoid Unnecessary Professional or Advisor Fees Professional or Advisor Fees

You can pay me now or you can pay You can pay me now or you can pay me laterme later

Advisors should communicate with Advisors should communicate with each othereach other

Someone should be the quarterbackSomeone should be the quarterback

Tax Consequences:Tax Consequences:

Taxable disposition for capital Taxable disposition for capital gainsgains

Spousal rollover - s. 73(1) - Spousal rollover - s. 73(1) - automaticautomatic Can elect out of the rolloverCan elect out of the rollover Adjusted Cost Base or Fair Market Adjusted Cost Base or Fair Market

Value, nothing in betweenValue, nothing in between

……. continued. continued

Tax Consequences:Tax Consequences: Spousal rollover - s. 73(1) - Spousal rollover - s. 73(1) -

automaticautomatic Use of implied or constructive trustUse of implied or constructive trust

Married 40 years, all land has been Married 40 years, all land has been acquired and held in the husband’s nameacquired and held in the husband’s name

Interest in land transferred to wife during Interest in land transferred to wife during husband’s lifetime followed by husband’s lifetime followed by subsequent disposition - potential for subsequent disposition - potential for attribution of capital gainattribution of capital gain

If husband owned half interest as trustee If husband owned half interest as trustee for wife - she could use her Capital Gain for wife - she could use her Capital Gain Exemption (CGE)Exemption (CGE)

Tax Consequences:Tax Consequences:

Spousal rollover - s. 73(1) - automaticSpousal rollover - s. 73(1) - automatic Use of implied or constructive trustUse of implied or constructive trust

Implied and constructive trusts have been Implied and constructive trusts have been found to exist in matrimonial property cases found to exist in matrimonial property cases but there but not dealt with in tax casesbut there but not dealt with in tax cases

Property not transferred into spouses name Property not transferred into spouses name and subsequent disposition of beneficial and subsequent disposition of beneficial interest - no attribution of capital gaininterest - no attribution of capital gain

Tax Consequences:Tax Consequences: Rollover to child - s. 73(3)Rollover to child - s. 73(3)

QualificationsQualifications Land is in CanadaLand is in Canada Transfer to a child of the taxpayerTransfer to a child of the taxpayer Property was, before the transfer, used Property was, before the transfer, used

principally in the business of farming in which principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged the taxpayer’s children was actively engaged on a regular and continuous basison a regular and continuous basis

Different for pre and post June 1987Different for pre and post June 1987

. . . . continued. . . . continued

Tax Consequences:Tax Consequences:

Rollover to child - s. 73(3)Rollover to child - s. 73(3) Transfer for no consideration - rolloverTransfer for no consideration - rollover

Can’t elect out of this rolloverCan’t elect out of this rollover Consideration paid between Adjusted Cost Consideration paid between Adjusted Cost

Base and Fair Market Value is proceeds of Base and Fair Market Value is proceeds of disposition for tax purposes and becomes the disposition for tax purposes and becomes the Adjusted Cost BaseAdjusted Cost Base

Consideration must be provided to use Consideration must be provided to use CGECGE

Tax Consequences:Tax Consequences: GST is normally applicable on transfer GST is normally applicable on transfer

of land, except whenof land, except when Purchaser is registered for GST at the Purchaser is registered for GST at the

time of the transaction, the vendor does time of the transaction, the vendor does not have to collect GSTnot have to collect GST

All or substantially all of the assets of the All or substantially all of the assets of the vendor are being sold to a GST registrantvendor are being sold to a GST registrant

A parcel of land is being transferred to a A parcel of land is being transferred to a family member for that person’s personal family member for that person’s personal use and enjoymentuse and enjoyment

Canada Revenue Agency Canada Revenue Agency PolicyPolicy

There is no GST collected when There is no GST collected when interest in land is transferred to a interest in land is transferred to a family member for no consideration family member for no consideration and the family member is not deriving and the family member is not deriving income from the property.income from the property.

e.g. Land put into Joint e.g. Land put into Joint TenancyTenancy

THIS IS ADMINISTRATIVE POLICYTHIS IS ADMINISTRATIVE POLICY

IssuesIssues

AMTAMT CNILCNIL ABIL ABIL Pre-86 capital lossesPre-86 capital losses Clawback of Old Age SecurityClawback of Old Age Security Capital Gain ReserveCapital Gain Reserve Valuation of FMV and ACB of landValuation of FMV and ACB of land

Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land

Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land

InventoryInventory No rollover or CGENo rollover or CGE IncomeIncome Rights or things on death - still may be tax Rights or things on death - still may be tax

on death if tax is being deferredon death if tax is being deferred Deferred income problemsDeferred income problems

Strategy to transfer livestock to corporation Strategy to transfer livestock to corporation using s. 85 of the using s. 85 of the Income Tax ActIncome Tax Act

Use land and CGE to bring debt into corporationUse land and CGE to bring debt into corporation

Depreciable PropertyDepreciable Property Rollover to children but no CGE except Rollover to children but no CGE except

for buildingsfor buildings Strategy to rollover depreciables and Strategy to rollover depreciables and

transfer land at FMV to avoid recapturetransfer land at FMV to avoid recapture Deal with debtDeal with debt

Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land

Shares in the Stock of a Family Farm Shares in the Stock of a Family Farm CorporationCorporation Rollover and CGERollover and CGE All or substantially all of the assets of All or substantially all of the assets of

corporation have to be farm assetscorporation have to be farm assets Corporation may have to be purified to be Corporation may have to be purified to be

eligible to be rolled over or to use the eligible to be rolled over or to use the capital gains exemptioncapital gains exemption

Different qualifications for CGE and Different qualifications for CGE and rolloverrollover

Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land

Interest in a Family Farm Interest in a Family Farm PartnershipPartnership Rollover or CGERollover or CGE Capital asset for capital gains purposesCapital asset for capital gains purposes All assets relate to valueAll assets relate to value Clauses to preserve the partnership on Clauses to preserve the partnership on

the death of a partnerthe death of a partner

……. continued. continued

Transfer of Farm Assets Transfer of Farm Assets other than Landother than Land

Shareholder AgreementsShareholder Agreements Provide for remaining shareholder to Provide for remaining shareholder to

continue business while the other continue business while the other shareholder is paid for equity on:shareholder is paid for equity on:

DeathDeath DisabilityDisability Voluntary withdrawalVoluntary withdrawal DivorceDivorce

Buy-sell provisions are different for Buy-sell provisions are different for non-farm businesses due to high capital non-farm businesses due to high capital and low income of farmsand low income of farms

Shareholder AgreementsShareholder Agreements

Shotgun clauses don’t really work on Shotgun clauses don’t really work on farms because shareholders often farms because shareholders often cannot afford to pay fair market value cannot afford to pay fair market value for the other’s sharesfor the other’s shares

Payout during lifetimePayout during lifetime Structured payout over timeStructured payout over time Put-call optionsPut-call options

Shareholder AgreementsShareholder Agreements Payout on death - life insurancePayout on death - life insurance

Avoid application of revised stop-loss rulesAvoid application of revised stop-loss rules Take advantage of rollovers to spouses and Take advantage of rollovers to spouses and

childrenchildren Use capital gains exemption when Use capital gains exemption when

availableavailable Capital dividend declared on the shares of Capital dividend declared on the shares of

the farming child who uses proceeds to the farming child who uses proceeds to purchase shares from other shareholderspurchase shares from other shareholders

Can be used to payout non-farming Can be used to payout non-farming childrenchildren

Farming child takes over farmFarming child takes over farm

WILLSWILLS

1. Young farm family1. Young farm family

Equally to all survivorsEqually to all survivors Land left until youngest child attains a Land left until youngest child attains a

certain agecertain age Other assets as each child reaches a Other assets as each child reaches a

certain agecertain age

WILLSWILLS

2. Mature farm family2. Mature farm family

If no children farm, use city willIf no children farm, use city will If children farm, succession plan must If children farm, succession plan must

be created first and then will drafted to be created first and then will drafted to fit planfit plan

WILLSWILLS

Process to Determine Process to Determine FairnessFairness

Mom and Dad must first agree with each Mom and Dad must first agree with each other on initial planother on initial plan

Plan should be discussed with each child Plan should be discussed with each child individuallyindividually

Family meeting should then be held to Family meeting should then be held to discuss the plandiscuss the plan

Perhaps several meetingsPerhaps several meetings

Process to Determine Process to Determine FairnessFairness

Family should consult professionals to Family should consult professionals to learn about available alternativeslearn about available alternatives

Family should meet again to decide on Family should meet again to decide on alternativesalternatives

Professionals should then be asked to Professionals should then be asked to put plan into effectput plan into effect

Fairness ToolsFairness Tools

Non-farm assetsNon-farm assets Shareholders loansShareholders loans AcreagesAcreages Payment by farming childPayment by farming child Farm assets that aren’t necessary for Farm assets that aren’t necessary for

the farm operationthe farm operation Life insuranceLife insurance

Colin SimmonsColin SimmonsCounsel West LawCounsel West Law

Calgary, AlbertaCalgary, AlbertaPhone: 403-252-1162Phone: 403-252-1162