How do you exit farming?

[Hopperbin]

Just been examining my situation and was hoping to retire early and just rent the land out, as it works my grain inventory could almost pay off the debt. But "look out" that inventory is going to get taxed big time and pretty much screws up my plans of retiring, now I have to keep working or find a farm manager. Any thoughts out there that would allow me to actually retire and just rent out the land which is what I would like to do? I even have been putting most expenses for the last couple years into the next year for this reason unlike most farmers who purchase before year end to reduce current taxes. Paying 45 percent tax is just no good. How does one reduce that tax. Have an appointment on Sat. with the accountant so would be great to get some input ahead of time.

Seems I am not the only one with a problem because someone wants to rent my land that(Has sold his farm) and in his opinion needs to farm my land for tax reasons(plus to me)

[Fransisco]

What if you sold your inventory over a number of years?

[cottonpicken]

Use your one time capital gains exemption?incorporate?

[countryguy]

Found out yesterday to my dismay that this doesn't happen overnight.The only way is to incorporate to get a 12 or 13% tax rate and slowly dissolve the corporation over a few years.As much as I don't want to I have to downsize and farm a few more years.Just lovely....

[ado089]

If your land is outside the corp you'll have to pay personal income tax on cash rent. If your land is in the corp you'll have some more options like hidding some living expense, vehicles, travel and such in there and continue to build wealth/equity while paying corporate tax rates on income and extracting your cash needs in the form of dividends once you get above your personal exemption levels. Just keep in mind that there is more than just a farm buisness that you can operate with some land. I'm not a pro so you'll want to check those things with one.

[ry0972]

i know of a few guys that increased their operations by 50% to as much as double for a year or two before they quit/retired (kept home 1/4 or section and have it custom farmed) and got huge payouts from AIDA/CAIS etc the next year and are still spending the money.

[ianben]

Here in UK it is tax efficient to die a farmer.

Nobody want to work till they die so the stubble to stubble contract has emerged.

Our tax system defines a farmer as someone who has financial risk and makes management decisions, does not demand that one drives a tractor or combine and gets dirty.

So the in stubble to stubble contract the farmer who wants to retire pays for the seed or some or all imputs. Seed works well though as it can be argued that the retiring farmer choses the variety and thus fulfilled the management decision part. The renter pays the rent plus the farmers costs as a share in the crop.

No different to what you are proposing in practice apart from the paper work.

Dont know if it would work for you.

[ianben]

Oh you guys and your crazy idea's.

Never direct incorporate, always do the partnership first, incorporate later. This way you are using your capital gains exemption on assets that are normally taxed on every dollar when sold (ex Inventory or equipment value over UCC). With your land, you always have special tax treatment even if you have no capital gains exemption (capital gain is included at 50%)

Hopper, I don't understand why you would choose to pay expenses in the following year? Have you or accountant never heard of the optional inventory adjustment (OIA)? I am questioning how much "looking forward" they have been doing for you.

A farm, whether incorporated or not, always can increase his income through OIA which is based on inventory and pre-purchased inputs at year end. Another option is would have been to not take capital cost for the year.

The third issue is that if your if you are preparing financial statements, what was your accrued income verses cash and were you paying the right amount of tax years ago? It always bites you somewhat in the end but is managable if you prepare early enough.

Have you considered a share sale. As long as your company is pure and a qualifying farm corp, you can sell the shares and use your capital gains exemption.

My accountant treats my tax return like a commodity, a formality. Here's the amount I should pay this year and I agree with it. We then look forward and one of the questions he asks every year is when do you want to retire and what does retirement look like to you?

As for the comment about downsizing and receiving huge program payments - most likely the application was prepared incorrectly. Many of those have been picked up for a review and now have been audited and payments retracted. Ever hear about someone with an overpayment....

An downsizing to farm for expense reasons, give me a break, how efficient will you be if you farm less acres with too much equipment. How much will you really save if you are incorporated and your tax rate is 15.5%. Think about it, every $100 expense you create, saves you $15.50. Even at the top marginal rate of 44%, for every dollar expense created or loss created, you only save 44cents on the dollar. Remember it cost you the other 56. Boy you are gonna get somewhere in a hurry.

My advice to anyone, pay the right amount of tax and as much of it at the right rates. If you don't and you are making money, it compounds, you build too much debt which increases overhead costs which then erodes profitability, a vicious circle.

And if you aren't paying tax or not profitable, you have other serious issues that need to be addressed.

[ianben]

Country guy, you need to talk with my guy.

Like I mentioned in the previous comment, there is a "much" better way through a partnership.

For those that direct incorporated, you missed out initially but if you are lucky enough to still be farming and maybe have a son that is or wants to farm you can create a partnership with him.

A great succession strategy but succession and financial planning is a whole nother topic....

[rockpile]

Hopper,
Is there a possibility that you could sell some of
your land to pay off all debts? That would be a tax
free exemption worth up to 750,000. But, then you
could manage to sell off inventory over time
reducing the tax load. Disposing of equipment and
supplies also has tax implications, anything over
allowable CCA deductions is added to personal
income at the time of sale. You have the option of
selling everything at once and bite the bullet, or
sell stuff bit by bit over time. But you have to
assess which is bigger - the tax bite or loss due to
depreciating value. Finally, how much RRSP room
do you have? That can be a big help if you have
banked it over the years instead of contributing.
I got out. Always had planned to. Took about 15
years of pre-planning to make it as painless as
possible. But regardless, in the end, you still sign
some big checks to the govt. The question you have
to ask yourself is whether or not you want to plod
along just to avoid taxes or if you really want to
commit to quitting? Also, you have to assess your
net worth and determine if you can do it in the first
place. I'm assuming you can. Hope these thoughts
are of help to you.
Rockpile

[SASKFARMER3]

hopper Don't quit we need guys like you. But I would down size and rent some of your land out. Play on a smaller acreage. Again Play. Go to a great accountant and discuss your situation talking about it on here is useless let the accountant see your situation and help you through it. Plan it right and you win plan it wrong and you think this fall sucked.
Good luck

[sagewood]

I just attended a seminar last week put on by Pellegrini Leblanc called 'The Great Escape' and they address all the exiting from farming issues. Hopperbin, I don't know where you are, but these folks are out of Red Deer, AB., but one of the fellows is from Sask., so maybe a call to them might find you someone you can talk to if you are in Sask. (Phone # 1 800 665 8459 or 403 347 8833 Perry Pellegrini. They laid out a lot of ways one can use the Cap. gains--you and your wife can both use it so there is 750,000 each to help out--the fellow summed up by saying that there are so many ways one can get out of farming and not give it all away in tax--I know they will give you a free consultation and then will discuss their charges after that it you think they can work for you and they can help you. I know that when I am ready to start selling off I am going to have them look at my situation--accountants are good, but if they do not exclusively deal with the 'retirement' end of things in ag. I don't think they are up to speed on everything that can be done in the agriculture arena. Good luck.