How do you exit farming?

[cafa]

Let me introduce the Canadian Association of Farm Advisors (CAFA) Inc.
CAFA is a national non-profit professional organization dedicated to assisting farm families and businesses by increasing the skills and knowledge of farm advisors. CAFA members include, among others, accountants, lawyers, agrologists, financial planners, lenders, human resource consultants, insurance agents, government staff, and interested farmers.
As CAFA is a secondary organization, most of our members have professional degrees, certifications, licenses, etc… in their field of expertise and have joined CAFA as part of their commitment to stay current and aware of the unique planning issues associated with farming and agriculture in general. They have made that commitment and are dedicated to farm families and businesses because the majority have both a professional and personal connection to the farm. They are professionals who understand many aspects of farming.
When looking for a professional to help with things like preparing business plans or financial statements or working through a succession plan, there are identifiable professionals with farm knowledge. CAFA has 400 members across Canada. You can find them at www.cafanet.com.

[bucket]

If you exit quick stage right - grow durum for two consective years and you will exit farming.

[Burbert]

Why would anyone want to quit farming? It is a glorious, meaningful, occupation. Just think, where else can you work so hard, produce so much, spend so much, to earn so little. What a truly patriotic occupation. Producing cheap calories so's the city cousins can have their cake and eat it too, while still having coin to spend on plastic, electronic crap from Chinie!

[checking]

So what did the Saturday accountant say? Or do we have to pay for that information!!

Be happy that your inventory isn't in shelf life products like bins of carrots. Although, that wouldn't be the end of the world either since you could convert carrot sale dollars into a storable product to sell in your retirement years. It sounds like this is a worry about the taxes on your grain, over that of capital gains on your land base, and value of depreciated out equipment.

Does land and equipment sale offset your debt obligations? If they do, the guy above, and many of the rest of us dirt sluggers would like to be in your predicament.

[Hopperbin]

The accountant didn't show, car trouble. Now have the year end consultation scheduled for next Sunday. Thanks Sagewood for your contact I will definitely be contacting them. My farm was incorporated by my father in the 70's. I originally had the thinking I needed to take a year off near the end of the late harvest as grain inventory does appear to cover all payments as long as I can stay out of the 45 percent tax rate, that said I would need to defer grain tickets to the next year and possible some to a year after that. That said having expenses bought in the year of use instead of a year ahead is a plus to me. All land and machinery is in the corporation. I feel set in my thinking not to sell any land and want to live off the rent. Machinery sales would become a gain. Not sure how I can use a capital gains exemption in this case as my thinking is to keep the corporation. I think there is a way to start a second corp buying out the first to use a capital gains exemption. so need to talk to accountant or financial adviser. I believe the capital gain exemption is not designed to be used that way and may come back to bite. My preference now after thinking more is to hire someone who can take a much larger management position. I don't believe I can find someone but one never knows. I suppose my situation is envious of most, I believe there are many more farmers out there that don't know what they have. I did expand the farm for in the last 8 years for financial competition reasons. Then made land purchases at the right time so equity was built up instead of committing to a lifetime of rent. Saskfarmer99 I hope the advice and service you provide your clients are understood by them, not that they are setting themselves up for an audit and a 20,000 accountant bill after plus out of control tax re evaluation.

[Hopperbin]

Hopper, my advice to you is just what I have learned over the years. Consider me a very knowledgeable corporate grain farmer. I use a very good accountant with a well known firm that has a huge client base in agriculture. As a bonus, he is an active grain farmer as well and he knows the industry and the tax/succession/financial planning side.

I still don't understand where you are gettting the 45% tax rate and why you feel you need to pay at that rate. Our farm has been running at the corporate limit (now $500,000 net income) for the last 4 years, we also try to maximize the personal low tax bracket through rent and/or wages.

In 2008, my estimate of any well managed grain farm should have had a $150-200 per acre bottom line. My guess for 2009 is around $100-125. With this guide in mind, I am just not understanding how/why you need to pay 45% tax.

Take your corp to $500,000 in the next couple year, pay you and your wife a salary of up to $75,000 each. Because you are considering reducing your farming, consider buying some RRSP's to get your personal incomes to $60,000 each.

I don't think you can set up a second corp and strip assets out and at the same time utilize your capital gains exemption. I think you can do this if the shareholders of the new entity are not related to you.

You also talked about an audit, if the company you deal with (which most likely would have people knowledgeable in this ares) tried this, you would be guaranteed an audit. But then again, personal experience with these guys is that the "audit protection" is just fluff.

I have never went through an audit but have went through a GST review. If there ever was an audit I am not worried because I don't feel I am pushing the fine line. I focus on profitablity and management of my farm, my accountant does the same. I pay my tax each year and don't focus on the amount. Its a part of life!

I have many friends that go out of their way to avoid tax. Although I don't get that impression from you Hopper, those are the guys that need to be worried about an audit.

And I ask you this. What profession organization (referring to a CA firm) would not stand behind their work in the event CRA comes a calling. With the civil penalties now being assessed on professionals (again referring to CA firms) no one is going to take a client down a road that puts them at risk. I would never ask my accountant to do this, nor would I expect it.

[timm]

saskfarmer99 do u roll all your equipment every year
and r u buying more land these days...do u have any
debt??

[skhadenuf]

just wondering is that 200 and 125 bucks an acre clear? Is that what you are saying? So those poor incompetant managers who had drought in those years still should have 100 to 150 bucks clear, how do you get that when your gross isn't even that? Are you growing some other cash crops on the side maybe?

[skhadenuf]

No we do not roll our equipment every year. We don't see a benefit in doing so. Our combines are a number of years old (2, 5 and 6), it costs us about $10,000 a year each to maintain, far less than swapping each year. In my mind, it just doesn't work on our farm, but may for others.

We don't drive $65,000 super duty's, the $35,000 Chev does that same thing. Up until this year, our vehicles had over 300,000 kms on them. Its was time.

We are a large farm in today's standards, but we run very little debt. At times of expansion or major change, we had to. Inputs are purchased at times when we feel the price is right however in 2008, 3/4 of our NH3 was applied in the fall at 80 cents. Looking back not a good decision, but at the time, we didn't want seeding delays in the spring. This fall we have 70% of the acres applied as well at 26c (avg 53c, I can live with that)

As far as the profit numbers quoted, yes that is clear. It is based on our accrued financial statements prepared by our accountants, reviewed with us and with our projections. I feel for you guys that experience more environmental factors than we do. We have had the killing frost on 2002 and 2004, too wet to seed in 2006. We managed to get through it.

I don't have a solution for you Skhadenough, if its not profitable for you can you lease it out, fall back on a trade or work for another producer.

As for the comment about growing some other crops...you must be the pro if you even thought of it

[skhadenuf]

Very interesting, your a very large farm with no debt, would you privilege us to more info how you'd accomplish this ie no crop losses, equipment all given to you land all given to you or what. There isn't a single large or small farmer in our area and I don't just mean local area that isn't carrying a substantial debt load. Can you give some yields maybe things like that as to how you arrived at these income levels. There's no way there isn't more to this story, oil wells?

[skhadenuf]

First of all when dad quit farming he had 4 quarters and you can imagine what equipment he would have had. Now the farm is over 70 with a bit more than 20% rented. There is 3 families.

Yields in 2008 were:
Canola 47
Barley 88
Canary 38
Oats 134
Wheat 58

There are no oil wells, land leases etc and we have never won the lottery. Land sells for anywhere around $90,000 to $135,000 per quarter. Rent is $38-55 per acre.

I'm not sure why it is hard to believe. I have a pier group of local farmers and we share a lot of information with each other, many are familar to our situation.

As far as crop losses - 1988 was one, 2002 and 2004 were tough. Because we have good production and high taxable income's our margins for AgriStability run between $125 and $150 per acre. With the changes in the program recently we have managed to stay consistent We always participate in crop insurance at 70% or better. We are not in livestock and other than a few raising pigs many years ago, that was the extent.

The one thing I will stress as a key to our success is tax manangement. We have never went out of our way to manage our tax below low bracket levels. We did the partnership process many years ago, then transferred to the corp. Since then it was even more easier with the low tax rate. Equipment is only a tool to get the process done. Finding the right tool at the right cost was how we made money. I have friends that are worried about the breakdowns so buy new equipment. We have breakdowns too and sometimes a machine sits for a day. Its frustrating, but you work through it.

Communication is also a key. We don't make any decision without discussing it with the other parties. Sometimes our Ag Advisor with MNP will become involved. They will test drive a major change before we actually do it (buying a few quarters or renting, a new piece of equipment etc). It costs us a few bucks to do this but its a way for us to have a general feel of the transaction and its effect on rate of return. Key word we know what our rate of return on our investment in our farm is...Like I mentioned before, our advisor is an active farmer as well. We get great direction, vision and have great conversations.

We have top notch bookkeeping records. We use a farm bank account and balance to the inflows and outflows. Many use a scribbler and there's now way you know what's going on. We do an annual crop plan where we look at the contribution margin of each crop which assists us in determining the right mix of crops to seed.

My questions to you:
a) Have you ever tried to drive your tax to nil by purchasing items that do not make your farm more efficient
b) Do you use a qualified advisor who really knows Ag or do you use the person who will slap something together for a minimal price.
c) Do you have an accurate financial statement or net worth document of your farm and if you do what has changed in the past number of years
d) Do you have difficulty in getting the job done. What I mean by that is the whole process from getting up in the morning to seeding on time, spraying, swathing, harvesting and marketing.

Management in my mind is making decisions 1% better than others day after day, year after year. The compounding effect of good decisions is success.

[timm]

Sounds like u dont have the iron desease....thats good
and as long as all three families continue to get along
life should be good.