Leroy, SK Ritchie Auction...

[FarmRanger]

Cost of bin $20,000
lease interest rate 8.63%
lease residual balloon $10,000
bank interest rate 6.00%
Marginal Tax Rate 40.00%
Loan downpayment $4,000
Length of lease/loan 5
Depreciation rate 10.00%
NPV interest cost 6.00%

Lease payment = 3,184
Loan payment = 3,798

Running the numbers through a buy versus lease calculator yields a Net Present Value = roughly breakeven

A higher relative lease interest rate, or lower marginal tax rate would make the lease worse financially.

<b>It's important to know your own numbers.</b>

[hobbyfrmr]

FarmRanger, I dont completely understand your statement.
I lease most of everything for the income tax deduction. Implements, bins, augers, utlility trailers etc. Anything I buy, I would have to borrow the money. So,with a lease I can expense 100% of the cost over the time schedule of the lease. Otherwise, if I purchase outright, I would still borrow the money and make the payments. I would then use the CRA depreciation schedule and it would take 15(?) years to depreciate bins, etc. The tax management alternatives I can think of would be to incorporate my farm, and then be taxed the corporate rate. My farm is small and the accountant does not think incoporation is required so far. Something I forgot, was that some farms have cash and buy items outright. CRA depreciation may work favourably long term.
Bluefargo, As far as the higher interest rate, shop around lease companies, compare their costs and prices and buyout terms,they have different angles to their leasing methods. Purchase prices from the dealer can also be negotiated. Thats about all I know on leasing, it seems to be working for me.

[hobbyfrmr]

FarmRanger, you answered my question before I posted it!!!

[FarmRanger]

In the above example, if I use a corporate tax rate of 17% (I think that is close, depending on your province?), then the lease has an NPV that is $800 worse than the buy. That's taking interest and depreciation tax implications into account. $800 is quite significant on a $20,000 bin.

I don't know your situation, but if the lease interest rates are very much higher than the bank loan rates, in most of the lease vs. buy scenarios I've looked at, I'd be financially better off buying.

If you know the numbers, I can plug them in for you.

[FarmRanger]

Hobbyfarmer and ranger

Just a couple things:

Although leasing as you presented can be an alternative to managing income tax it is only another method of FINANCING. Bins and buildings are really on the only way to bring deductions in quicker though a lease verses capital cost. On any proper structured lease of normally 20% and 30% capital cost assets, lease verses purchase benefits have a very narrow variance and you mainly end up at the same place after 5 years (especially tractors/combines etc)

I think the main trick to leasing is its a great way to push a sale because of the "easy pmts and tax advantages". Not suggesting that anyone is buying something they don't need but it can be easy to fall into the trap.

And more importantly, if you are talking about incorporating your farm someday, make sure you have the family farm partnership set up at least 2 years in advance of incorporating.

If you are single, create a partnership with your own corporation.

The tax savings and flexibility with this structure far outweigh any lease transaction

[highwayman]

In the past, leasing grain bins presented advantage for us when it was calculated with 10% residual and paid out in 3 years. Was able to cash flow it and use the tax savings when needed. Not sure if 10% residual is allowed any longer by CRA.

[FarmRanger]

Good points Saskfarmer99. The tax implications of the 2 year partnership before incorporating can be quite significant.

The problem I've seen with leasing is the easy enticing way people can get lured into leases, especially when you can use your trade-in as the first lease payment. My point was that leases aren't the financial bargain that the salesmen will tell you they are, especially if they jack the interest rate up. Just because something is a total tax write off doesn't mean it's the best decision in the long run.

I created a spreadsheet for analyzing the yearly cashflows from a buy versus lease. You have to take into account the various things affecting cash flow, and the timing of interest/principle/tax savings or any other financial considerations which have cashflow implications.

[wilagro]

Basing expenditures and receipts on a strict formula based model leave very little room for response to unforeseen crises and hinder rather than enhance good government practices. Formula based guidelines need to be flexible enough for initiative and open debate to flourish.

Politicians who rely on formula based government to validate their policies are just plain LAZY.

[TOM4CWB]

Wilagro,

This is the valid and logical way to plan future financial management.

Only God himself can know the future... and make a plan that accomplishes his purposes.

We mortals must rely on past experiences... to look forward into time and space.

Cheers!

Happy New Year!!

God Bless Canada!!!

[hobbyfrmr]

Normally I negotiate the purchase price of the items I am going to buy. Then, I call up 3 lease companies, give them the details and then compare scenarios. I do not regard them as just another way to get money to buy stuff. I see your point a salesman will present all options to make a transaction.
About the partnership thing, well I am not that advanced in farm management, I'm the kind of guy just trying to get the kids to dance/hockey and fuel in the vehicles. I will begin to ask about this and I appreciate the insight.

[cottonpicken]

Sask99,what do mean partnership with yourself
and the corporation?

Is it better to keep some assets out of the
corp,and take a higher personal income?

[wilagro]

Well Tom...tell that to our hidebound PC government here in Helberta. Ralphie (the clown) Klein made it illegal to run a deficit and guess what...that is what we are running. The government had to break the law in order to implement a change in policy. Inflexible government formulas and policies can't foresee what circumstances may arise that may require a corrective response.

If and when you become a part of a Wild Rose government (heaven forbid), you may find this to be helpful...don't paint yourself into a corner with rigid policies.

[cottonpicken]

Throttling back on spending?

Whats the cpp deficit?227 billion?

Whats the real rate of inflation in healthcare and
education?

Want to see a look into the future
.
Im no dtn commentator but our books will never
be balanced

[cottonpicken]

For bachelor's or people that do not wish to partner with a spouse, brother or son/daughter, many accountants may feel that there is no option for this situation.

There are many logical and good reasons not to partner with a family members or relation, not just because someone made a comment that once you create a partnership with your wife that you have given 50% of the farm away. This is not true.

When you create the partnership you have to roll the assets from the proprietor to the partnership. This is done on a tax free basis and tax elections and agreements must be prepared to make it all legal in the eyes of CRA.

When you create the partnership with a corporation, the corporation is your partner and will have a percentage of income assigned to it each year. Generally you would want the percentage allocated to the corporation to be low since you want the value of the partnership you own personally to be the highest it can be when you sell your partnership to the company.

It is the best and only way to achieve a 31% permanent income tax savings on the value of your partnership.

Its the best way to sell the farm, especially for smaller farms where the value of equipment and inventory is around that 1.5 million when they want out. If everything is done right, a farm like this would pay 13% (sask crop rate) and pull the rest of the cash tax free out of the corporation and then wind up the company.

As far as your question about keeping more assets out, I'm not sure what you are specifically meaning here. In general you would want to keep land outside of the company or at least the land you currently own when you incorporate. For those that are expanding, it can be more beneficial to purchase land inside to company because of the higher tax free dollars available. Equipment, buildings and inventory are the assets you want inside as they are the ones that bear the largest tax liability.

For those that have done a direct incorporation without the partnership, you generally will have transferred a lot of land to the company. Now if you wish to retire and sell the farm, you will be forced to take large dividends over many years to get the cash out.'

If your land is inside the company and you wish to keep it, you will have to buy it back out of the company and at fair value at that time. If you wish to rent it out and its inside the company, you will have to report the income personally anyway since rental income is not eligible for the low tax rate in corporations.

About 12 years ago I formed a partnership with my spouse and we incorporated it about 7 years ago. I cannot say I have any regrets. Until the last couple years I kept all my land outside of the company but now have been purchasing new land inside. At some point in time I can gift any personally owned quarters of land to one of my 3 kids whereas if its inside the company I am not able to. It just gives maximum flexilbility in my estate.

The partnership with a company was done with my brother a number of years ago. It worked really slick for him.

[cottonpicken]

Reading your post again about the only other thing I wish to add is flexibility.

When you keep some farmland outside of the corp you now have another method of compensating yourself - Rent

It really becomes an issue of the following:

a) Do you want to pay into CPP, therfore you pay wages to yourself
b) If you don't want to pay into CPP but want to build RRSP's (to replace the CPP) then rent or rent/wages combo
c) If you want the cheapest tax overall to get income into your own hands, take dividends.

Everyone's situation is different and no two will be the same