Bankruptcies of the 80s

[jazz]

Earning lots?
Into the second corporate tax bracket?
At what point does it pay to somehow split it off?
Or have a seperate Corp buy and lease machinery to the farm.....I don't even know if that would work.
Multiple corps?

Since I am no danger of crossing it, I wouldn't know.... where does the small business tax designation end?

$500k I think.

Multiple corps or go up to a LLC which is much more complicated structure with higher tax rates and much more onerous to maintain.

But you could start setting up land co(s) an and having each one farm as a separate entity. Big companies have dozens of subsidiaries.

[LEP]

Richard5 would give you the best advice. But IMO if you are in this predicament buy the land. You would need a few hundred acres more in inputs that you can prebuy and you can sell your wheat at $7 in the spring to pay for them. This year looks like better grain prices. Who knows how long that will last. It will also free up bins going forward.

Yes incorporating is deferring the tax to later but it also gives more after tax dollars now to pay principal.

We pay dividends and don't pay ourselves a salary anymore mainly because of paying both sides of the CPP. CPP is such a low return on investment that it is like another tax. We did't adopt that strategy until the last 4 or 5 years so we still have some unused RRSP room to continue to buy a few dollars in RRSPs. Originally having some unused RRSP room was a strategy to assist unwinding the corp.

Get yourself a better accountant. You don't necessarily need someone like MNP fulltime. But to get set up initially I think a bigger firm can get you on the right track. They can also explain your options for unwinding with or without a successor. An unwind need a few years to happen. It's all about managing your tax brackets through time.

The sask small business rate is dropping this year and gradually returning to the present rate so a good time to correct this situation you are in. Be prepared to ask some very pointed questions. Give them the for instances, etc. Ask how to, etc. Take notes. $15,000 in advice can be saved multiple times. I have gotten advice a few times from them but my local accountant still does my yearend.

The prebuying/deferring trap is exactly that. IMO don't buy cows unless you have a burning desire to work with livestock. They take alot more time and attention than you think looking from the outside. Losing a few extra calves at calving quickly waters down the returns.

If you are in your 30's you have 20 or 30 years time horizon. Sounds like your operation is capable of generating a very good return on investment so well worth it.

[Flatlander]

Buying land today involves having faith that the government will not lose control of the market. All of the land price increases have been purely due to fakenomics. What happened in the 1980's was due to the realization that there would be hyper inflation if the central banks did not stop the money printing. They stopped printing and you know what happened next. Today of course is the same situation. They will not stop printing but will the market force them to do so? Market forces will push land down like the 80's because fundamentals are all bearish: increasing competition from the black sea and once the $usdx heads higher our customers like china and India can't borrow to eat anymore. We are currently seeing an inflationary blip due to covid printing in a deflationary macro environment. Anyways you will be buying the high and as governments around the world lose influence over their economies there is nowhere but down to go. Interest rates are heading higher as it will take even more printing to keep them down as debt demand goes hyperbolic. Will the US go to where the Fed buys all the debt? In canuskistan we are just about there already with the Bank of Canada being the only buyer of new debt. That said if the land next to me was for sale I would try hard to get it and would sell land further out to get it if possible. Offered for some land a few miles away recently that has been for sale for 2 years but am not prepared to go higher as it is marginal land. Some other land we offered for 3 years ago was sold internally to family this spring but the buyers want to flip that land again as well and this is in AB. Land prices are not as high as the local rumor mill has it either.

Not sure about Alberta but in sask go to comparable land sales data and get the real story on price, forget about coffee shop. Should have the same info available for City and town property as well but it must the realtor cartel with the power to keep that information on the down low. But all can see what I paid for farmland

[blackpowder]

Titles are public here.

[newguy]

After the the big price drop I bought a quarter for 18 grand that was renting and landlord needed a downpayment on a house.Banker told me if I got it free it would not pencil out.Of course I bought it anyway.Throw the pencil away if it fits.

[Sheepwheat]

I’m reading this thread marvelling that everyone was proclaiming the bins are empty. Yet here we are, entire crops sitting in bins, guys holding old crop wheat to get better grades etc.

I thought the bins were empty!

It confirms what I see around here. The bins are not empty. 😂

[SWFarmer]

Earning lots?
Into the second corporate tax bracket?
At what point does it pay to somehow split it off?
Or have a seperate Corp buy and lease machinery to the farm.....I don't even know if that would work.
Multiple corps?

Since I am no danger of crossing it, I wouldn't know.... where does the small business tax designation end?

The small business deductions starts is reduced once the taxable capital of the corporation exceeds $10 million. For every 10 dollars of taxable capital over 10 million the small business deduction is reduced by $1. So once taxable capital exceeds $15 million the business is no longer eligible for the SBD.

Here is a good link that explains associated companies. https://accountingottawa.com/related-and-associated-corporations/

Any companies that are deemed to be associated are only eligible for the SBD once. So the 500k limit can be divided between the associated companies however the owner decides to.

[GDR]

The other scenario is hire a herd manager and start buying cows to offset income. You get to write off the wage for the guy managing the herd, plus write off the cost of the cows. I realize, that this is adding to the problem at the end, but so does incorporating?

Not a cow on the place at the moment. Just thinking outside the box?

Want to sell some cows woodland?

No, no, no, and did I say no? Dont buy cows unless you really like them, not for tax deferral. You think your tax problem is bad now, most feedlots are forced to buy millions in calves each year, often knowing they will lose money on them as otherwise they are stuck with gigantic tax Bill's. It's just a cycle you can't beat but much worse with living animals.

Flea Beetle, your current tax situation and deferral is pretty common. I'm in the same boat. It's easy for everyone to say you should have incorporated but I think that is debatable. Both systems have drawbacks and not sure there is a perfect answer.

Not giving advice but will tell you what I'm doing incase it helps. We transitioned to a partnership from a sole proprietor 2 yrs ago. (Was a fairly involved process) Now going to the next step of rolling to a corporation. Partnership helped a bit, but not much. You need the 2yr min partnership and then you can roll over to the Corp using both of your capital gains exemption. ( this can actually be used on inventory, deferred sales and equipment) Resisting tax, I had built Rrsps up(not really great when you need money to grow the farm)and had not withdrawn agriinvest. Plan is to withdraw both those over the next few years, will have some tax to pay on them, but it's ok because when you use your cap gains exemption there is a minimum tax amount you still have to pay regardless and one can be offset against the other if that makes sense. Current owned and financed land will still be held personal, any future purchases likely to be in the corporation. If you have to draw large amounts out to pay personal land payments you are worse off being incorporated.

Argument is with a corp you have more $ to work with now to grow the business faster, but gonna have to pay the piper later. Doing it all personal, after the tax man is paid what's left is yours forever. I've decided I want my cap gains exmp used up now incase it's taken away so that is the main reason for the change. Also think current tax rates are gonna be higher tomorrow than they are today so not sure deferral is the answer either.

[Richard5]

Parents have pretty well retired with savings and no debt. They put in around 100 acres just to say they are still farming. I rent the land off of them at a very favourable family rate. Have enough to keep myself plus a hired man busy. Possibly too busy depending who you ask.

Have three siblings that want nothing to do with the farm. I am in the process of buying the equipment off of my parents. They are financing me and selling the equipment for what they have left in their capital cost allowance as to keep the farm strong and not give Trudeau money to waste.

I had a few quarters of my own, plus just bought a few more from my parents when they “retired”. (They still come most days for a few hours). The rest of the land as I understand will be split between the 4 children later on. I will most likely rent it from my siblings except possibly a few quarters from one brother.

I would have had minimal debt by 2025 had i not purchased the land and now the equipment off of my parents. I pretty well had my own line of equipment, but now will have doubles of most things. A few items are close to needing updating. Most are reasonably new enough to run for at least ten years.

The kicker here is that I was managing income tax well enough by pre buying all inputs, plus carrying grain over if need be. But now with basically doubling farm size by taking over my parents side of the farm, tax has become a major issue to be managed. Ending up carrying over 25%+ of inventory every year from the last 5 to avoid tax, plus prepaying all expenses. All the while still giving Trudeau 6 figures.

I think incorporation is in my future, but accountant had advised against it. Said if a child does not want to take over, it is very expensive and exhausting to wind down the business without paying more tax than if had kept it personally? I am not savvy enough to know what would happen. And I even went to get a second opinion on that, and that accountant basically just said you turn it into a holding company if no kids want to run the business. But sooner or later, that business has to be wound down, no? And he couldn’t satisfactorily answer what would happen at that point.

If child wants to take over, then I can see the benefit of incorporation. Seamless transition from parent to child. I just can’t get the straight answer on what happens if there is nobody to pass it on to?

So back to a want or a need at this point. Could live very comfortably without it. Probably more comfortably than by buying it. But not in my nature to sit around either. And...it is touching the home quarter. Some land decent, some marginal.

I think others have voiced in already but I would echo a few others in that you need to talk to someone who knows agriculture and agriculture tax. Did you accountant even consider the partnership route? Will you or your parents use their cap gains exemption fully with land? Much better to use you exemption on everything else first and land last.

[Richard5]

Well that is the only place left to turn. Not sure if I can defer 2 years out? After that, I’m screwed. I usually sell the high priced crops and hold the lower stuff. (ie- have lots of wheat to sell)

So what you are saying is that I am pretty well forced to incorporate...

Edit in, accountant was a guy that retired a few years ago that dad had been using for years. Maybe too old and long in the tooth?

Guy I went to for second opinion was a well respected mid aged guy that does almost strictly farm accounting. He was gung hoe to incorporate, but like I said couldn’t answer what would happen to wind it down. If in the end more tax would be paid.

What if the govt changes the corporate tax from 17% to 30% to pay for this Covid deal? Now you have no cash accounting to hide with, plus no tax benefit for being a business. I realize that is a stretch, but don’t underestimate the govt to change the rules half way through for their benefit.

Remember, they aren’t going to get it from the personal tax payers that aren’t working...

If the gov't would increase corp rate to 30% that would just mean you could take a 90-100k dividend for very little extra. One needs to understand how dividends are taxed and something called intergration.

Someone else mention buying equipment and putting in the shed before paying tax - This makes zero sense, better off paying the tax.

With the deferring, prebuying strategy are you running debt in order to have cash flow? Usually if you are avoiding tax you will be forced to run a lot of debt. Interest and tax are both funds out the door but tax at least crosses off some net income of the past and then its done. Accountant once told me its tax once or interest forever. - Everyone think about that one.

I think the biggest thing people get caught up on is the fact of actually paying tax. Its like its a sin or something. If you are actually making money, then tax is part of it. The key here is having well prepared accrued financial statements prepared by someone who know ag, not just to lowest cost or someone who claims they know it all. Those statements should be explained to you each year and be able to show you what your real profit was that year.

A good farm accountant should not have a focus soley on income tax and making it zero. Those days are long gone. A good farm accountant should also have some type of system to compare you to target per acre numbers or other farms of similar size. My accountant uses future income taxes also on their financial statements so I know how much my tax liability is growing or shrinking.

A few comment on how some good ag firms are more expensive. Well maybe you came in with a big bag of shit and spreader engaged while coming through the door. I can't say I am concerned about fees as I have very good bookkeeping records that are balanced monthly. My accountant has described how some of his customers used 5-10 inputs line of credits, cash advances and many kinds of term debt. This is a bookkeeping nightmare unless you understands books.

How many people realized that your Viterra, Richardson Ag Partner, FCC and many others input line of credits increased their interest rates this spring when the borrowing rate went down. I just cannot understand why producers use these input lines of credit at all or more than a couple months. Get a bank line of credit and quit spending on other shit under you get your numbers back where they should be.

[Richard5]

the other if that makes sense. Current owned and financed land will still be held personal, any future purchases likely to be in the corporation. If you have to draw large amounts out to pay personal land payments you are worse off being incorporated.

I would echo the comments about not buying cattle. You will end up with less $ when they are sold off so you would be better off paying the tax.

Nobody has mentioned donating the money but on a personal basis you actually get a much higher tax rate deduction with donations. Its not much different that buying 100k of cows, getting back 80 k the next spring.

The only other comment is regarding the land. If you have high principle payments personally before incorporating its not the incorporation's fault. Hopefully whomever is doing your incorporation will be able to calculate (and defend the calculation) a large shareholder loan. If only in a partnership 2 years, your partner would most likely have not created much partnership value unless you both rolled in equal shares of farm assets at the start. From what my accountant told CRA is having a lot of fun with accounting firms that are doing this wrong.

Basically what I am saying is that if the farm is all dad's and rolled into a partnership, mom only earns her share of the increase in valve while the partnership is in place. Calling it 50/50 at the end of 2 years would be the biggest breach of income splitting.

Yes I am very versed in this area. I asked a lot of questions as I wanted to understand it. Went through it twice, once with my spouse and a few years ago setting up my son.

All I can say is it shouldn't be rushed, your exit should be explained and the focus should not always be tax. Another huge advantage is if your accountant actually comes from farm or is actually involved with one. The interview question could simply be "what is the optimum seeding rate and survival rate in canola". If they have no idea, walk out the door

[LEP]

I have a Corp and I’m still deferring

Set a corporation up in your wife’s name and double the small business limit. Deferring is bad business.

But like Richard5 says go partnership first and roll into the corporation.

[flea beetle]

Before taking on my parents side of the farm, debt was very manageable. Most debts before buying out parents including purchased land are to be finished in 2025.

I have now added 3 quarters of land from my parents and their equipment this last year. So taking money personally to pay these payments while incorporated would be tax suicide i believe.

Would updating equipment, but leasing it and buying it out at the end instead of buying it outright in the beginning help? I am not talking about going on a spending spree, but naturally replacing equipment as it wears out.

One question I have always had about incorporation is:
Do you not pay the corporate tax while in operation, and then pay personal tax on everything again if there is nobody to take it over? So 17% corporate tax rate, and then 35% when closing it down? Versus just paying the 35% if keeping it personal the whole time?

[Richard5]

[QUOTE=LEP;472177]Set a corporation up in your wife’s name and double the small business limit. Deferring is bad business.

Lep - I had asked this question to my accountant once when planning structure for son.

Many people have husband and wife as shareholders of first company already. Creating a company n spouse's name would be very risky even if you one spouse transferred everything to the other as they are closely related. If your sole reason is lower tax, nothing flies anymore

[Rareearth]

Some advice has been to set up a Partnership then roll into a corporation after a few year to use up your capital gains.
You own land and machinery personally now, forget the partnership route(time, money, complicated, etc)transfer in personal assets into new corporation and trigger or take advantage of capital gains tax this way. Saves one step. Then the share holders loan account in the company is tax free money if you “want it” or “need it”

Buy the land, it’s not that complicated. Set up a corporation.