Succession Strategies for Canadian Farmers
Farming in Canada is one of the oldest industries and continues to play an integral economic role, domestically and beyond. Between traditional farming, food and beverage processing, ag-tech innovation and more, the industry contributed about $143.8 billion, or approximately 7%, to Canada GDP in 20221.
The sector has a lot more potential, given that farmers in Canada and around the world will need to increase food production by 60% between now and 2050 to meet demand2. To meet the on-going global demand, the sector needs to put more emphasis in areas like innovation, operational efficiencies and especially, succession planning.
According to Statistics Canada, 60.5% of farm operators were older than 55 in 2021, a number that’s been trending higher over the past few decades3. But at a time when food scarcity is a growing concern, few have a plan to transition their business. As many as 88% of farmers say they have no written succession strategies in place3.
Preparing for the next phase
The process to begin your succession plan should begin as soon as possible as it can be a lengthy process as it forces you to analyze all the parts of your business (and life). Where do you want to see your business in five years or ten years? What is the value of the business now and at the time of sale? How and who will manage the finances from the sale? Who do you see being the successor? Succession planning can go beyond the "traditional idea" of passing the business to children or family members. It can take on additional forms including selling the business to a co-owner or an outside party or leadership succession planning with existing employees.
Having a plan can ensure you don’t let the urgent overtake the important.
“At BMO, we strive to engage with our clients and successors at appropriate times during the transition journey. We encourage inclusion of successors in the banking conversations at appropriate stages for the business and welcome an open dialogue as the business transitions; tailoring our approach accordingly.” says Chris Costain, Director, Agriculture Industry Sectors, BMO Commercial Bank, Canada.
Taking tax into account
As you develop your succession plan, it’s critical to consider how all family members – whether they’re taking over the farm operations or benefitting from the sale of assets – may be impacted from a tax perspective.
While there are several agribusiness-specific strategies that can help protect your business and family, there are two key tax considerations when contemplating farm succession: The Lifetime Capital Gains Deduction and the Intergenerational Rollover.
The eligibility requirements are not identical for both tax incentives, although in many situations both are available to potentially decrease or defer tax on transfers of qualifying farm property.
Lifetime Capital Gains Deduction
As a Canadian farm owner, you can use the Lifetime Capital Gains Deduction – nearly $1 million in 2023 – to shelter capital gains on the sale or transfer of land used in a Canadian farming business or an interest in a family farm business owned through a corporation or partnership. The deduction is reduced if the person has already used it for past claims.
Whether you qualify for this tax deduction will depend on several factors, including whether you are actively engaged in the business of farming and whether you’re earning more from income sources other than farming.
If you qualify, there are many ways to maximize its benefits. One strategy is called crystallization. It allows you to immediately trigger the Lifetime Capital Gains Deduction without the farm ownership changing hands. This increases the property’s tax cost base, reducing any potential capital gain on a future sale or transfer of the farm.
This approach is often combined with an estate freeze, which transfers future growth of the farming business to (younger) family members and locks in the current value of the farm so that when you pass away, your estate only pays capital gains taxes on the accrued gain at the time of the freeze. Any gains post-freeze is eventually taxed in the new owner’s (child’s) hands.
Intergenerational Rollover
With the Intergenerational Rollover, you and your family can, in theory, defer paying capital gains tax on qualifying transfers of the farm indefinitely. This strategy lets you pass down the family farm to your Canadian resident children or grandchildren on a tax-deferred basis either during your lifetime or when you pass away.
Your kids will inherit your tax cost base, which means they’ll be the ones responsible for eventually paying the tax unless they also qualify for this deferral strategy. But if they want the proceeds from a sale, versus having their own children take over the farm, then a potentially hefty bill (assuming the capital gains deduction isn’t available) will come due.
These are complicated strategies, so it’s important to work with a tax expert who can advise on the tax implications specific to your family situation, including the Alternative Minimum Tax (AMT). It’s important to understand the recent proposed changes to the AMT which could reduce the benefit of the capital gains deduction.
The family farm continues to serve an important role in the Canadian economy and, as such, receives special status under Canada’s tax law. However, planning for family farm succession requires consultation with professional advisors, as the tax rules are extremely technical and complex.
With ag sector being the livelihood for many Canadian families and a vital component to the success of the economy, it’s important that farm owners take proper steps in passing the operations and ownership to someone else. Talking to a financial professional can guide you through the unique complexities of succession planning within your industry.
John Waters, Vice President, Director of Tax Consulting Services at BMO Private Wealth, contributed to this article.
1 https://agriculture.canada.ca/en/sector/overview
3 https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210024401
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Christopher Costain, P.Ag
Director, Agriculture Industry Sectors
Chris works with a team of passionate BMO professionals who serve our customers in the agriculture sector across Canada, providing financial solutions, strategies, …(..)
View Full Profile >Farming in Canada is one of the oldest industries and continues to play an integral economic role, domestically and beyond. Between traditional farming, food and beverage processing, ag-tech innovation and more, the industry contributed about $143.8 billion, or approximately 7%, to Canada GDP in 20221.
The sector has a lot more potential, given that farmers in Canada and around the world will need to increase food production by 60% between now and 2050 to meet demand2. To meet the on-going global demand, the sector needs to put more emphasis in areas like innovation, operational efficiencies and especially, succession planning.
According to Statistics Canada, 60.5% of farm operators were older than 55 in 2021, a number that’s been trending higher over the past few decades3. But at a time when food scarcity is a growing concern, few have a plan to transition their business. As many as 88% of farmers say they have no written succession strategies in place3.
Preparing for the next phase
The process to begin your succession plan should begin as soon as possible as it can be a lengthy process as it forces you to analyze all the parts of your business (and life). Where do you want to see your business in five years or ten years? What is the value of the business now and at the time of sale? How and who will manage the finances from the sale? Who do you see being the successor? Succession planning can go beyond the "traditional idea" of passing the business to children or family members. It can take on additional forms including selling the business to a co-owner or an outside party or leadership succession planning with existing employees.
Having a plan can ensure you don’t let the urgent overtake the important.
“At BMO, we strive to engage with our clients and successors at appropriate times during the transition journey. We encourage inclusion of successors in the banking conversations at appropriate stages for the business and welcome an open dialogue as the business transitions; tailoring our approach accordingly.” says Chris Costain, Director, Agriculture Industry Sectors, BMO Commercial Bank, Canada.
Taking tax into account
As you develop your succession plan, it’s critical to consider how all family members – whether they’re taking over the farm operations or benefitting from the sale of assets – may be impacted from a tax perspective.
While there are several agribusiness-specific strategies that can help protect your business and family, there are two key tax considerations when contemplating farm succession: The Lifetime Capital Gains Deduction and the Intergenerational Rollover.
The eligibility requirements are not identical for both tax incentives, although in many situations both are available to potentially decrease or defer tax on transfers of qualifying farm property.
Lifetime Capital Gains Deduction
As a Canadian farm owner, you can use the Lifetime Capital Gains Deduction – nearly $1 million in 2023 – to shelter capital gains on the sale or transfer of land used in a Canadian farming business or an interest in a family farm business owned through a corporation or partnership. The deduction is reduced if the person has already used it for past claims.
Whether you qualify for this tax deduction will depend on several factors, including whether you are actively engaged in the business of farming and whether you’re earning more from income sources other than farming.
If you qualify, there are many ways to maximize its benefits. One strategy is called crystallization. It allows you to immediately trigger the Lifetime Capital Gains Deduction without the farm ownership changing hands. This increases the property’s tax cost base, reducing any potential capital gain on a future sale or transfer of the farm.
This approach is often combined with an estate freeze, which transfers future growth of the farming business to (younger) family members and locks in the current value of the farm so that when you pass away, your estate only pays capital gains taxes on the accrued gain at the time of the freeze. Any gains post-freeze is eventually taxed in the new owner’s (child’s) hands.
Intergenerational Rollover
With the Intergenerational Rollover, you and your family can, in theory, defer paying capital gains tax on qualifying transfers of the farm indefinitely. This strategy lets you pass down the family farm to your Canadian resident children or grandchildren on a tax-deferred basis either during your lifetime or when you pass away.
Your kids will inherit your tax cost base, which means they’ll be the ones responsible for eventually paying the tax unless they also qualify for this deferral strategy. But if they want the proceeds from a sale, versus having their own children take over the farm, then a potentially hefty bill (assuming the capital gains deduction isn’t available) will come due.
These are complicated strategies, so it’s important to work with a tax expert who can advise on the tax implications specific to your family situation, including the Alternative Minimum Tax (AMT). It’s important to understand the recent proposed changes to the AMT which could reduce the benefit of the capital gains deduction.
The family farm continues to serve an important role in the Canadian economy and, as such, receives special status under Canada’s tax law. However, planning for family farm succession requires consultation with professional advisors, as the tax rules are extremely technical and complex.
With ag sector being the livelihood for many Canadian families and a vital component to the success of the economy, it’s important that farm owners take proper steps in passing the operations and ownership to someone else. Talking to a financial professional can guide you through the unique complexities of succession planning within your industry.
John Waters, Vice President, Director of Tax Consulting Services at BMO Private Wealth, contributed to this article.
1 https://agriculture.canada.ca/en/sector/overview
3 https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210024401
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