Peter Boys, Boys Financial Services

Case Study – Farm Succession Planning

Farm Buildings

I was referred to work with a couple in their mid 60’s who were needing to begin the succession planning process as they were looking at selling their farm. The husband was having issues with his back and could no longer lift anything heavy.

On the first visit to the farm I reviewed their initial financial information and it became very obvious that they would have had a significant tax bill to pay just with the recaptured depreciation with their farm equipment.

I asked them who their accountant was and the couple said they hired a family friend who is a retired bookkeeper living in Wetaskiwin that did not charge them much.

They mentioned they were planning to stay living in their house for the time being and rent out their farm land to a neighbor. They would then eventually move to the closest town as the neighbor wanted to buy their land and build a house for them as payment.

I suggested that it may be a good idea for them to meet with a farm CA and get an independent 3rd party review of their books and tax returns. This initially met with some resistance but I pointed out that even though this might cost $14,000 or more over the next few years, the tax saving opportunity would be in excess of $100,000 – so not a bad return on the investment. I offered to meet with them at the farm CA’s office in Wetaskiwin in a couple of weeks, sit in on the meeting and provide the CA’s with all their financials ahead of time.

I sent copies of their financials, current situation and future plans to the office in Wetaskiwin for them to review ahead of time with some of my ideas on things to consider. We came up with a number of strategies. The husband had been paying the wife a salary for a number of years and she had contributed to an RRSP every year – this would give us the opportunity to take advantage of a retiring allowance for her, move over $80,000 tax-free from the machinery sales proceeds into a spousal RRSP. We also came up with a way for them to bring four large pieces of farm equipment that were heavily depreciated up to current market value, to eliminate any recapture when sold. Knowing they planned to live on the farm for a few more years, I suggested they subdivide the home acreage out of the home quarter, as they would get more for it that way rather than selling it to the neighbor when they moved to town.

They agreed to all of our suggestions and after selling their machinery, the net tax saving over the next two years was just over $100,000. While still living on the farm they had the house renovated and the home acreage subdivided out. I advised them to invest $100,000 from their machinery sales process into a joint and survivor non-guaranteed prescribed annuity for lifetime income for both of them. They first needed to apply for a $100,000 joint and last-to-die and term 100 life insurance policy with premiums to the first death to replace the annuity funds. They were approved standard for this and opted to set up some favorite charities as the beneficiaries of their life insurance.

When they were ready to move to town, their neighbor built a new $500,000 home for them. Once they moved in, we set up a 50% Manulife One account on the house with Manulife Bank – this combined their chequing, line of credit and savings account all in one. I did this for several reasons; firstly there would be no interest cost as long as they did not use the line of credit and if they kept a positive balance in the account we would pay them the daily interest savings rate. Plus if they ever needed emergency funds, there is no need to cash in other savings or investments as they could borrow at prime plus a half using their home equity.

They figured that they got an extra $80,000 for the home quarter by subdividing the acreage out and renovating before the sale. Their neighbor ended up with all of their land at a fair price, financing the sale through Farm Credit as a result of me suggesting he talk to them as well as his bank. I got to invest the excess cash left over after building their house from their farm sale proceeds into an unregistered jointly owned segregated fund. This investment was fully guaranteed and in addition, I got to set up two tax-free savings account to max-out their available contribution room. They deposit the maximum allowed every January into these tax-free savings accounts, with the money allocated for their children and grandchildren.

I meet with them every year for a meal and a review to make sure they are on track and have no other issues that they need help with. They will never run out of money while still having a beautiful home and yard, as well as two new vehicles all paid for.
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