The aging of our farm or small business owners in Alberta highlight the urgent need for many to get started into the sale or succession planning process. This or be forced to as a result of accident, sickness, disability or death over the next 5 to 10 years. Here’s some food for thought about the potential negative consequences in delaying the process.
Consider that with today’s ever increasing land values, the embedded capital gains tax liability also increases when sold or transferred to the next generation. As of now, farmers have access to $1 million of individual lifetime capital gains exemption to help soften the tax hit when going through this process. Small business owners have $813,600 at this time, with the lifetime exemption available to individuals on the sale of unincorporated farm or small business assets, or on shares of qualified Canadian small business corporations.
As with all government programs, this exemption allowance comes with a number of rules and conditions attached. But when sufficient time is allowed to enable one’s financial advisors to develop and implement the needed planning strategies, it can ensure the eventual sale or transfer takes place in a tax effective manner.
To aid in this process, Canadians farms and small businesses have a range of options, including different ownership structures ranging from sole proprietorship through partnership arrangements, incorporating, setting up holding companies, family trusts, etc. In order for corporations to qualify for the lifetime capital gains exemption there are a number of complex tests to be met. Essentially they need to have the right “asset mix” at time of disposition and in the two years prior to sale, plus be subject to a holding period test. With the sale come things such as claw back of OAS payments and the potential to be assessed with the alternative minimum tax.
As to which is the best structure, it comes down to the needs of each individual or family, the nature of their business, the likelihood of success of the business, and the potential tax benefit verses the costs involved with each option. Long-term success depends on allowing sufficient time to set up such things as a holding company or family trust.
In dealing with farm or small business families over the last 18 years, several issues come to mind that can delay or complicate the process. Farmers tend to dislike paperwork, paying taxes or professional fees. Many also find it difficult talking about sale or succession issues with their families. It’s getting better with time as more families realize the importance of discussing and planning for the eventual sale or roll-over, but most need someone who has an intimate understanding of their issues and needs to quarterback the process, co-ordinating the accounting, legal, tax, banking and other professionals. This person can also help keep lines of communication open through what can be a lengthy process.
It’s better to start sooner than later. It’s also important to find someone who has experience in the process to successfully steer your farm or small business sale or rollover. In the end, the final goal is for the whole family to be able to get together for a meal at occasions such as Easter, Thanksgiving or Christmas without any acrimony or hard feelings.
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