Governments cannot run big deficits without raising taxes. We are seeing some tax changes coming in 2017 with more to come.
Check into life insurance and annuities before year end: Tax changes are coming for corporately owned permanent life insurance. If you are considering a sale to a third party or transition to the next generation, you should check into the significant benefit that life insurance can bring to the table now. It can provide a large sum of tax-free cash in a cost effective manner to conserve or equalise one’s final estate. An annuity is a source of low or no tax income that can be guaranteed for life for individuals or jointly. Annuities will face an increase in taxation of income in the new year. With five year GICs only paying 2% or less, an annuity paying out from 6% to 8% may be a suitable place to invest some of your retirement savings.
Tax changes for poultry & dairy quota: For those of you who may be considering retirement and selling your quota in the near future, there are changes coming to how the sale of quota will be treated in 2017 from a tax perspective. This will require some advanced tax planning. I would urge any dairy or poultry operations who are considering selling to contact a qualified agriculture tax specialist for help with the tax planning that will be needed.
Increasing land values and capital gains means more tax: Farm families need to determine what the potential embedded taxable capital gains liability is in all of their land holdings by quarter. One of the toughest planning challenges I face when a farmer becomes disabled or passes away, is to figure out the ACB (adjusted cost base) that the land was acquired at on a quarter by quarter basis. The ACB comprises the value at time of rollover, gifting, purchase at the time it was acquired, plus any qualified improvements. The capital gain is the difference from this and the sale price or it’s assessed fair market value at time of transition or rollover. Then, the total capital gains calculated on all quarters is taxed based on 50% of the gain. For example: for 2,500 acres originally purchased at $150 an acre the ACB would be $375,000. If sold today for $3,500 an acre it would total $8.75 million, with a capital gain of $8,375,000! Taxed at 50% would result in a taxable income of $4,187,500. This would be reduced by any remaining lifetime capital gains exemption, but it still leaves a large tax bill!
A concern among tax advisors is that CRA may increase the inclusion rate for capital gains, such as the 75% rate it once was! Regardless, I would suggest any farm or small business families take the time to research both the ACB of your land or business values and compare it to current values. Record these on a simple spread sheet along with a list of qualified improvements that would bump up the ACB. Keep it in a safe place along with all the supporting documentation.
The sad fact is, without proper planning, the biggest tax bill most small business owners and farmers will pay is on death. Don’t put off some very simple steps to help ensure sale or transfer of your farm or small business is done in the most tax efficient manner possible.
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