Current statistics and the number of baby boomers reaching retirement age indicate that a large number of farms and small businesses will change hands over the next five years. The worrying issue is that a recent survey found that just a quarter of farm or small business owners had any kind of succession plan to prepare for their eventual retirement.
Of those polled, regardless if they had a formal succession plan or not, when it came time to retire many planned to transfer it to a family member or sell it to a third party, partner or employee. Nearly a quarter planned to simply close their business, but a full 27% were unsure as to what they’d do.
In 18 years in dealing with farm and small business owners, I find this rings very true, as they take great pride in their independence. Unfortunately this can work against them as related to sale or succession planning, resulting in them putting the whole idea on the back burner to sometime down the road.
The longer this process is delayed means the greater the risk that they or their families may be forced into some tough choices as a result of sickness, disability or death. Farmers and small business owners often have significant tax liability from RRSP income, capital gains on their business share valuation, property or land, and recapture of depreciation on machinery.
Today’s ever increasing farmland and business values keep adding to the imbedded tax liability and planning complexity, as relating to both retirement and estate planning issues. One of the most effective tax planning strategies is time. Ideally, at least five years should be considered when incorporating, setting up family trusts, investment holding companies or other complicated structures.
Life insurance can play a large role in conserving the value of an estate by offsetting tax, debt or other liabilities. It can also provide an affordable way to compensate children not involved in the farm or business if one sibling takes over. Life insurance can also be used to tax shelter surplus cash while the insured persons are alive, and provide additional retirement income by leveraging the cash value.
The actual mechanics of the succession planning are relatively easy to design and implement, but don’t happen without a consensus between all of the parties involved. Unfortunately, it’s easy to get bogged down and frustrated with the emotional issues that usually result from the lack of communication.
This is where farm and small business families need to work with someone who takes a team approach, to guide them and keep the process on track, as procrastination often becomes an issue when having to make the tough choices required. Farm families especially have some unique tax planning opportunities and need to work with a team of professionals who understands them and how best to structure them.
If sale or succession issues are coming up in your near future, get started into the process sooner rather than later. Don’t let the CRA by default be a major beneficiary of the legacy you have laboured for over your lifetime!