The latest Farm Credit farm land values report shows that Alberta had the 2nd largest increase of any province in 2015 of 11.6%, just behind Manitoba. So what’s driving these differences within provinces? Higher values of farm cash receipts can account for some of these variations. For example, 2015 receipts for pulses and special crops are estimated to be up 22%. The largest increase in farmland value across the prairies was in areas where pulse crop production was concentrated, hence the correlation between higher cash receipts and increasing land values.
Farm land has increased rapidly in value over the last 15 years. This is great for leveraging for borrowing, providing rental income in retirement, or to sell at a premium price to fund one’s retirement. It’s not so great for young farmers looking to expand their land base, or for farming families transitioning the farm to a child grappling with how to equalise things for their non-farming children.
So what does this have to do with estate planning? Let’s look at an example. Dad and mom are in their late 60’s and have four children working at good jobs in other provinces with no interest in the farm. They plan to sell the farm but would like to leave some legacy for their children and grandchildren after they are gone, while ensuring they will be able to retire comfortably. They own eight quarters of land, currently worth an average of $2,500 an acre, with a market value of $3.2 million. The total purchase price or Adjusted Cost Base (ACB) is $1 million, which would mean a capital gain of $2.2 million. They both still have $1 million of lifetime Capital Gains Exemption room to use.
After using their Capital Gains Exemption there would still be a capital gain of $200,000 taxed at 50% of the gain. $200,000 taxed at 48% would mean $96,000 of tax payable, plus some Alternative Minimum Tax would be assessed as well. They also have $500,000 of RRSPs between them which is great for income, but should they both die in a common disaster the result would be that their estate would be hit with an additional tax bill of $240,000. As a worst case scenario, $336,000 could end up going to CRA. Their concern was how to pass their full estate value onto their children and grandchildren.
Also consider another situation, where one son is working on the farm with his parents, and there are three other siblings who have no interest in farming but feel they are entitled to some of the value of the farm. What is the best way to both conserve and equalise their estate to the non-farming children and grandchildren?
In these examples, joint last-to-die life insurance policies can be a useful tool to fill in the tax hole in an estate, or to equalize an estate so that non-farming children get their share. Unfortunately, taxation of life insurance policies is changing for the worse in 2017.
If you’re planning to transition or sell your family farm or small business within the next five years, take the time to sit down with a qualified financial advisor group. Both our provincial and federal governments are planning to increase taxes, so working with professionals to implement some effective planning strategies could save you and your estate hundreds of thousands of dollars. Every year delayed narrows the options available and increases the costs.
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