RESOURCES

Tax Changes and Your Family Farm What You Need To Know

On January 25th 2018 in Assiniboia Sk, Vern Peters CPA, CA, and Partner with Stark & Marsh discussed the most recent income splitting and passive assets changes along with:
  • Transition planning; next generation & exiting the farm
  • Land Companies and why all farmers should be considering them
  • Asset Freezes as an alternative to Share Freezes
 
Topic 1: Land Companies

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Topic 2: Asset Freeze

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Topic 3: Income Splitting

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Topic 4: Excluded Shares

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Topic 5: Excluded Business

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Topic 6: Passive Assets

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Q & A Session
 
  1. So if they treat crop share rent like cash rent even if the crop share, the landlord, buys some expenses, they will still be referred to as capital? This complicates things even further when you are sharing expenses as well; is it sufficient? I’m not sure. Under the old rules, I would say yes it adds weight that this would be active income; now that the rule have been adjusted and they are trying to go after 70% they may choose to go after this type of scenario more aggressively as well. Joint ventures would outline both parties contribution, the expenses that were being shared, similar to a crop share arrangement with more elements. It would also indicate that you were participating in the management and decision making; this would help make it appear more active.
  2. Passive income in your operating company – to reduce that – is it possible to purchase first of all farmland with that to reduce the number? If you are actively farming that land the yes. You would be converting a passive asset into an active asset.
  3. Instead of paying dividends out, can you hold cash in a company? And if so how much? There is no limit on what you can hold however if you hold too much you are risking, for instance,  that cash not being eligible for rollover if you have children and also not eligible for the capital gains exemption. If you have more then 10% of your assets in passive income then this is what you are putting at risk.
  4. Is cash in the bank considered passive asset? Yes. But it could be a good or a bad asset. CRA would look at that cash to see if it fluctuated or remained the same. If it remained the same and for instance never dipped below 1 million dollars CRA would likely deem it has a bad asset; if the cash fluctuated it could partly be a good asset. Each situation is different. Vern Peters refers to it as “cash that is not required for the next operating cycle” which can be difficult to determine because while you are going to have cash outflows for input, you are also going to have cash inflows from grain sales. So you need to decide if you really need that cash or is it a bad asset?
  5. If it’s only the income off of that cash that would be taxed at a high rate – in having more than 10% would you give up your capital gains? Yes, there are separate rules. If you have more than 10% in inactive or passive assets you are jeopardizing your capital gains deduction on those shares and rollover. How passive income is taxed is based on being an old or a new asset; if it’s a new asset is it is it $50,000 of less? Or is it more than $50,000.00.
  6. Are the arm’s length versus non arm’s length policies still in effect?  Yes, that is still in place. Specified corporate income & specified partnership income is still there.

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