Incorporating Farm
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We have been able to get along really well as we are as far as doing the work, everything has always been split even anyways so that wont change much. We are hoping more along the lines of tax. We have gotten into the snowball of prebuying to get out of some income tax but have pretty much run out of room there. I always like how non-farmers talk about all the tax breaks we get as farmers, I've never been given many breaks!
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6,092 Posts
A downside to the incorporation is it makes the accounting a lot more difficult and expensive.
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Sounds like you are ready. There are distinct tax advantages within a corporation.
Like mbfarmer says it avoids the "my field/your field" mentality that ruins so many working relationships. More farms would successfully transfer if farming children were immediately cut into the profits of the farm company. Some more info here: http://www.thecombineforum.com/forums/27-general-farming-board/166706-incorporation.html
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How so? We've been incorporated over 30 years and I've never thought it was any tougher keeping my corporate books in shape compared to my personal books. Just more entries. It will cost more for a CA if your bank insists you use one.
Do you already own land/equipment/grain etc individually? If so, going straight into a partnership may not be the best route. If you go into a formal partnership first, for a period of two years or more, there are significant tax advantages when rolling the assets into the corp.
You will need to talk to an accountant, but I think you really need to make a least $100,000 more net than your cost of living will be (money you will have to take out of the corp to live). Corps have higher accounting and legal costs. Much harder to get your money out a corp later. At lower net incomes it will be a wash between paying more tax as an individual farmer and paying some of the higher fees in a corp. Until you get to the critical size it is usually better to build some wealth outside the corp and then when you roll it into the corp you start with a share holders loan of some value for future use.
Remember paying tax is a good thing. It means you are making money. Way too many farmers pay in the absolute lowest personal tax bracket for years and then get caught paying in the highest tax bracket when they near retirement. If you have some extra money now, don't be scared to pay a little tax on it and put into some investments like TFSA, RRSP, etc. if you haven't started or fully contributed.
Remember paying tax is a good thing. It means you are making money. Way too many farmers pay in the absolute lowest personal tax bracket for years and then get caught paying in the highest tax bracket when they near retirement. If you have some extra money now, don't be scared to pay a little tax on it and put into some investments like TFSA, RRSP, etc. if you haven't started or fully contributed.
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X2 Bud. I was going to say at least $85,000 of net income before you incorporate. If you are married income spliting with your wife is also a great way to reduce your income. Our accounting fees with the corp are atleast 2-3x of what they use to be in a non corp. If you can not manage your income through deferals and all the other things mentioned avove then it is time to incorporate. From what our accountant has indicated if you take more than $90-100,000 peresonally out of the corp per year per share holder through dividends you will be paying a fairly high tax rate that will be no better than a non corp. As Bud said a corp is a great way to manage extra income that comes into the farm but it seems difficult to get a lot of the money out personally without getting taxed substantially. Maybe someone else on the forum knows some secrets on how to get more income out of the corp personally per year without getting nailed by the government.
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You will pay almost the exact same tax farming personally or in corp farm- only advantage of corp is you can controll when you pay. Try shutting down a corp farm and getting money out and see how much fun and legal bills you have. Now if your going to pass the corp farm onto the next generation and there farming it's about the best way to do
What about the one time capital gains exemption? If you bring land into the corp, the land can no longer qualify for that, you would have to sell the whole corp to realize the exemption and most farmers just want the land not your whole business. Check with an accountant.
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I would not bring personal land into the company. It can be used to take income that is EI and CPP exempt, you can use your capital gains exemption later on that land. Buying new land within a company makes sense because you are paying less than half the tax on the principal!!! I assume kevlar and his brother's farm is making money and expanding down the road. Incorporating is a long-term decision and not for everybody. Corporations aren't a place to park money either(there are rules against that), you must be re-investing it in the farm or taking it out as rent/wages/dividends and paying taxes on it. Bud is right, paying taxes are a good thing.
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1,618 Posts
The tax advantages to doing this are huge, I would suggest a meeting with a "big" accounting firm that know what they are doing, include your dad as well, because the tax advantages for him are really significant.
One partnership with you, your brother, mom & dad. I bet mom and dad don't pay tax again... Ever.
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I don't know why it doesn't make sense for a young farmer to transfer land into a corp? Especially if it has risin in value significantly, the difference in price is tax free money that can be withdrawn from corp.
And closing corps and withdrawing money isn't that difficult.. , just need a good qualified accountant. And don't be afraid to spend 2,3, or 4 X more money on an accountant than you did before, it's usually money well spent.
And closing corps and withdrawing money isn't that difficult.. , just need a good qualified accountant. And don't be afraid to spend 2,3, or 4 X more money on an accountant than you did before, it's usually money well spent.
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In my opinion you don't want to incorporate until you have maxed out your RRSP and your income is into the 3rd bracket ($90,000). Incorporating does have some good features. For me incorporation best feature is it allows me to smooth out my personal income without getting into the 3rd bracket. Having a $500,000 income cushion is a good thing also. As said before you will have to be more precise with your books and your accounting fees will range from $1200 to $10,000 or more depending on who is your accountant. If you do incorporate pick your year end to be Dec 31st and do not put any land into the corp if you don't have to. Good luck.
or more depending on who is your accountant. If you do incorporate pick your year end to be Dec 31st and do not put any land into the corp if you don't have to. Good luck.
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Best advice I can give is to talk to an accountant with whom you trust. They will know what should work best for your situation.
Keep in mind that forming partnerships and incorporating is not a one step process. To minimize current and future tax obligations, it may take a period of several years to be properly set up and implemented. If you think it is something you will need a few years down the road, best to start right away. Like I said above, the most logical first step for you and your family is to enter into a formal partnership to begin with, and then look at incorporation after 2 years or more.
Accountants will not be cheap, but they are well worth the money if you find a good one.
Accountants will not be cheap, but they are well worth the money if you find a good one.
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