Should You Incorporate Before the End of the Year?Jana Harder
As unique a lifestyle as farming and ranching is, it is also a business with assets that have seen an increase in value of the past 20 years. Just as with non-ag businesses, there are a number of legal structures available to ranchers, regardless of the exact nature of your farm or ranching operation. One option is the corporation. When you file the necessary paperwork with the Corporate Registry, you create a corporation, which is a separate legal person that owns and operates the business. This form of business ownership is becoming more common, and the 2016 census numbers from Statistics Canada show a 45% increase in the number of incorporated family farms in Canada in the last ten years, as the follow table shows:
Source: Statistics Canada. Table 32-10-0158-01 Farms classified by operating arrangement, historical data
As the end of the 2018 tax year approaches, many ranchers, along with their accountants and legal advisors, will be taking stock to determine if their current legal structure still fits their needs, or it is time to reorganize.
If your ranch generates more revenue than you need to cover your personal expenses in any given year, it is probably time to incorporate. Maybe it is time to allocate the future growth of the farm to the next generation, but you still want to make the major decisions. You may wish to give an equity stake in the ranch to a child-in-law while ensuring that the original homestead and the lands used in the business stay in the family should your child divorce. A corporation is separate from your personal affairs, and having this additional ‘person’ in the mix opens the door for tax and estate planning strategies that cannot be implemented with a proprietorship or a partnership.
Some advantages of having a corporation include:
- the corporation can have multiple owners (called shareholders), each with different types of rights to control the business and earn a profit;
- shareholders can make agreements, called unanimous shareholder agreements, about how they will operate the business and who can be a shareholder;
- With contracts and leases, you can bring the next generation more certainty in your estate and succession plans, as assets are owned by the corporation directly and corporations can exist indefinitely;
- the assets of your business can be transferred, or “rolled over”, to the new corporation on a tax-neutral basis;
- income splitting between spouses and children is available in some circumstances; and
- small business tax rates are lower than most personal tax rates, so there is a tax deferral when you re-invest the profits back into the business.
That is not to say that corporations do not have any drawbacks:
- a corporation is more complex and expensive to establish and operate than a sole proprietorship;
- corporations are taxed directly, so a corporate tax return must be filed every year;
- future financing is more complicated;
- farmland owned by a corporation is not eligible for the lifetime capital gains exemption; and
- annual filings are required to keep the corporation ‘alive’.
What does incorporating entail?
The decision to incorporate starts with a discussion with your accountant to determine if doing so will result in tax savings. Then, your lawyer will help you complete the incorporation process, from choosing a name and creating bylaws to issuing shares. While you can incorporate at any registries office, it is best to use a lawyer because the corporation must be set up with specific features, and you will save money by doing it correctly from the outset. Your accountant will advise on the timing of the incorporation and any rollovers to transfer assets to the new corporation, and your lawyer will prepare the paperwork for these transactions. You will also need permission from your lender if you have mortgages, equipment loans or lines of credit. If you think you might need the corporation as part of your 2018 tax planning, it has to be incorporated before December 31, so start the conversation with your accountant soon.
This article provides legal information only. You and your ranch are unique and deserve quality legal advice that considers your specific circumstances.
By Douglas S. Martinson, Heather F. Koltusky, Isabelle Cadotte and Genevieve (Genny) Loxley © MHR Law LLP, 2018
This article also appears in the October 2018 edition of Alberta Beef Magazine.