1. ESTATE PLANNING FOR FARMERS & RANCHERS Colin Simmons Counsel West Law

2. Integrate financial, legal and tax aspects with human or family considerations

3. It is easier to deal with legal and tax aspects of succession It is easier to deal with legal and tax aspects of succession Short term tax objectives can conflict with succession plan Short term tax objectives can conflict with succession plan A parent’s best interests are not always the same as the childrens’ best interests A parent’s best interests are not always the same as the childrens’ best interests

4. OBJECTIVES IN FARM SUCCESSION PLANNING

5. 1. Security for Parents Place to live for remainder of lives Place to live for remainder of lives Sufficient income Sufficient income

6. 2. Fairness for Children Awareness and acceptance by all parties Awareness and acceptance by all parties Avoidance family disputes Avoidance family disputes Difficult because farm assets are usually worth more than non-farm assets Difficult because farm assets are usually worth more than non-farm assets Communication among family members is essential Communication among family members is essential

7. 3. Keeping the Farm in the Family Farming child receives a viable operation Farming child receives a viable operation Farming child probably won’t be able to pay fair market value Farming child probably won’t be able to pay fair market value Potential conflict between the objectives of the parents and the successors Potential conflict between the objectives of the parents and the successors

8. 4. Eliminate or Minimize Tax Proper tax planning results in payment of little or no tax Proper tax planning results in payment of little or no tax Rollovers for farm assets - inter vivos and on death Rollovers for farm assets - inter vivos and on death $500,000 capital gains exemption $500,000 capital gains exemption Conservation easement Conservation easement Right or things election on death Right or things election on death Taxation can be used to encourage farm families to begin to create a succession plan Taxation can be used to encourage farm families to begin to create a succession plan

9. 5. Avoid Unnecessary Professional or Advisor Fees You can pay me now or you can pay me later You can pay me now or you can pay me later Advisors should communicate with each other Advisors should communicate with each other Someone should be the quarterback Someone should be the quarterback

10. Tax Consequences: Taxable disposition for capital gains Taxable disposition for capital gains Spousal rollover - s. 73(1) - automatic Spousal rollover - s. 73(1) - automatic Can elect out of the rollover Can elect out of the rollover Adjusted Cost Base or Fair Market Value, nothing in between Adjusted Cost Base or Fair Market Value, nothing in between …. continued

11. Tax Consequences: Spousal rollover - s. 73(1) - automatic Spousal rollover - s. 73(1) - automatic Use of implied or constructive trust Use of implied or constructive trust Married 40 years, all land has been acquired and held in the husband’s name Married 40 years, all land has been acquired and held in the husband’s name Interest in land transferred to wife during husband’s lifetime followed by subsequent disposition - potential for attribution of capital gain Interest in land transferred to wife during husband’s lifetime followed by subsequent disposition - potential for attribution of capital gain If husband owned half interest as trustee for wife - she could use her Capital Gain Exemption (CGE) If husband owned half interest as trustee for wife - she could use her Capital Gain Exemption (CGE)

12. Tax Consequences: Spousal rollover - s. 73(1) - automatic Spousal rollover - s. 73(1) - automatic Use of implied or constructive trust Use of implied or constructive trust Implied and constructive trusts have been found to exist in matrimonial property cases but there but not dealt with in tax cases Implied and constructive trusts have been found to exist in matrimonial property cases but there but not dealt with in tax cases Property not transferred into spouses name and subsequent disposition of beneficial interest - no attribution of capital gain Property not transferred into spouses name and subsequent disposition of beneficial interest - no attribution of capital gain

13. Tax Consequences: Rollover to child - s. 73(3) Rollover to child - s. 73(3) Qualifications Qualifications Land is in Canada Land is in Canada Transfer to a child of the taxpayer Transfer to a child of the taxpayer Property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis Property was, before the transfer, used principally in the business of farming in which the taxpayer, the taxpayer’s spouse or any of the taxpayer’s children was actively engaged on a regular and continuous basis Different for pre and post June 1987 Different for pre and post June 1987.... continued

14. Tax Consequences: Rollover to child - s. 73(3) Rollover to child - s. 73(3) Transfer for no consideration - rollover Transfer for no consideration - rollover Can’t elect out of this rollover Can’t elect out of this rollover Consideration paid between Adjusted Cost Base and Fair Market Value is proceeds of disposition for tax purposes and becomes the Adjusted Cost Base Consideration paid between Adjusted Cost Base and Fair Market Value is proceeds of disposition for tax purposes and becomes the Adjusted Cost Base Consideration must be provided to use CGE Consideration must be provided to use CGE

15. Tax Consequences: GST is normally applicable on transfer of land, except when GST is normally applicable on transfer of land, except when Purchaser is registered for GST at the time of the transaction, the vendor does not have to collect GST Purchaser is registered for GST at the time of the transaction, the vendor does not have to collect GST All or substantially all of the assets of the vendor are being sold to a GST registrant All or substantially all of the assets of the vendor are being sold to a GST registrant A parcel of land is being transferred to a family member for that person’s personal use and enjoyment A parcel of land is being transferred to a family member for that person’s personal use and enjoyment

16. Canada Revenue Agency Policy There is no GST collected when interest in land is transferred to a family member for no consideration and the family member is not deriving income from the property. There is no GST collected when interest in land is transferred to a family member for no consideration and the family member is not deriving income from the property. e.g. Land put into Joint Tenancy THIS IS ADMINISTRATIVE POLICY

17. Issues AMT AMT CNIL CNIL ABIL ABIL Pre-86 capital losses Pre-86 capital losses Clawback of Old Age Security Clawback of Old Age Security Capital Gain Reserve Capital Gain Reserve Valuation of FMV and ACB of land Valuation of FMV and ACB of land

18. Transfer of Farm Assets other than Land

19. Inventory Inventory No rollover or CGE No rollover or CGE Income Income Rights or things on death - still may be tax on death if tax is being deferred Rights or things on death - still may be tax on death if tax is being deferred Deferred income problems Deferred income problems Strategy to transfer livestock to corporation using s. 85 of the Income Tax Act Strategy to transfer livestock to corporation using s. 85 of the Income Tax Act Use land and CGE to bring debt into corporation Use land and CGE to bring debt into corporation

20. Depreciable Property Depreciable Property Rollover to children but no CGE except for buildings Rollover to children but no CGE except for buildings Strategy to rollover depreciables and transfer land at FMV to avoid recapture Strategy to rollover depreciables and transfer land at FMV to avoid recapture Deal with debt Deal with debt Transfer of Farm Assets other than Land

21. Shares in the Stock of a Family Farm Corporation Shares in the Stock of a Family Farm Corporation Rollover and CGE Rollover and CGE All or substantially all of the assets of corporation have to be farm assets All or substantially all of the assets of corporation have to be farm assets Corporation may have to be purified to be eligible to be rolled over or to use the capital gains exemption Corporation may have to be purified to be eligible to be rolled over or to use the capital gains exemption Different qualifications for CGE and rollover Different qualifications for CGE and rollover Transfer of Farm Assets other than Land

22. Interest in a Family Farm Partnership Interest in a Family Farm Partnership Rollover or CGE Rollover or CGE Capital asset for capital gains purposes Capital asset for capital gains purposes All assets relate to value All assets relate to value Clauses to preserve the partnership on the death of a partner Clauses to preserve the partnership on the death of a partner …. continued Transfer of Farm Assets other than Land

23. Shareholder Agreements Provide for remaining shareholder to continue business while the other shareholder is paid for equity on: Provide for remaining shareholder to continue business while the other shareholder is paid for equity on: Death Death Disability Disability Voluntary withdrawal Voluntary withdrawal Divorce Divorce Buy-sell provisions are different for non-farm businesses due to high capital and low income of farms Buy-sell provisions are different for non-farm businesses due to high capital and low income of farms

24. Shareholder Agreements Shotgun clauses don’t really work on farms because shareholders often cannot afford to pay fair market value for the other’s shares Shotgun clauses don’t really work on farms because shareholders often cannot afford to pay fair market value for the other’s shares Payout during lifetime Payout during lifetime Structured payout over time Structured payout over time Put-call options Put-call options

25. Shareholder Agreements Payout on death - life insurance Payout on death - life insurance Avoid application of revised stop-loss rules Avoid application of revised stop-loss rules Take advantage of rollovers to spouses and children Take advantage of rollovers to spouses and children Use capital gains exemption when available Use capital gains exemption when available Capital dividend declared on the shares of the farming child who uses proceeds to purchase shares from other shareholders Capital dividend declared on the shares of the farming child who uses proceeds to purchase shares from other shareholders Can be used to payout non-farming children Can be used to payout non-farming children Farming child takes over farm Farming child takes over farm

26. WILLS

27. 1. Young farm family Equally to all survivors Equally to all survivors Land left until youngest child attains a certain age Land left until youngest child attains a certain age Other assets as each child reaches a certain age Other assets as each child reaches a certain age WILLS

28. 2. Mature farm family If no children farm, use city will If no children farm, use city will If children farm, succession plan must be created first and then will drafted to fit plan If children farm, succession plan must be created first and then will drafted to fit plan WILLS

29. Process to Determine Fairness Mom and Dad must first agree with each other on initial plan Mom and Dad must first agree with each other on initial plan Plan should be discussed with each child individually Plan should be discussed with each child individually Family meeting should then be held to discuss the plan Family meeting should then be held to discuss the plan Perhaps several meetings Perhaps several meetings

30. Process to Determine Fairness Family should consult professionals to learn about available alternatives Family should consult professionals to learn about available alternatives Family should meet again to decide on alternatives Family should meet again to decide on alternatives Professionals should then be asked to put plan into effect Professionals should then be asked to put plan into effect

31. Fairness Tools Non-farm assets Non-farm assets Shareholders loans Shareholders loans Acreages Acreages Payment by farming child Payment by farming child Farm assets that aren’t necessary for the farm operation Farm assets that aren’t necessary for the farm operation Life insurance Life insurance

32. Colin Simmons Counsel West Law Calgary, Alberta Phone: 403-252-1162