Presented by Randall A. ha

1. MNP
Finding the right answer starts here.
Farming Structures, Income Tax
And Succession Issues
Presented by:
Randall A. Hay, MBA, CA
Jason VanGarderen, BCom, CA

2. Overview
• Structure Options:
• Proprietorship
• Partnership
• Corporation
• Integration & the Power of After Tax Corporate Dollars
• Farm Replacement Property Rules
• Accessing the Capital Gains Exemption (“CGE”)
• Farm Corporations – Advanced Considerations
• Family Farm Corporation definition
• Accessing multiple Small Business limits
• Large Farms - $10M Capital

3. Overview, cont’d
• What is Succession Planning?
- The Process
- Timing
- Effective Family Governance
• Estate Planning Issues to be Aware of
– Will Update
• Example 1
• Example 2
• Example 3

4. Structure Options

5. Proprietorship
Description
• One individual in business independently
• Assets owned by the proprietor
• No separation between proprietor and business
Taxation
• Taxable at marginal personal tax rates
• Summary of BC Brackets :
Salaries: Dividends 1
11,101 - 41,500 ~ 21% ~ 7%
41,501 – 83,100 ~ 34% ~ 20%
83,101 – 128,900 ~ 38% ~ 26%
> 128,900 ~ 43.7% ~ 33.71%
• Basic personal amount $11,100
• Canada Employment Tax Credit $1,051
1 Personal tax on dividends is lower in order to account for corporate tax already paid.

6. Proprietorship, cont’d
Sale of the business
• Asset sale is the only option without restructure prior to sale
• Tax efficient sale of the farm is difficult
• Consider incorporation prior to sale
• If time permits (greater than two years), create a
partnership prior to the sale
• Spread income over a number of years
• Purchase price allocation considerations

7. Proprietorship, cont’d
General Comments on the Structure
• Very limited liability protection
• The only qualifying asset for the capital gain exemption (“CGE”)
is land and possibly production quota – may result in wasted
CGE
• Inventory – taxable on death or on beneficiary's return
• Qualifying assets can transfer during one’s life time or on
death to a Canadian child tax deferred
• Cash basis calculation of taxable farm income, therefore
deferral of tax available with year end planning
• If possible should avoid the use of this structure.

8. Description
• Two or more individuals (includes corporations) in business
together
• Assets owned by the partnership
• Provincial Partnership Act – but written partnership agreement
overrides
• Set-up and maintenance structure costs may initially be less
than corporations
Taxation
• Taxable at the investor (partner’s) level (ie personal tax
return/corporate tax return, etc.)
• Taxed at partner’s tax rate:
• Corporation – Corporate tax rates;
• Individual – Personal marginal rates; losses deducted
against other income

9. ’
Sale of the business
• Consider asset sale, sale of partnership interests1, or
incorporation prior to the sale
• Spread income over a number of years
• Purchase price allocation considerations
• Agri-stability margin stays with the partnership if sold as a going
concern
1 Income Tax Act considers a partnership interest equivalent to a share in a company.

10. ’
General comments on the Structure
• Limited liability protection with individual partners.
• A farm partnership interest (“PI”) may qualify for CGE
treatment which can result in a significant advantage on
incorporation, sale of the business, death, etc.
• Much simpler than a proprietorship transfer on death –
deal with the partnership interest versus individual assets
like inventory.
• If “Family Farm Partnership” (“FFP”), PI can transfer
during one’s lifetime or upon death, tax deferred to
Canadian Child.
• Cash basis calculation of taxable farm income

11. Corporation
Description:
• Separate legal entity
• Corporation owns the assets of the business
• Directors make decisions
• Investors are shareholders instead of asset owners
• Flexibility in the structure
• Voting vs non-voting shares
• Participating 1 vs non-participating shares
1 Participating means access to dividends and company net assets on Wind-up and dissolution
of company.

12. Corporation, cont’d
Taxation:
1. Corporate Level
• Taxable at corporate rates – active income in BC:
• First $500,000 net active income currently taxed at 13.5%;
• Greater than $500,000 net active income at 26.5% (2012 –
25%)
2. Investor’s or Shareholder Level
• Wages, dividends, director’s fees
• Wages taxed at full personal marginal tax rates, deductible
in the corporation
• Dividends result in dividend tax credit equal to tax paid by
the corporation on the income

13. Corporation, cont’d
Sale of the business
• Consider asset sale or sale of the shares
• Spread income over a number of years
• Purchase price allocation considerations
• Agri-stability margin stays with the company

14. Corporation, cont’d
General Comments on the Structure:
• Liability protection
• A farm corporation may qualify for the CGE which can result
in a significant tax advantage on sale of the business or
death
• Much simpler transfer on death – deal with the shares
versus individual assets like inventory.
• If a “Family Farm Corporation” (“FFC”), shares can
transfer during one’s lifetime or upon death, tax deferred
to Canadian Child.
• Low initial tax rates - ability to reinvest low tax rate dollars
• Cash basis calculation of taxable farm income

15. Integration
Canadian tax system is built on the concept that personal and
corporate tax should be integrated
• Tax paid by the company + tax paid on the dividend to the
individual = tax paid as if the individual earned the income
directly
• Provincial influences – integration is not perfect
• Timing considerations – power of after tax corporate dollars
Example…

16. INTEGRATION
Greater than
First $500,000 $500,000
Company $100 $100
Corporate Tax 13.5% (13.5) 26.50% (26.5)
Retained Earnings 86.5 42.66% 73.5 44.07%
Dividend Tax 33.71% (29.16) 23.90% (17.57)
After Tax Person Cash $ 57.34 $ 55.93
Assumes highest personal tax bracket of 43.7%
In theory, corporate tax plus personal dividend tax should equal the personal tax paid on $100 of $43.7.
Due to Provinces setting their own provincial tax rate, there is not perfect integration. In BC there is
a 1.04% (43.7 - 42.66) tax savings for dividend versus salary if corporate tax rate = 13.5%. If account
for CPP on salary, difference increases to 2.4%.
Dividends do not attract CPP nor create RRSP room.
Salary is subject to CPP (possibly EI) and creates RRSP room.

17. Power of After Tax Corporate Dollars
Company Proprietor
(tax rate 13.5%) (tax rate 43.7%)
Before tax cash $115,600 $178,000
Tax paid (15,600) (78,000)
Bank Loan repaid $100,000 $ 100,000
It takes $62,400 ($78,000 - $15,600) less Corporate cash to repay $100,000
bank loan.
• best tax shelter in North America
• better than RRSP’s
• creates corporate wealth

18. Farm Replacement Property Rules
Proprietorships, partnerships and corporations can replace farm
properties sold by purchasing replacement farm properties before the end
of the following taxation year in which farm properties were sold.
July 31st year-end:
Sold farm land and buildings December 31, 2011
Must replace farm land and buildings by July 31, 2013
Generally, full tax deferral if spend as much on replacement farm as
received.
Must replace land and buildings with land and buildings.
Must replace quota with quota.

19. Accessing the Capital Gains Exemption
Assets that can qualify assuming definitions met:
• Farmland
• Production Quotas
• Family Farm Partnership Interests
• Family Farm Corporation shares 1
Accessing multiple family exemptions when value exists:
• Inter-vivos gift to children, 3 year hold prior to sale
• Transfer on death to spouse
• Building equity in hands of spouse/child
Possible Side-effects of reporting capital gain offset by CGE in
personal tax returns:
• If over age 65, claw back of OAS
• Alternative Minimum Tax
• Drug plan and other social programs tested by income, not taxable
income
1 A company cannot claim the CGE. Only individuals who own shares of a family farm company can claim CGE.

20. ACCESS CGE UPON INCORPORATION OF
FARM PROPRIETORSHIP IN COMPARISON TO FARM PARTNERSHIP
Proprietorship FMV Cost Capital Gain
Inventory $ 500,000 $ - $ N/A
Buildings and equipment 500,000 500,000 -
Land 700,000 100,000 600,000
Quota 2,000,000 1,200,000 800,000
$ 1,400,000
Ignore depreciation on buildings and quota
Bank debt $1,500,000
Available $750,000 CGE for proprietor
Company Tax Balance Sheet 1
Do not elect Elect to use $750,000
$750,000CGE CGE
Inventory $ Nil $ Nil
Buildings 500,000 500,000
Land 100,000 100,000
Quota 1,200,000 1,950,000 2
$ 1,800,000 $ 2,550,000
Bank Debt $ 1,500,000 $ 1,500,000
Due to Shareholder 300,000 1,050,000 3
$ 1,800,000 $ 2,550,000
1 Under Income Tax Act, can elect a transfer price on each type of asset which can cause no income tax upon incorporation
or can elect a price which triggers a capital gain equal to $750,000 CGE.
2 Elected quota transfer price of $1,950,000 which triggered $750,000 capital gain offset by $750,000 CGE.
3 Additional $750,000 shareholder loan avoids maximum dividend tax of 33.71% for an undiscounted
maximum personal tax savings of $252,825 ($750,000 x .3371)

21. Partnership - Husband and Wife
FMV Cost
Partnership:
Inventory $ 500,000 $ -
Buildings and equipment 500,000 500,000
Land 700,000 100,000
Quota 2,000,000 1,200,000
Bank debt (1,500,000)₁ (1,500,000)
Partnership Interest $ 2,200,000 $ 300,000
Available $1,500,000 CGE ($750,000 per partner)
Company Tax Balance Sheet
Elect to use $1,500,000 CGE
Inventory $ 500,000 nil inventory cost for tax deduction purposes
Buildings 500,000
Land 300,000
Quota 2,000,000 transferred separately from partnership interest,
$ 3,300,000 recapture may apply. Tax cost will be adjusted
for amortization purposes
Bank Debt $ 1,500,000
Due to Shareholders 1,800,000
$ 3,300,000
Additional $1,500,000 shareholder loan avoids maximum dividend tax of 33.71% for an
undiscounted maximum personal tax savings of $505,650 ($1,500,000 x .3371)
1 Partners hip interes t, like a com pany s hare, includes the FMV of all partners hip as s ets - inventory. Sale of directly
inventory directly res ults in 100% incom e inclus ion. Sale of partners hip interes t in a capital gain eligible for offs et
by the $750,000 CGE.

22. Advanced $750,000 CGE Company Strategy
Use $750,000 CGE
Form parent company (Parentco) for estate planning purposes.
Transfer on a tax free basis all "hard" farm assets - land, buildings and equipment - from Farmco to Parentco.
Result maybe adding to shareholder loan $750,000 plus without personal income tax (subject
to CRA denying tax benefit)
Mr & Mrs A
Parentco Buildings, equipment and land
Farmco
Herd & quota

23. Family Farm Corporations and Family Farm
Partnerships– Is the definition met?
• Family Farm Corporation (“FFC”) and Family Farm Partnership
(“FFP”) – all or substantially all of the assets used in a farming
business operated by a family member
• Watch for custom work division, trucking division, investment
assets, other non-farming assets mixed in with the company – if
they exceed 10% of the Corporation’s total assets the definition
may not be met
• Penalty may be that the ability to gift shares to children during
lifetime or on death eliminated.
• May result in costly restructuring requirement – put a structure in
place that can deal with this issue
• You may be exposing farm assets to a non-farming business
liability and vice versa.

24. NON-QUALIFYING FAMILY FARM CORPORATION - EXAMPLE
FMV %
Inventory $ 500,000
Buildings and equipment 500,000
Land 700,000
Quota 2,000,000
3,700,000 64
Trucking division 1,500,000
Rental property 600,000
2,100,000 36
$ 5,800,000 100
Bank debt $ 1,500,000
Due to shareholder 300,000
Share value 4,000,000
$ 5,800,000
Tax on deemed disposition, on death of surviving spouse:
$4,000,000 x 21.85% = $874,000
If purify Family Farm company with two other companies each own Trucking
division and Rental property:
$2,100,000 x 21.85% = $460,000
Recommended Structure:
Mr & Mrs A
Farmco
Farmco Rentalco
Truckingco

25. Accessing Multiple $500,000 Small Business
Limits Taxed at 13.5%
• If you plan on growing to a size that will generate significant
income, plan for this ahead of time
• Consider joint venture or corporate partnership structures to
increase access
• Need to review cost/benefit analysis in 2012 when high
corporate tax rate is 25% in comparison to low corporate tax
rate of 13.5%. Benefit on an additional $500,000 x (.25 - .135)
= $57,500 p.a. must be compared to increased complexity,
cost and risk of CRA denial additional $500,000 taxed at
13.5%.

26. Larger Farm Corporations - $10M Capital
• At $10M, access to 13.5% low corporate tax rate on $500,000 grind
starts.
• At $15M, access to 13.5% low corporate tax rate on $500,000 is nil.
• Calculated on a combined bases with associated companies.
• Starting to become a more prevalent issue in the farm sector – large
dairy farmers with costly quota, grain farmers with large inventories,
land and equipment.
• Be aware of the issue – if you plan on growing, make sure your
structure allows for the growth without this issue.
• Example of only one planning option (there are other planning
options) – keep investors in the farm in separate, non-associated
entities.

27. What is Succession Planning?
Succession is: Succession is not:
• A process • An event
• About family, people and • One person’s problem
relationships • About minimizing taxes
• About ownership and • About equality
management
• Driven by technical issues that
• About what is fair are handled by lawyers and
• Driven by the family values, accountants
wants and concerns

28. The Process
• I want to retire
• Do I sell? Who to?
– Third party
– Family
– Management
• Or do I keep the business?
– For my family
– For myself

29. The Process, cont’d
• What is it worth?
• Who will buy it?
• How will they pay?
• Business plans and planning for
the business
• Ongoing process and monitoring
• Closure – moving on

30. Timing
• The sooner the better
• Family inputs and delays
• Most important – START!
• Get right team together at outset

32. Effective Family Governance
 Maximize consensus around protocols Clarify objectives, process, authority,
 Encourage “fair process” – valuing responsibilities
consistency
Avoid overlap between structures but
 Build clear supervisory system for
encourage discussion
each body
Be prepared to revise any mandate
 Have a process to make revisions
 Maximize openness of communication. and have process for doing so
 Provide for appropriate and timely Use non-family advisors to increase
communication between the family, effectiveness and efficiency of family
directors and management governance bodies
 Create a process to allow question Search for opportunities to learn from
workings of any body
other families.

33. “Hagar the
Horrible”

34. Estate Planning Issue To Be Aware Of
1. Will
Last time updated?
Result: All children – active and non-active – inherit all and
business/farm no longer remains in family.
• “Fair is not always equal”
• Insurance to create fairness?
2. Irreversible Estate Freeze Too Early
Result: “Windfall” appreciation – quota – and split in the family.

35. Estate Planning Issues To Be Aware Of, cont’d
3. Losing the Ability to Transfer Assets on a Tax-
Free Basis
• 10% threshold non-qualifying passive investment type assets
exceeded.
• No Ongoing Purification – Small Business Corp/Family Farm
Corp
• Lose access to $750,000 Capital Gains Exemption
• Lose access to tax-free intergenerational transfer family farm
corporation
• Farmland transferred 50-50 to siblings

36. Estate Planning Issues To Be Aware Of, cont’d
4. Breaking Up Is Hard To Do When Parents
Gone
Parents Alive – Relatively easy to carve off company
assets into several companies with no immediate tax
consequences.
Parents Not Alive – Into much more restrictive “butterfly”
rules. Professional Costs can exceed $100,000.

37. Will Update – Ongoing Process and Critical
Example #1
Will never updated – simply states estate assets to surviving spouse.
If no surviving spouse, split equally amongst all my children.
No insurance in place.
Farmco estate asset value
- Shareholder loan – nil
- Share value - $19M.
Parents own all shares of Farmco.
Both parents die in plane crash.

38. Will Update – Ongoing Process and Critical
(cont’d)
Example #1: (cont’d)
Six Siblings:
Farm Child
Darryl - operated dairy farm for 30 years and lives with his family on farm.
Non-farm Children – all live in various towns with own career and families.
Lacy
Larry
Bertha
Betty
Bobby
As per the outdated Will, all six (6) children each inherit $3.167M of Farmco
shares. Farmco sold to pay out children.

39. Example #2
Parents Will updated for the undernoted Farmco share distribution
No company insurance on lives of children
Farmco estate asset value
- Shareholder Loan – nil
- Shares $19M
Six Siblings
Will Distribution
Darryl $14M
Lacy 1M
Larry 1M
Bertha 1M
Betty 1M
Bobby 1M
$19M

40. Example #2 (cont’d)
Company redeems shares owned by non-farm children with 3% dividend
rate over 20 years.
Annual payment - $ 326,290
Total payment - 6,525,797
Payments to non-farm children taxable dividends in their hands.
Interest paid on company bank loan to redeem shares may not be fully
tax deductible.

41. Example #3
Company Insurance in place to buyout Non-Farm Children
Company acquires $5M T100 Life Insurance on parents lives.
Parents – 50 years old
- 32 years remaining life
Annual Premium (estimate) - $51,435
Total Premiums paid over 32 years - $1,645,920
IRR1 Company Owned Life Insurance Policy
Before Tax – 15%+
Caveats and Other Issues:
• BC Wills Variation Act
• Voting vs non-voting shares
• Maximum amount of shares owned by non-farm children to be bought back by company each year
defined
• Accessing non-farm children’s $750,000 CGE.
1 Internal Rate of Return before tax that is required to grow annual insurance premium of $51,430 paid over 32 years to $5M.
This IRR includes tax benefit of company ownership and discounted tax benefit of Capital Dividend account.

42. What To Do??
DO NOT HESITATE TO
CONTACT A
SPECIALIST AT MNP
WE CAN ASSIST IN ALL AREAS INCLUDING,
but not limited to:
-Year ends
- Tax planning
- Estate and Succession Planning
- Family Governance Model
- Choosing insurance brokers and dealing with insurance brokers on
your behalf to review appropriateness of amount and type of insurance

43. Thank you.
Questions?