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Incorporating Your Farm Business

Have you been running your business on your own for years? Have other farmers talked about incorporating their farms? Are you wondering what’s best for your situation? Incorporation – creating a new legal entity called a corporation, that is your “company” – offers many benefits. But not every farming operation should be incorporated. It’s important to know your options and what incorporation could mean for you and your operation.

Here’s an overview of pros and cons of farm incorporation:

  • Tax rates:
    • A corporation may earn up to $500,000 per year at a rate of 12% in 2018. This compares to an individual who will pay a tax rate of 25.0% on the first $46,605 of taxable income, 30.5% on the next $46,603 and 36.0% to 48.0% on income above $93,208.
    • The tax rates above are only available for active business income, so investment income or income from property is taxed at 50.7%. Farm land rental income is treated as investment income.
  • Tax deferral and planning
    • Some operations, especially farming, can have vast swings of net income year to year. A corporation allows operators to take out a set amount of compensation each year to smooth personal income, avoiding the high levels of personal tax each year.
    • A corporation gives you the ability to take dividends or wages out of the corporation and utilizing effective tax planning can help plan for other items, like the use of donations, RRSPs, the Canada Child Benefit, as well as CPP remittances.
    • In order to fully benefit from the lower tax rates of the company the income/equity must be left in the corporation. Any funds withdrawn generally will be taxed personally.
  • Estate issues
    • Upon the death of a shareholder, shares of a qualified farm corporation may be transferred to a child at the parent’s “tax cost”. This effectively allows the farm corporation to be transferred to the child with no immediate tax consequence.
    • In order to qualify for this treatment, the corporation must employ all or substantially all (90% or more) of its assets in the business of farming. If the land were to be rented this would not be considered farming income unless the rent was from a spouse, child or grandchild.
  • Debt repayment
    • Debt repayment must be funded out of tax paid dollars. Assuming total debt of $200,000, the business will require different levels of net income for tax depending on if it is incorporated or not:
  • Professional costs
    • Incorporations face increased costs of administration including increased accounting fees, legal fees and annual corporate filing costs. There could be some significant up-front costs to set up the corporation and complete the necessary transfers.
  • Limited liability
    • Incorporation limits the liability of the corporation’s shareholders. It is important to discuss any changes with existing creditors or lending institutions to ensure that your current debts can be transferred to a corporation and what personal liability you will need to guarantee on behalf of the company.

Form of business

Proprietorship

Corporation

Debt level

$200,000

$200,000

Tax rate

30.5%*

12%

Net income for tax required
to have $200,000 after tax dollars

$287,770

$227,272

Tax cost

$87,8770

$27,272

*Assume individual at the 2nd tax bracket
The table represents a tax savings of $60,498 for the business as a corporation, which can be used to pay off debt.

  • Professional costs
    • Incorporations face increased costs of administration including increased accounting fees, legal fees and annual corporate filing costs. There could be some significant up-front costs to set up the corporation and complete the necessary transfers.
  • Limited liability
    • Incorporation limits the liability of the corporation’s shareholders. It is important to discuss any changes with existing creditors or lending institutions to ensure that your current debts can be transferred to a corporation and what personal liability you will need to guarantee on behalf of the company. 


These benefits and costs are only a summary of the implications of incorporating your business so we strongly recommend that you discuss your specific situation with your trusted advisor.

Whether you are incorporated or not, the agriculture business advisors at Avail CPA believe you deserve to know your options and should receive sound planning and advice. Talk to us today to see how we can help your farm business grow.

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