Letter to Hon. Bill Morneau on Proposed Changes to Tax Planning
October 02, 2017
Re: Consultation on proposed changes to tax planning using private corporations
Dear Minister Morneau,
Saskatchewan Pulse Growers (“SPG”) is a farmer-led development board in Saskatchewan charged with helping to expand the pulse crop industry in the province. I am writing to you today to express our concerns with regards to the proposed changes to the current tax regime for private corporations.
The recommendations of the Advisory Council on Economic Growth outline the role that the agri-food sector can play as a driver of economic growth in Canada. In particular, the Council’s report highlights how oilseeds and pulses can contribute to that growth. We agree with this vision and are up to the challenge. However, an agri-food production base that is stable and profitable in the long term is central to this strategy. SPG feels there are some measures in the tax changes being proposed that, if implemented, will work against these important economic development goals. Specifically, our comments relate to provisions that will hinder the transfer of farmland to family members and the ability to hold the required passive investments in a corporation.
The next generation
Goals of today’s grain farms often include two key goals – to create a livelihood for the family now and to create a livelihood for their children when they are ready to take over operating the farm. The proposed tax changes will, at a minimum, make this much more difficult to transfer the farm to the next generation. At worst, it will be impossible for the next generation to take over the farm.
Grain farming is a capital-intensive business. A single piece of equipment can cost up to a million dollars and an investment in land can be millions of dollars. Farmers need to run operations where most of their assets are tied up in land and equipment with little available to set aside for retirement during those operating years. For this reason, most farmers are unable to fund their retirement through traditional methods such as a pension or RRSP.
Thus, a farmer will often fund their retirement through selling their farmland as they wind down their farming operations, often selling that land to their children. In the past, farmers could rely on the land capital gains exemption (“LCGE”) for some tax relief on the sale of land regardless of who it was sold to. The proposed provisions will no longer allow for the LCGE to be utilized when selling farmland to family even if they were previously involved in farming this land. This creates a barrier for selling their land to a family member.
As an example, currently a farmer could sell $500,000 of land to their child and utilize their LCGE and only $500,000 would be paid with no taxes because of the LCGE. The new provisions would require $840,000 to be paid to the parent to achieve the same $500,000 of after-tax income because the entire $840,000 becomes a dividend and would be taxed at the highest rate for dividends – approximately 40%. If the retiring farmer sells that same land to an independent third party, they can still use their LCGE and would need only sell $500,000 of land to have $500,000 after tax.
To fund their retirement, the farmer now faces either having less funds available for retirement due to the additional taxes or having their children take on a larger amount of debt to fund the retirement as it would have been prior to these proposed provisions. It would be cheaper, from a tax point of view, for a farmer to sell their land to a stranger than it would be to sell that same land to their adult children. If a goal of the Government of Canada is to foster an increase in the economic contribution of the agri-food sector in Canada, it is difficult to see how creating major disincentives to selling farmland to family members achieves this goal.
We recommend that the government take a second look at this provision to ensure that no disincentive to selling farmland to family members is created by any tax changes.
Investing in Business
There are legitimate reasons for any business to be investing funds in a passive investment. As already stated, the capital requirements for grain farms are considerable no matter the size of a farming operation. An important part of meeting these capital requirements is through saving and investing dollars until adequate funds are available for additional land or equipment purchases. The intent to tax the income from these passive investments at a higher rate will make the ability to reinvest in the business more difficult.
Investing some funds is also important for farmers from a self-insurance and risk management approach as it can allow the business to more readily deal with the realities and ebbs and flows of a commodity-based business that relies on the weather to hopefully reach its production goals. An unintended consequence of increasing taxation on passive investments could lead to more required reliance by farmers on ad hoc government payments instead of farmers being able to weather downturns on their own. It is imperative that any new rules governing passive investments within corporations do not impair farms’ ability to save for future capital expansion or replacement needs.
An additional concern and one important to the growth of the future farm industry is how the proposed high tax rate could affect the availability of rental land. Many young farmers that cannot afford to purchase land will rent land to increase their operations. Much of this rental land is held by retired farmers no longer actively involved in farming. This land would likely be considered to be a passive investment and income from it could be subject to the punitive tax measures being proposed.
The result could see this land being sold as opposed to rented, making it more difficult for newer farmers to expand and grow.
In closing, we hope you will address these issues prior to finalizing your proposed tax changes. Doing so will create positive conditions for the transfer of farm businesses between generations and to continue to foster a business environment where small business can grow and succeed. Should you have any questions regarding our submission, please do not hesitate to contact me at 306-827-7656 or email@example.com.
Corey Loessin, Chair
CC: The Right Honourable Justin Trudeau, Prime Minister of Canada
The Honourable Lawrence MacAulay, Minister of Agriculture and Agri-Food