Because of the rapid way in which things progressed, there is a lot of confusion as to what legislation was proposed, modified, or simply dropped altogether.
I have attempted to outline the “evolution” of these tax changes in this article, from early 2017 to where we are today.
I wish I could tell you that the tax changes create a better tax environment for business owners, but in my opinion the opposite is true – business owners now face more complexities and uncertainties then ever in managing their tax affairs and trying to comply with tax legislation.
On that positive note, let us start with a quick history lesson:
March 22, 2017 – Budget 2017
Finance signals its intention to address specific tax planning strategies employed by business owners.
July 18, 2017 – Finance releases the Proposals
Finance releases the consultation paper, and unexpected draft legislation and explanatory notes (“the Proposals”).
The Proposals target the following strategies:
- Income splitting (“Income Splitting Proposals”): Income splitting is redirecting taxable income between the family so that the family “unit” pays the least amount of income tax. This includes allowing more than one family member to access the Enhanced Capital Gains Exemption (ECGE).
- Private corporations investing in passive assets (“Passive Investment Proposals”): Canadian-controlled private corporations carrying on an active business in Canada (which includes farming) have the ability to pay a low rate of tax on the first $500,000 of corporate business profits. Corporations can invest the after-tax business profits in rental property, stocks, bonds, etc., and delay triggering personal tax until some later date.
- Surplus stripping (“Surplus Stripping Proposals”): Converting what would otherwise be a taxable dividend from a company to a capital gain, which are currently taxed at lower rates.
Outrage within the business and tax community ensues.
The business and tax community identify a significant number of issues with the Proposals, including but not limited to:
Income Splitting Proposals:
- Too complicated for business owners, let alone professional tax advisors, to understand, increasing tax compliance costs.
- Significant concern that the Proposals will result in CRA challenges to what should be a relatively simple business decision, i.e. how much can I pay my family members and myself.
- The cost of incorrectly applying these rules is significant – income is taxed at the highest marginal tax rate for the province of residency. In Ontario, this can be as high as 54%.
- Farmers and their family members may not be able to access their ECGE.
- Business owners will pay extremely high rates of tax on investment income earned in a corporation and paid out to the owner as a dividend. In some cases, the rate of tax could be as high as 73%. The sale of land or quota within a corporation, or the rental of land owned by a corporation, is treated as investment income, which would specifically affect farmers.
- Estates could face significantly larger tax burdens if a business owner passes away.
- Tax costs to transition incorporated businesses to the next generation increase significantly, providing a tax incentive to sell the business “outside” the family.
Finance makes a number of significant announcements regarding the Proposals:
- October 16, 2017: Finance announces it intends to proceed with the Income Splitting Proposals, however
- They intend to simplify them; and
- Restrictions on the ECGE will be dropped altogether.
- October 16, 2017: Finance announces it will reduce the small business tax rate to 10% effective January 1, 2018 and to 9% effective January 1, 2019. This affects CCPC’s carrying on an active business in Canada. This announcement is a surprise, albeit a welcome one.
- October 18, 2017: Finance announces it intends to proceed with the Passive Investment Proposals, however current investments will be “protected” from the new rules, as well as corporations earning less than $50,000 of investment income in any given year.
- October 19, 2017: Finance announces it is going to drop the Surplus Stripping Proposals altogether.
The revised Income Splitting Proposals are simplified, and a number of exclusions to the rules are introduced.
The Income Splitting Proposals are to be effective January 1, 2018.
February 27, 2018 – Budget 2018
Finance releases draft legislation regarding the Passive Investment Proposals.
These rules are simpler and less complicated compared to what Finance was originally proposing.
March 27, 2018 – Bill C74 – Budget Implementation Act, 2018, No. 1 (March 27, 2018)
“Version 3” of the Income Splitting Proposals as well as the Passive Investment Proposals are introduced in this Bill.
Where are We Now?
Income Splitting Proposals
We are in a completely different world now when it comes to income splitting.
A family business carried on through a corporation, partnership, or trust must consider the new rules when any family member is paid from that business.
Generally speaking, if you pay a family member income from a family business, that income will attract the highest marginal tax rate for your province. This concept is known as “tax on split income,” or TOSI.
Thankfully, there are exceptions to the TOSI rules. Some of the more notable ones are as follows:
- TOSI does not apply to a wage or salary – which have always been subject to a “reasonability” requirement;
- TOSI does not apply to income from an “excluded business” – this exception looks at the level of involvement of the family member in the business, both in the current year and throughout the history of the business;
- TOSI does not apply to income from “excluded shares” – this exception is only relevant for incorporated businesses, and looks at the nature of the business being carried on in the company, the source of its income, as well as the type and number of shares owned; and
- TOSI does not apply to a capital gain from the disposition of “qualified farm property,” which can include shares of a family farm corporation, however you still have to be careful if a minor shareholder is involved.
Passive Investment Proposals
Effective January 1, 2019, if a corporation earns in excess of $50,000 of investment income in the prior year, access to the low small business tax rate in the next year is affected.
This will apply to the corporation earning the investment income, as well as any other corporations “associated” with that corporation (essentially a group of corporations with common control/shareholders).
“Investment income” will not include the sale of assets that are used in an active business, such as farmland or quota.
Consult with your tax advisor immediately to:
- Determine the impact of the Income Splitting Proposals on the current business structure/remuneration plan for family members;
- Consider the impact of the Passive Investment Proposals and whether access to the low small business tax rate is affected, assuming your business is incorporated; and
- Determine whether any planning or restructuring is required because of these new rules.
April 1st marked the official launch of the Canadian Agricultural Partnership, a progressive $3-billion commitment that will help chart the course for government investments in the sector over the next five years.
The Partnership aims to continue to help the sector grow trade, advance innovation while maintaining and strengthening public confidence in the food system, and increase its diversity.
Federal, provincial and territorial (FPT) governments have been working collaboratively since 2016 to develop the next agricultural policy framework, the Canadian Agricultural Partnership. FPT governments consulted with a wide range of stakeholders, including producers, processors, indigenous communities, women, youth, and small and emerging sectors to ensure the Partnership was focused on the issues that matter most to them.
In addition, under the Partnership, business risk management (BRM) programs will continue to help producers manage significant risks that threaten the viability of their farm and are beyond their capacity to manage.
Ministers of Agriculture will convene in Vancouver this July for the Annual Meeting of Federal, Provincial and Territorial Ministers of Agriculture.
"I am incredibly proud to announce that the Canadian Agricultural Partnership has officially launched and all that it promises for our great sector. Our goal is to help Canadian farmers, ranchers and processors compete successfully in markets at home and around the globe, through this strong collaboration between provincial, territorial and federal governments," said Lawrence MacAulay, Minister of Agriculture and Agri-Food Canada.
The upgrade project, scheduled to begin this spring, will ensure the third-generation business will continue to deliver the highest quality, fresh products to a growing base of loyal customers in the retail, food service and restaurant sectors for decades to come.
“Milton has been an important part of our history and our home base for three quarters of a century,” says Bob Sargent, Vice President of Sargent Farms. “We’re committed to making the investments needed to continue growing our operation, provide our customers the best possible products and help make our community a great place to live and work.”
The footprint of Sargent Farms’ processing plant in Milton’s downtown core will remain the same, but all processing equipment inside the facility will be replaced with the latest, state-of-the-art technology. The retrofit will be carried out in stages over three years, primarily during off hours, allowing the plant to continue operating throughout the project.
Sargent Farms, which produces 100% Halal chicken processed by hand, has experienced significant growth over the past decade, driven in part by two retail stores it recently opened in Milton and Mississauga.
The new processing equipment will increase the plant’s efficiency, allowing it to satisfy growing consumer demand by processing more chicken in a shorter amount of time. Greater efficiency will also contribute to the processing plant’s overall profitability, increasing stability for its workforce of almost 300 employees.
Among other benefits, the project will help Sargent Farms continue to enhance its animal care standards and diversify its line of top-quality, local chicken products.
This latest upgrade for the Milton plant follows an investment of approximately $4 million in 2014.
“It’s important to us to continue to build on our long-standing reputation as a progressive and innovative processor. The investments we’ve made in recent years and will continue to make in this project will help us make good on that commitment,” says Kevin Thompson, CEO of Sargent Farms.
In addition to its Milton headquarters and processing operation, Sargent Farms also operates a further processing facility in Mississauga.
Chris Ballard, Minister of the Environment and Climate Change, was recently joined by Parminder Sandhu, Green Ontario Fund board chair and interim CEO, and Dr. Helena Jaczek, MPP for Oak Ridges-Markham, to announce the launch of the GreenON Agriculture and GreenON Food Manufacturing programs.
GreenON Agriculture will provide funding to help improve energy efficiency in climate-controlled production facilities such as swine or poultry barns, greenhouses and grain dryers.
Improvements include new or upgraded energy curtains and cover materials in greenhouses and building insulation in walls and ceilings of livestock facilities.
GreenON Food Manufacturing will help encourage food and beverage processing facilities to adopt innovative, cleaner technologies, with opportunities for low-carbon fuel use, waste heat recovery, improved air balance and upgraded refrigeration systems.
Supporting farmers and agri-food businesses in the transition to a low carbon economy is part of Ontario's plan to create fairness and opportunity during this period of rapid economic change. The plan includes a higher minimum wage and better working conditions, free tuition for hundreds of thousands of students, easier access to affordable child care, and free prescription drugs for everyone under 25 through the biggest expansion of medicare in a generation.
“A competitive and sustainable agri-food sector is vital to Ontario’s economy. Helping our province’s covered agriculture and food and beverage processing sectors transition to a low-carbon economy will help ensure their long-term sustainability while supporting Ontario’s commitment to reducing greenhouse gas emissions," said Jeff Leal, Minister of Agriculture, Food and Rural Affairs.
The announcement was made following the first meeting between Federal Agriculture and Agri-Food Minister Lawrence MacAulay and B.C. Agriculture Minister Lana Popham.
"The AgriRecovery response will help B.C. ranchers and farmers recover from their losses, and return to their land and their livelihoods. Our governments are working with producers, local officials and stakeholders, and the results and spirit of resilience is collective and clear, we will work together to respond to this emergency until the job is done," Lana Popham, B.C. Minister of Agriculture said.
Government officials are working together to quickly assess the extraordinary costs farmers are incurring and what additional assistance may be required to recover and return to production following the wildfires.
The types of costs under consideration include:
- Costs related to ensuring animal health and safety.
- Feed, shelter and transportation costs.
- Costs to re-establish perennial crop and pasture production damaged by fire.
The Honourable Bardish Chagger, Leader of the Government in the House of Commons and Minister of Small Business and Tourism, today announced a $1.9 million investment with the University of Waterloo to examine greenhouse gas (GHG) emissions associated with agricultural activities and the potential benefits of alternative land use practices and beneficial management practices (BMPs).
This project with the University of Waterloo is one of 20 new research projects supported by the $27 million Agricultural Greenhouse Gases Program (AGGP), a partnership with universities and conservation groups across Canada. The program supports research into greenhouse gas mitigation practices and technologies that can be adopted on the farm.
Canada’s farmland values showed an average increase of 7.9 per cent in 2016, compared to a 10.1 per cent increase in 2015 and a 14.3 per cent increase in 2014. Canadian farmland values have increased at various rates for the past 25 years.
The average value of Ontario farmland increased 4.4 per cent in 2016, following gains of 6.6 per cent in 2015 and 12.4 per cent in 2014. Values in the province have continued to rise since 1988.
In six provinces, the average increase in farmland values slowed from the previous year. And despite the overall national increase, seven of the 51 regions assessed across Canada showed no increase in farmland values in 2016.
“The impact of some of the key farmland value drivers appear to be fairly consistent across Canada,” said J.P. Gervais, FCC chief agricultural economist. “Levelling out of commodity prices and some challenging weather conditions may have taken some of the steam out of farmland values and hopefully this moderating effect will turn into a trend.”
Prince Edward Island experienced the highest increase among the provinces and saw the only double-digit increase at 13.4 per cent. There were not enough publicly reported transactions in Newfoundland and Labrador to accurately assess farmland values.
“Demand for Canadian agricultural products remains strong at home and abroad,” Gervais said. “A healthy agriculture sector – supported by a low Canadian dollar and low interest rates – helped sustain increases in farmland values in 2016.”
“I would, however, caution producers not to become overly confident,” he said, noting crop receipts have increased at a slower rate than farmland values over the past few years. “Although we have just come off of several years of record farm receipts, agriculture is a cyclical business and producers should always plan for different market conditions.”
Gervais encourages producers to identify key risks and available solutions to manage these risks should changes suddenly occur in their businesses or the economic environments in which they operate.
To view the 2016 FCC Farmland Values Report, video and historical data, visit www.fcc.ca/FarmlandValues.
To learn more about the report, register for the free FCC webinar on April 18, which can be found in the Agriwebinars section at www.fcc.ca/events.
Top Drivers“There are certainly other factors that could influence Canadian agriculture, such as the global economy, the investment landscape, commodity and energy prices,” says Gervais, speaking to his top five agriculture economic trends to watch in 2017. “The Canadian dollar, however, has been a major driver for profitability in the last couple of years and could have the biggest influence on the overall success of Canada’s agriculture industry in 2017.”Gervais is forecasting the dollar will hover around the 75-cent mark and will remain below its five-year average value relative to the U.S. dollar in 2017, potentially making the loonie the most significant economic driver to watch in Canadian agriculture this year.
The low dollar not only makes Canada more competitive in agricultural markets relative to some of the world’s largest exporters, but it also means higher farm cash receipts for producers whose commodities are priced in U.S. dollars.
A low Canadian dollar will keep the demand for Canadian agricultural commodities healthy, which is especially important considering the higher projected supply of livestock and crops. This means potential revenue growth, especially considering a likely rebound in livestock prices off the weakness observed in the second half of 2016.
“A lower Canadian dollar makes farm inputs more expensive, but the net impact in terms of our export competitiveness and cash receipts for producers is certainly positive,” Gervais says. “Given the choice, producers are better off with a low-dollar than one that’s relatively strong compared to the U.S. dollar.”
Food processors are also better off with a low Canadian dollar, which is partly the reason behind the strong growth in the gross domestic product of the sector over the past few years. Canadian food products are less expensive for foreign buyers, while it is more difficult for foreign food processors to compete in the Canadian market, according to Gervais.
“The climate for investment in Canadian food processing is good, given the low dollar and growing demand in the U.S.,” Gervais says. He projects that exports of food manufactured products to the US could climb five per cent in 2017.
A lower-than-average U.S. per Canadian dollar exchange rate supports foreign sales of agribusinesses as more than 90 per cent of all exports are made to the U.S., and compensate for a weaker demand due to the recent downturn in the U.S. farm economy.
“The dollar’s impact on agribusinesses is complex and not as consistent as it is on producers and food processors,” said Gervais, noting that strong farm cash receipts due to a weak loonie are generally good news for agribusinesses, since they can expect sales to producers to increase with rising revenues.
But he also notes that “a weak loonie raises the price of inputs like fertilizers or equipment, making them more expensive for producers, which may impact their purchase decisions.”
For an in-depth analysis of the impact of the Canadian dollar and Gervais’s four other economic drivers to watch in 2017, visit the FCC Ag Economics blog post at www.fcc.ca/AgEconomics
According to the report, leading Canadian farm businesses in the top 25 per cent financially out-perform those in the bottom 25 per cent by a wide margin: a 525 per cent increase in return on assets (ROA), 155 per cent increase in gross margin ratio, and 100 per cent increases in return on equity (ROE) and asset turnover.
“This is the first time we clearly see how specific business management practices positively affect a farm’s financial outcomes,” says Agri-Food Management Institute (AMI) executive director, Ashley Honsberger. “Management matters and this study illustrates just how much of an impact the top habits
The study, commissioned by AMI and Farm Management Canada, included 604 farms of all types and sizes, and farmers of all ages, nationwide, in the grains and oilseeds, beef, hogs, poultry and eggs, dairy, and horticulture sectors.
The leading driver of farm financial success is continuous learning. Farms in the bottom 25 per cent are three times less likely to seek out new information, training or learning opportunities.
Number two is keeping finances current so that key farm decisions are made based on an accurate financial picture of the business. Farms in the bottom quartile are three times more likely to have financial records that are months behind and are also almost three times more likely not to monitor their cost of production.
The third driver of farm success is seeking the help of professional business advisors or consultants. Farms in the top quartile are 30 per cent more likely to work regularly with a farm business advisor or team of advisors.
Four other drivers also ranked highly: having a formal business plan, knowing and monitoring cost of production, assessing and managing risk, and using budgets and financial plans.
Of the 55 poultry and egg farmers surveyed nationwide, 69 per cent felt the financial health of their farm was a little or much better now compared to five years ago.
The top 25 per cent of poultry and egg farms shows a five per cent ROA compared to 0 per cent in the bottom 25 per cent; 37.7 per cent gross margin ratio compared to 0 percent; 15.6 per cent ROE compared to 15.4 per cent; and 13.6 per cent asset turnover compared to 10.1 per cent.
Poultry and egg farmers lead the pack. Thirty-six per cent have a formal business plan, well ahead of the 25 per cent average of all other farmers, 36 per cent have a financial plan with budget objectives, which again is higher than the average of all other farmers at 33 per cent, and 26 per cent have a formal human resources plan, considerably more than the 17 per cent average of all other farmers.
The study also showed that 69 per cent use supply chain relationships to add value, which is significantly higher than the 49 per cent of all other farmers.
Honsberger advises farmers considering making business management changes to divide a large task into smaller steps, such as using the off-season to attend education events or meet with a business advisor.
A resource for farmers, dubbed “Pledge to Plan” can also help with business management activities for each season, support tools, and stories of producers who’ve already gone through the process. It’s available at pledgetoplan.ca.
The study was funded through Growing Forward 2, a federal-provincial-territorial initiative.
About the Agri-Food Management Institute
AMI promotes new ways of thinking about agribusiness management and aims to increase awareness, understanding and adoption of beneficial business management practices by Ontario agri-food and agri-based producers and processors.
Farm losses and restricted farm losses are a prime example of the interpretive confusion that might exist under Section 31 of the Tax Act. These rules limit the amount of losses from a farming operation that can be deducted from other income by taxpayers whose chief source of income is neither farming nor a combination of farming and some other source.
There is extensive case-law dealing with the issue of what a taxpayer's "chief source" of income is for this purpose. The last bench-mark case found in favour of a producer and ignored whether the source of income was a combination of farming or some other source. The court ruling did not factor the government’s contention that farm income had to be the main source of income.
The court decision didn’t last long because the federal budget of 2013 introduced a change to the Act that reinforced the government’s earlier interpretation of the legislation. The amendment states that if your chief source of income is not farming, then the restricted farm loss rules apply. Farm losses in this case may reduce income from other sources for the year only to the extent of the lesser of the farm loss for the year or $2,500 plus half of the farm loss exceeding $2,500 to a maximum of $15,000.
The deduction for the farm loss for a year is therefore limited to a maximum of $17,500 representing an actual loss of $32,500. Any farming loss which is not deductible currently by virtue of Section 31 becomes a "restricted farm loss".
There are subtle differences in the way CRA categorizes two sets of farmers.
- The taxpayer who does not look to farming or to farming and some subordinate source of income for his livelihood but carries on farming as a sideline business
- The taxpayer who does not look to farming or to farming and some subordinate source of income for his livelihood and who carries on farming activities with no reasonable expectation of profit.
- Extent of activity in relation to businesses of comparable nature and size
- Amount of gross revenue from farming in relation to the relevant expenses
- Time spent in the operation as compared to other income earning activities
- Profit and loss experience in the past years
- Taxpayer's training
- Taxpayer's intended course of action
- Capability of the venture as capitalized to show a profit after charging capital cost allowance
Oct. 14, 2016 - Farming is a unique type of business that causes financial planning to take on dimensions not often seen in other industries. This is reflected in the Income Tax Act, which has numerous provisions for things like farm income, tax deductions, various subsidies, and more.
It can feel at times overwhelming and hard to keep up-to-date. Fortunately, there are people with the knowledge and expertise who can help.
Engaging an accounting or tax planning firm can give your farm the ability to grasp the nuances of the tax laws and get the most tax deductions and minimal liabilities possible.
Navigate an ever-changing landscape
Small businesses and farms are subject to various types of subsidies and tax quirks that the provincial and federal governments use to help spur growth or respond to situations like droughts or cold snaps.
Tax legislation relevant to farming and small business are regularly tinkered with as government tries to respond to industry shifts, projections and predictions, or other concerns that may or may not be more hype than substance.
Knowledge is power when dealing with subsidies, and managed accounting can give you the power needed to keep track of the benefits you qualify for as well as how to take advantage of them.
Reconcile reality with government
Government works best when things can be precise and measured. As any farmer knows, nature doesn't always care for timetables. This can lead to situations where seemingly trivial differences in how an animal or piece of equipment is used can affect how it gets classified for tax purposes.
Accounting for it all
Among the various types of income that need to get reported are profits from property or livestock sale, breeding fees, renting fees, incidental income, all taxable subsidy and conservation payments, and gross income from other sources.
Expenses can include things like feed, pest management products, fertilizer, and more.
Even if you don't have an upcoming tax filing to make, this all results in a great deal of numbers to keep track of. Accounting services can help you stay on top of your income and expenses so you can have a full and accurate view of your financial situation.
FBC is Canada's Farm & Small Business Tax Specialist, providing tax accounting and bookkeeping services to over 20,000 farms and small businesses from Ontario to British Columbia. Our complete financial planning for farm and small business owners takes a long-term approach to address your specific needs at all stages of life and business, minimizing your taxes year after year. Year-round services include tax planning, tax optimization, business consulting and audit protection.
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Canada's Farm Progress ShowWed Jun 20, 2018
Global Forum for Innovations in Agriculture Wed Jun 20, 2018
PIC Health DayWed Jun 20, 2018
2018 Hatchery-Breeder Clinic Tue Jul 10, 2018
2018 Chicken Marketing SummitSun Jul 22, 2018
Poultry Science Association AGMMon Jul 23, 2018