TOO BUSY HARVESTING TO FIGHT LIBERAL TAX PLAN
FURIOUS FARMERS SAY CHANGE WILL MAKE IT HARDER TO PASS LAND ONTO FAMILY MEMBERS
Canadian farmers, busy pulling in the fall’s harvest, fear Finance Minister Bill Morneau’s proposed tax changes will make them uncompetitive relative to large land aggregators and could exacerbate a demographic crisis in farming communities.
Herb Groenenboom, who grows wheat, barley and canola with his two brothers near Picture Butte, Alta., said he’s angry the federal government’s proposed tax changes were announced at the busiest time of the year for farmers.
“It’s kind of like they’re trying to sneak it through,” Groenenboom said, noting the consultation process is scheduled to end in early October, before the harvest ends.
Morneau and his Liberal party announced plans in July to change taxes for people who incorporate their business, to eliminate various exemptions and tax benefits used by small business owners.
Morneau described the changes as a way to close loopholes on the wealthy but Edmonton based- tax lawyer Greg Gartner, who also operates a cattle ranch east of the city, said the changes would disproportionately affect farmers.
“It’s almost imperative that farmers incorporate,” Gartner said, adding that land accounts for roughly 70 per cent of a farmer’s capital costs and, unlike equipment, land cannot be depreciated for tax purposes.
Gartner said that family farms incorporate to pay 15- per- cent small business tax ( plus taxes on dividends to shareholders, who are normally family members working on the farm) rather than up to 50 per cent at the highest marginal personal income tax rate.
But Gartner said family farm operations don’t pocket the difference between the two tax rates because their tax savings are spent paying down land purchases. He also said farmers pay dividends to family members who work on the farm, full time or part time, or who pitch in during busy seasons.
The proposed changes would put i ncorporated family farmers at a disadvant age to l arge corporate land aggregators, many of which are owned by pension funds that use their own tax exemptions, and to communal farming operations such as the Hutterite colonies, who can divide the farms’ income by the number of adults working there.
Gartner and other farmers told Financial Post that competing against communal farms and pension funds to purchase farmland would become more difficult as a result of the tax changes to incorporated family farms.
Jocelyn Sweet, deputy spokesperson at the department of finance, said the changes are not intended to make small farms uncompetitive against large farms. “The proposed changes affect the manner by which income is taxed when received by shareholders, not when kept in the business,” she said in an email.
Sweet also said the government would maintain a lifetime capital gains exemption of $1 million for farmers to allow for “the intergenerational transfer of farms.”
However, farmers are concerned the Liberals’ tax plan will affect their ability to pass their farms on to their children in three different ways: by changing how capital gains for family members are taxed, how dividends paid to family members on the farm are taxed and how passive income is taxed.
The way the proposed new t ax rules are written, Gartner said, an older farmer who wants to sell a $ 4- million farm would pay $ 500,000 in tax if selling the land to an aggregation company or a neighbour but would pay $ 1.64 million if selling it to their children and the children used money generated by the farm to pay for the purchase.
“In the next 10 to 15 years, we’re looking at a huge succession of land in Western Canada,” said Norm Hall, who grows wheat, barley, flax and dry peas near Wynyard, Sask. Hall is also the first vice- president of the Canadian Federation of Agriculture.
The average age of a farmer in Canada was 55 years in 2016, according to Statistics Canada. The data also show that just nine per cent of farmers in Canada are younger than 35 while roughly 55 per cent are older than 55.
For incorporated family farmers renting out their land to help fund their retirement, the taxes could also cause a mass sell- off of land.
Devan Mescall, an assistant business professor at the University of Saskatchewan, said many retired farmers rent out their land as part of their retirement income and currently pay 53-per-cent tax on that passive income.
“There is more land rented out than ever before because of the retirement of baby boomers,” Mescall said.
He said t he proposed changes would bring the tax rate up to between 66 per cent and 71 per cent. “The incentive then is for the farmer to sell the land,” Mescall said, adding the changes could result in a large amount of land being sold, likely to aggregation companies, and away from family farmers.