Are you a grain or livestock producer? Are you thinking of incorporating your farming operation? Here are five significant advantages to consider as you make a decision.
1. Tax Deferral Opportunity
In Canada, the income tax system is designed so that whether income is earned personally or inside a company, the total taxes paid should be the same. If you don’t require all your income to be paid to you personally each year, incorporating your business creates an opportunity to defer taxes until a future period, as the corporate tax rate on active business income is 10% while the personal tax rates range from 26% to 47.5% (2021). By incorporating, the difference between the two tax rates allows you to accumulate funds in the company to reinvest into the operation, pay down debt or expand your business.
2. Capital Gains Exemption
Every Canadian has a Lifetime Capital Gains Exemption (LCGE), but few are able to utilize through a corporation. Farmers who own land personally can use the LCGE by rolling their land into their corporation and trigger the capital gain on the land.
This has two benefits:
- The corporation can present the land at its value when it was rolled into the company, rather than at the historical purchase price. This helps strengthen the corporation’s balance sheet.
- Crystalizing the capital gain creates a tax-free payable from the corporation to the individual which can be drawn out personally as cash. Because the capital gain is sheltered under the LCGE, this transaction triggers lower taxes.
Lenders, advisors, customers, vendors and other professionals may view a farming corporation as more sophisticated and financially stable as compared to personally held operations. Incorporating shows a long term commitment to your business, and lenders will appreciate the professionally prepared financial statements and tax returns from your corporation.
4. Liability Protection
Incorporating your farm as a business provides some protection from liability, due to the fact that a corporation is a separate legal entity. Any legal action or disputes with a creditor would generally involve the corporation rather than the shareholders personally .
If you have further questions about incorporating your farming operation, we encourage you to reach out to your legal advisor. If you don’t have a legal advisor, please contact us and we can recommend some professionals that we trust.
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