14 Quota subject to new tax rules by DAVID SCHMIDT


VANCOUVER – Producers in the supply managed sector face new tax rules that could see them paying significantly more tax if they choose to sell. Rules implemented January 1 no longer treat quota as a separate capital class. It’s now subject to the same rules as buildings and equipment, allowing it to be fully depreciated at 5% per year. Previously, producers could only depreciate 75% of their quota at 7% per year. That’s the good news. The bad news is that any appreciation in the value of quota is now considered a capital gain, and potentially subject to recapture. Buying other quota can avoid recapture, but this will not exempt producers from capital gains rules as in the past. “Under the new rules, you


need to know the cost of the kilograms of quota you sold,” KPMG senior principal David Metzger told producers attending the BC Dairy Conference in Vancouver in early December.


Since the cost is the average price paid for all quota, producers will have to track every quota purchase in order to make accurate calculations.


Metzger says the new rules will likely result in significantly higher tax bills for quota sales but will allow shareholders to take money out of farm corporations tax-free. This benefits people who want to tap into farm equity but penalize those who don’t. The changes come as the profitability of dairy farms diminishes.


KPMG senior manager Matt Creechan has collected several years’ worth of financial data


from 66 conventional BC dairy farms to create benchmarks for the sector.


He said the cash producers have to pay for overhead, debt and taxes – gross profit – has been declining.


Creechan, who defines as a dairy’s gross profit as total revenue minus the direct costs of production, peaked at $8.70 a hectolitre in 2015 but dropped back to $8.20 a hectolitre in 2016 as milk prices fell. (These are industry averages so they should be taken with a grain of salt, Creechan said, noting, “Each producer is unique so you need to take that into account.”)


While cash per hectolitre fell, quota and production increases over the past year mean the amount of debt per kilogram of quota is the lowest in four years. In 2016, dairy farmers carried an average of


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$21,700 of debt per kilogram of quota, a drop of almost $1,500 from 2015.


Creechan also reminded producers that revenue and expense numbers aren’t linear. Only feed costs increase in step with production. The cost of fieldwork jumps in segments while small production increases do not change wage costs. Creechan says a cash contribution analysis can help guide decisions regarding quota swapping and purchasing. Based on his analysis, he believes producers can spend about $11 a kilogram to swap in quota. However, he says quota swapping is a more expensive, stop-gap solution than purchasing quota when a producer doesn’t need to build additional facilities to accommodate the extra production.


COUNTRY LIFE IN BC • FEBRUARY 2017


Succession planning isn’t easy


by DAVID SCHMIDT


CHILLIWACK – This is 2016, not 1956 or 1980. That’s how certified farm family coach Elaine Froese of Manitoba opened her discussion of succession planning at the BC Young Farmers Farm Fest in Chilliwack last fall.


Saying it’s all too common for conversations between generations to go off the rails, Froese titled her presentation “what we wish our parents understood.” Too often parents are rooted in the past while their sons and


daughters look to the future, she said.


Family history, future roles, daily expectations and changes in the type of operation are not only key issues in succession planning but often major stumbling blocks as well.


One young audience member noted her family had spent close to $100,000 on succession planning, yet failed miserably because of irreconcilable differences between generations. Her story was not unique as Froese and other audience members detailed many other examples of succession planning gone horribly wrong. Most often, Froese says, it is because of a lack of trust among the parties or because the older generation is not willing to cede control. She stressed the need to bring in coaches, lawyers, accountants and other experts to assist with the process. She puts her money where her mouth is. Even though she has advised countless families on succession planning, she brought in an outside coach when her family did its own plan.


The first requirements are for each participant to determine their own key communication and conflict styles as well as those of every other participant. “Action people want directness and results orientation, process people want options, order and not to be rushed, people styles want relationship building before business talk and ideas people want to tell you the big picture without interruption,” she said.


Understanding and


accommodating those styles will go a long way towards achieving a positive result.


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