OCTOBER 2017 • COUNTRY LIFE IN BC


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Tax critics rail against “stealth attack” on farmers Yet federal tax changes may not affect many farmers


by PETER MITHAM OTTAWA – Small business advocates are warning


that proposed changes to federal tax policies could hit owners of incorporated companies – including farm corporations – with higher taxes. A public consultation launched in mid-July wrapped up October 2 with a wave of criticism aimed at getting Ottawa to give further thought to changing the rules around income splitting, the holding of income within private corporations and capital gains. The ad hoc Coalition for Small Business Tax


Fairness, a gathering of 35 business and trade organizations across Canada including the Canadian Cattlemen’s Association, Canadian Federation of Agriculture, Canadian Horticultural Council, Canadian Pork Council and Grain Growers of Canada, was at the forefront of the opposition. “These proposals, while intended to target the


wealthy, will hurt middle-class business owners from every sector of the economy,” said Dan Kelly, president of the Canadian Federation of Independent Business, in a letter the coalition sent to federal finance minister Bill Morneau on August 31.


“Seventy-five days for comment in the midst of the summer holidays is not a consultation, it’s a stealth attack on farmers and family businesses,” added Perrin Beatty, president and CEO of the Canadian Chamber of Commerce who served as national revenue minister under former Prime Minister Brian Mulroney in the 1980s. Morneau denies claims the proposed changes attack family-run businesses. “In addition to efforts to combat international tax evasion and avoidance, our government is looking closer to home, and is taking steps to address tax planning strategies and close loopholes that are only available to some – often the very wealthy or the highest income earners – at the expense of others,” he writes in the introduction to the proposal. “There is evidence that some may be using corporate structures to avoid paying their fair share, rather than to invest in their business and maintain their competitive advantage.” In the case of income splitting, the proposed


rules “would help to determine whether compensation is reasonable, based on the family member’s contribution of value and financial resources to the private corporation.” But when it comes to farm businesses, a number


of variables make it difficult to determine what’s reasonable. “It’s a case by case situation,” explains Michael


Hughes, a taxation specialist with Meyers Norris Penny LLP in Nanaimo. “Let’s say you’ve got a husband, wife and two children. If everyone is actively involved in the farming operations, then it’s not going to be a problem. But if you have got a child who’s going to university, for example, who’s a shareholder and not actively involved in the operation, then it is going to be a problem. And there are a substantial amount of situations out there like that.” The changes may also affect a couple in which


one partner works off the farm, or a partner suffers a long-term debilitating illness and their active contribution to the farm business drops. Succession planning provisions could also be impacted. “There’s a lack of understanding out there around some of the wording that’s being used,” Hughes says. “‘Reasonable’ is a very vague term. What does ‘risk assumed’ mean? What does ‘capital contributed’ mean? These are words that are being thrown around that don’t have a history of jurisprudence around them.”


While some analyses contend that a change in corporate structure could mitigate the impact of any rule change, Hughes isn’t so sure. This is particularly the case with succession planning, where farmers are trying to manage the transfer of millions in assets from one generation to the next. A corporation to hold the farm assets in which family members are shareholders is a tax-efficient way to manage the transfer of land, particularly in areas such as the Lower Mainland where land values make it difficult for existing farmers and new entrants alike to buy property. Rules designed to limit tax avoidance would


make succession planning a far more difficult proposition because family members not actively involved in farm operations could be at a disadvantage. “How do you create an estate that’s not going to get contested or create problems within the family unit?” Hughes asks. “These rules have drastic impacts on that, absolutely. So I think every single farming family is affected, whether it’s now or whether it’s later on in an estate plan.” Yet not everyone believes the changes will be a tax disaster for farmers. Michael Wolfson, a former assistant chief statistician at Statistics Canada, expects the changes


Bar M Ranch 2000 Hwy 97C, Ashcroft. BC


to primarily affect urban professionals. Wolfson’s research, published in the peer-


reviewed scholarly publication Canadian Tax Journal last year, found that the less than 10% of the bottom 90% of tax filers – those reporting incomes of $68,800 or less – had an incorporated business. However, almost half of tax-filers in the top 1% –


those reporting incomes of $163,300 or more – had an incorporated business and more than 70% of those in the top 0.01 per cent (incomes of $2,305,700 and up) did. This is consistent with the evidence the federal


government has put forward to support changes. “The tax advantages afforded by tax planning in


relation to private corporations have encouraged many individuals to incorporate their businesses,” the federal government argues. “In some industries, the proportion of incorporated self-employed individuals almost doubled between 2000 and 2016.”


Farmers not racing to incorporation A sector-specific breakdown for agriculture is


more difficult but the latest census of agriculture indicates there’s been no stampede towards incorporation among BC farmers. Ten years ago, 15.5% of BC farms were incorporated and today it’s just 19.3%. The change in real numbers is just 10%, rising from 3,068 farms in 2006 to 3,381 farms today. While incorporation has been an effective strategy for many farmers, Wolfson says it’s those with the greatest after-tax incomes who stand to be hit hardest. BC farms with average net operating incomes less than $35,000 aren’t in that category. “Requiring millionaires who use [incorporation]


for aggressive tax planning to pay more tax is certainly not an attack on the middle class or mom- and-pop corner stores,” Wolfson said in a recent analysis circulated to media. There’s certainly been no rush among farmers to


rejig their real estate assets to prepare for new rules. “Planning how to transition the farm to the next generation is a huge undertaking with many things to consider,” says Gord Houweling, an agent with BC Farm and Ranch Realty Corp. in Abbotsford who regularly works with farmers to both expand their businesses and divest properties. “With the current government’s proposed tax


changes, farming folks need to look into this. Whether the plan is to preserve the family farm or if the plan is to exit the industry, it seems more important than ever to attend to this matter.”


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