At least once in your life you’ll need a doctor, a lawyer and a preacher. But every day, three times a day, you need a farmer (Brenda Schoepp). Farming plays a pivotal role in our economy as it fulfills our basic daily necessities and it is in everyone’s interest that our Canadian farms continue to prosper in the future.

According to the Statistics Canada 2021 Census of Agriculture (the “Census“)[1]

• There are almost 189,900 farms in Canada, and
• on average, a Canadian farmer is 56 years of age.

The Census also found that in 2021,[2]

• 124,999 of those farms have no succession plan in place,
• 41,502 of those farms have a verbal succession plan, and
• [only] 22,873 of those farms have a written succession plan.

These statistics are evidence for the need to discuss efficient family farm transition.

Farm Transitioning to the Next Generation

The transition of the family farm is a significant decision with important family implications. One of the keys to a successful farm transition/succession is for all family members to be involved; the parents, the next generation of farmers (if any) and the family members who will not pursue farming. Ultimately, farm transition requires a willingness of the parents to let go of ownership (and decision-making) over time and a readiness to train a successor(s); this is referred to as the “psychological” dimension to farm transition and represents the initial step.  One should not underestimate the importance of communication among family members early.

Estate Planning

When farmers start the transition process, one should not take too lightly the importance of amending the parents’ Last Will and powers of attorney early in the process. Why? Should the parents pass away before the farm transition/succession plan is completed, the Last Will provides clear instructions as to whom is inheriting the family farm; it essentially adds an assurance that the parents’ goal concerning the succession of the family farm will be accomplished.

The estate plan should be done concurrently with the tax and farm succession plan. The estate plan will likely need to be reviewed and amended further once the farm transition is officially completed. The key is for all advisors to be working cooperatively.

In the context of farm succession, treating the children fairly does not necessarily mean equally. It is true that the children who pursue farming will inherit a valuable asset (i.e. the farm business) but also the lifestyle that comes with the asset.  Parents hoping to “equalize” their estate with the non-farming children will need to consider what is fair and how best to provide for the non-farming children without jeopardizing the viability of the family farm. Insurance may be an effective tool worth considering; it would allow the non-farming children to receive funds without compromising the financial operation of the family farm.

The estate plan will require input from all professional advisors with the hope they have some experience with farm succession; a farm succession is unique and is far from a “one size fits all.”

Tax & Farm Succession

The tax implications will be the main focus of the advisors and for good reason; it represents an opportunity to transfer the farm in a tax efficient manner (i.e. minimizing the tax implications) while ensuring sufficient retirement income for the parents. The tax implications involved in a farm transition are complex but when properly planned, will result notably in the parents accessing their lifetime capital gain exemptions ($1,250,000 for farm property), farm assets being transferred on a rollover basis (i.e. tax-deferred basis) and the parents receiving proceeds for future years (i.e. their income for their “retirement”), etc.

The tax analysis is complex and will require experienced tax advisors and legal advisors because of significant fiscal peculiarities involved when dealing with farm property.

Conclusion

Since most farmers are, on average, 56 years of age, professional advisors should recognize that many family farms will be transitioning within the next decade. Ultimately, farm succession will require an approach that considers the tax implications, the farming operations and the family’s wishes. It is imperative that discussions and planning occur early to establish the wishes of the parents, the farming children and the non-farming children and that any tax planning complements those non-tax considerations.

 

[1] https://www.statcan.gc.ca/en/census-agriculture

[2] https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210024401