The work of grain producers is very cyclical. You could have a good year, followed by a not‑so‑good year, followed by a really great year, followed by a disaster year. Over time, this might even out, but what happens when you have a number of good years in a row? For some farmers, this presents significant tax challenges. Fearing the tax consequences of rising income levels, farmers are often reluctant to sell all of their crop. If you fit this description and your income seems to be steadily increasing over time, the next logical step could be to incorporate your farm operation. However, there’s more than one possible approach.

A lower tax rate

For active incorporated businesses, income up to $500,000 is currently taxed at a flat rate of nine per cent federally, plus your provincial tax rate, which varies across the country. The immediate sale of any inventory will be taxed at a lower rate in a corporation than it would be if you’re operating as an individual. In other words, if your farm is incorporated and you keep your income below $500,000, your low rate of tax will remain unchanged, whereas it would increase significantly if your income grew as a sole proprietor.

Smarter expensing

When sole proprietors do a tax estimate towards the end of the year and they find their income is too high, they often start looking for expenses, and they might even incur new expenses to reduce their tax bill. Unfortunately, this often puts them in a position to spend more than they should spend on these expenses, rather than wait for more reasonable prices. In contrast, corporations don’t need to worry as much about increased tax rates, so they can afford to wait to invest in expenses until the best possible price is available.

Drawbacks to full incorporation

A few years after incorporating, most businesses are extremely pleased they made the decision, but there are some significant challenges to navigate when you commit to incorporation. For one, this increases your fees because there is an initial cost involved in incorporating for accountants and lawyers to draw up the tax agreements and other forms that need to be filed with the Canada Revenue Agency (CRA). In addition to these initial costs, you’ll encounter some higher annual costs because you have to file a separate tax return and financial statements. You’re also subjected to more onerous bookkeeping ⁠–⁠ because you have to keep track of all your transactions, whereas sole proprietors are usually only listing their revenue and expenses ⁠–⁠ and the cost of setting up new accounts such as GST, payroll, AgriInvest, etc.

Partial incorporation

In cases where a sole proprietor has excess inventory, one possibility is to establish what is known as a crop corporation or a grain marketing corporation. In this structure, the farm continues operating as a sole proprietorship, but a corporation is also set up to sell up to $500,000 of excess grain at the lower tax rate. The consideration you would receive is basically an “IOU” from the company to pay yourself personally for moving that inventory into your corporation (technically, these would be considered preferred shares). Using this approach, you can control when the IOU is claimed, preferably when your personal income is at a relatively low rate, as this will keep your tax bill low.

Why not fully incorporate?

This partial incorporation approach is gaining momentum because it offers many of the advantages of incorporating without the drawbacks. The cost of this approach is significantly lower than full incorporation ⁠–⁠ because fewer transactions are taking place ⁠–⁠ and you are only required to complete some tax forms with the CRA, rather than pay to establish formal legal agreements. It might not be the ideal approach for all businesses, but if you’re hesitant to make the move to incorporation, this could be the most practical compromise.

Meet the Author

Ryan Kitchen
Yorkton, Saskatchewan
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