Accountants regularly advise of the tax and accounting benefits available to corporations. But there remain some producers who are reluctant to take the next step and incorporate their farm operations. With some recent harvest reports of higher than average yields, it is time once again to look at the pros and cons of incorporating.
Flat tax rate
The most obvious benefit of a farm corporation is the flat tax rate (12 per cent in Saskatchewan, for example) on net income under $500,000. A flat tax helps producers make better business decisions.
Often, a proprietor is reluctant to sell their crop later in the year (even if prices are strong) because they are worried they have already sold enough crop and their tax bill will be too high if they sell more. With the flat corporate tax rate, farm corporations normally pay the same percentage of tax whether they sell now or later, meaning they can market crops whenever prices are strong.
Similarly, proprietors often will have tax estimates done in December so they can determine how much seed, fertilizer and chemical to pre-buy for the coming year, and lower their current tax bill. With the flat corporate tax rate, corporations save the same amount of tax whether they buy inputs now or later, so they can purchase inputs when prices are low.
Corporate headaches
If a proprietor does decide to take the plunge and incorporate their operation, they may experience unexpected problems and, sometimes, regret. There are some common complaints from owners of farm corporations:
- New business accounts must to be opened [GST/HST, payroll, Agri-Stability, etc.].
- There may be high costs initially for lawyers to prepare agreements and for accountants to prepare tax forms.
- Corporate record-keeping requirements are more in-depth and onerous. A proprietor might only keep a tally of income and expenses, whereas a corporation must track the ins and outs of each bank, credit card, and input financing account, and must account for any income or expenses deposited to or paid from personal accounts.
- Annual accounting fees are higher for corporations. The need for more-detailed record keeping creates more work for accountants at year-end. Corporate owners can experience frustration with the time it takes accountants to complete their year-end, and with the fees for assisting with and correcting the records.
- Making withdrawals from a corporation can create personal tax problems. Proprietors can draw money from their farm operations without tax consequences, whereas a draw from a corporate account is essentially personal income.
The crop corp solution
With all of the growing pains associated with corporations, it is not surprising that some proprietors are reluctant to “go all in.” In response, more and more proprietors are using crop marketing corporations (crop corps).
Crop corps are set up solely to market excess crops and ultimately save funds for the future. The producer continues to operate as they always have; they continue to use the same method of record keeping and the same GST/HST, payroll and Agri-Stability accounts. However, if there is more crop to market than is needed to generate cash for the farm operation, the excess crop is transferred to the crop corp and sold through the corporation, taking advantage of the low corporate tax rate.
The strategy involves several steps. The producer uses Section 85 of the Income Tax Act to roll excess grain into the crop corp. In return, the producer receives preferred shares (essentially an IOU from the corporation). When the corporation repays the IOU, the producer claims the funds as income on their personal income tax return. Sometimes the repayment is delayed until retirement, when the producer (presumably) is in a lower tax bracket.
Another use for the funds that accumulate in a crop corp is to buy new machinery. The crop corp might purchase a new tractor or combine and rent it to the farm. (At this point, the crop corp must register for a GST/HST number and charge GST/HST on the rent.)
Crop corps have gained popularity primarily because they address many of the complaints of moving an entire farming operation into a corporation:
- The crop corp does not immediately need to register for a GST/HST or payroll number.
- The transfer of excess crop to a corporation does not require a legal sales agreement.
- The value of the crop transferred is simply the price paid by the elevator at delivery; there is no guessing involved.
- As there might only be a single sale and deposit in a year, the record keeping for a crop corp can be quite simple.
- A simple corporation with few transactions usually means faster turnaround at the accountant’s office, and consequently lower fees.
After a few years of operating a crop corp, a proprietor usually has a better understanding of how corporations work, and may decide it is time to incorporate their entire farm operation. The transition from this point often is easier than “going all in,” all at once.
Contact your Collins Barrow advisor for more information and to discuss whether a crop corp is an appropriate solution for your farm operation.
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