Farm Incorporation

[rrmoon]

We are toying with the idea of incorporating our farm. Our primary goal would be to make use of the $500000 capital gains exemption by moving land and other assets into the company. I would like to hear some feedback - particularly any negatives or problems that might be caused by this move.

[dyck]

There are so many issues with incorporation that a single post might not cover all the pros and cons. For many farm businesses, the main reason for incorporation is tax. In Alberta, the current rate is 19% on the first $200,000 of active business income and scheduled to go lower over the next few years. That is a heck of a lot better than the top personal tax bracket. Another tax benefit to incorporation is the "crystallization" of the $500,000 capital gains exemption. When you move assets into a corporation, you can "sell" them to the corp and use the capital gains exemption, or use Section 83 of the Income Tax Act which allows a rollover of the assets to the corp. Other benefits:
- liability limited to amount invested unless you sign it off with personal guarantees
- estate planning is easier because you're only transferring shares, not assets

Disadvantages:
- It's a complex arrangement. Things like share structure, buy-sell agreements, etc. are not easily understood.
- Professional fees, both ongoing and at time of incorporation are high since you will probably have to use an accountant and lawyer.
- Losses are trapped inside the corporation and can't be used personally
- Corporations don't have access to the $500,000 capital gains exemption. Selling assets from the corporation is highly taxed.
- "Once you're in, you're in" If you move land into a company, you can't direct it in your will (a lot of people keep land out of a company for that reason)

That's just a quick idea of what you're looking at when incorporating. I would suggest talking to a good accountant who's done this before and to a farm management specialist