Many incorporated family farming operations in Canada are able to use a 15 per cent corporate income tax rate on the first $500,000 of income. They do this by using a Small Business Deduction to reduce their corporate tax rate from the standard 26.5 per cent tax rate. This Small Business Deduction only applies to small farming operations. To be eligible for this lower 15 per cent tax rate, farm corporations must be under $10,000,000 to $15,000,000 of capital. This capital amount is approximately equal to the cost of all of your corporation’s assets.

Capital levels are a commonly overlooked issue, particularly in the dairy industry, where a farming corporation purchasing land at $20,000-plus per acre and bidding on quota at $24,000 per kg can quickly run into problems with eligibility for the Small Business Deduction as their assets can easily accumulate over $10,000,000. Once the $10,000,000 capital threshold is surpassed, the amount of income taxed at the favorable 15 per cent rate is gradually reduced and replaced with a 26.5 per cent tax rate. This can be offset at least partially by the lower tax rate on eligible dividends paid out. For example, an incorporated dairy farm with capital of $14,000,000 and income of $500,000 will have $100,000 taxed at a 15 per cent rate and the remaining $400,000 taxed at a 26.5 per cent rate.

Care should also be taken when multiple corporations are owned, as this capital calculation may need to be considered across all of them. If you suspect that your operation is getting close to the $10,000,000 capital amount, it is a good idea to approach your tax advisor. Working together with a qualified and experienced income tax professional is critical to limiting the amount of tax your family farm corporation is liable for. Possible solutions for reducing your capital could include:

  • Changing your company’s capital asset depreciation policies. There are a number of ways to calculate a company’s annual depreciation. If a different method better reflects the useful life of your assets and increases depreciation expense, the company’s capital will be reduced.
  • Distribute excess cash to repay shareholder loans or pay down debt. Pay larger wages or dividends directly to the shareholders.
  • Consider a reorganization of your corporate structure. Capital of unassociated corporations will no longer be combined in determining the reduced small business limit.
  • Transfer corporate assets to other corporations. There are strategies to accomplish this, but due to their complexity, they should be discussed with your tax advisors. It may be possible to transfer corporate assets, such as land, to the shareholders or another company without any significant tax implications.
  • If a new parcel of land is required and can be purchased in the personal names of the shareholders, consider expansion purchases outside of the corporation.

In some cases, the increase of capital may be unavoidable. If so, discussions should be had with a qualified and experienced tax advisor to determine the best strategy available to make use of the lowest tax rates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.