Whether selling milk, eggs or other produce, farmers working in
supply management use a quota system to take their product to
market. Dairy farmers, for instance buy a quota, which then makes
them eligible to produce a specified amount of milk.
For a farmer who operates as a sole proprietor or in a
partnership and holds the quota individually or in partnership with
someone, a new challenge will be introduced on January 1, 2017. At
the moment, if you sell your quota the gain portion will be taxed
as business income, not as a capital gain. Even though it's
taxed as business income, it's offset by the lifetime capital
gains exemption that everybody has – for farmers, it's a
million dollars – so you get an offsetting deduction without
issue. Starting January 1, however, this same income will be
treated as a capital gain. As a result, alternative minimum tax
(AMT) could kick in.
AMT is a CRA calculation that may apply if you've got high
dividend income or you're using your lifetime capital gains
exemption, whether for small business shares or farm property.
It's an alternate calculation of personal taxes by the federal
and provincial government. AMT is problematic because it's an
outlying cost. This is an out of pocket cost that most farmers are
For instance, say you have a dairy farmer in Ontario who owns 55
kgs of quota and is considering getting out of dairy farming. The
farmer's gain on the quota is $885,000. Under the current rules
the gain is reported as business income and is offset by the
lifetime capital gains exemption resulting in no additional taxes.
If, however, the farmer defers selling the quota to 2017, the gain
is reported as a capital gain and although it is offset by the
lifetime capital gains exemption similar to current rules, AMT will
result in an approximate amount of $32,000 (assuming a base income
of $150,000 which includes the recapture of quota).
AMT is like a tax installment that you have paid to the
government. If you're taxable in the next seven years, the AMT
paid will offset the taxes owing. But if you're not, you will
not recover the AMT paid and it becomes a sunk cost. For more
information on AMT read our May 20, 2014 Farm Alert titled
The 'Evils' of Alternative Minimum Tax.
If you are seriously considering selling your quota, perhaps due
to medical reasons, difficulties in finding hired hands or lack of
a successor to the farm, 2016 is the ideal time to go for it.
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.
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