Farm incorporation why

If the corporation has more than one class of shares then the rights and privileges of each class must be determined. The right to vote and receive the remaining property must be attached to at least one class of shares, although both do not need to be attached to the same class.

Any share can have rights assigned or attached to it. These rights should be listed in the articles of incorporation or corporation bylaws. Some of the more common rights that can be attached to shares include:. Redeemable shares: A retractable share gives the shareholder the right to redeem or sell back to the corporation their redeemable shares.

Special or preferred shares would typically be "retracted" at the par or cumulative value. A predetermined price or predetermined method of calculating a value would be used to value the common shares would also be stipulated in the Shareholders' Agreement. Retractable shares: Some shares are entitled to a dividend payment each year. However, there may be years where the corporation does not pay dividends. If the shares are cumulative, the dividend not paid will still by owed to the shareholder.

In other words, the corporation is obligated to pay the dividend in the next or future years. The dividends not paid would accumulate until paid.

Cumulative shares: Some shares are entitled to a dividend payment each year. Non-cumulative shares: For a non-cumulative share, the corporation is not obligated to pay "missed" dividends in future years. In other words, unpaid dividends do not accumulate. The shareholder agreement outlines how the corporation will operate.

It usually covers the establishment, operation and termination of the corporation. Some of the key benefits to a shareholder agreement are it:. The choice between personal or corporate ownership of assets should be considered in light of the tax advantages, personal preferences and the degree of desired flexibility in the future.

Assets can be owned personally and leased to the corporation or transferred to the corporation. This can be done in any combination that the shareholders wish. The Income Tax Act allows farming assets to be transferred to the corporation on a tax deferred basis as long as the appropriate elections and forms are filed with Canada Revenue Agency.

This is called a "rollover" in tax terminology. The Act also allows the option to choose a price that will trigger part or all of the capital gain if the goal is to utilize the capital gains exemption. In very simple terms, when an asset is transferred into the corporation the individual receives a "package" made up of shares and non-share consideration.

This non-share consideration can include a shareholder loan that the company now owes the shareholder. Usually this loan represents the "tax paid" portion of the asset. This loan can then be paid out to the shareholder on a tax-free basis. Table 3 outlines of some of the various transfer combinations. Table 3. Transferring assets into a corporation. Table 4. Advantages and disadvantages to transferring land to a corporation. This would trigger a capital gain that the owner could then apply his capital gains exemption against.

The shareholder can receive tax-free payments from the corporation on the shareholder loan. The decision between maintaining personal ownership of land or transferring it into the corporation is often difficult to make.

Every situation is different. There are both advantages and disadvantages to transferring land into the corporation. Table 4 lists some of these. In many cases land is transferred into the corporation because of the desire to trigger a capital gain and use the capital gains exemption or because a significant portion of the debt is attached to the land.

When land is transferred, the parents usually trigger any gains and take back a shareholder loan up to the tax value. Payments on the loan come out of the corporation tax-free to the shareholder and so this loan is sometimes used in estate planning to deal with non-farming kids or for the retirement needs of the parents.

There are situations where it may be advisable to leave land outside the corporation. Where there is more than one parcel of land, the family may desire flexibility for estate planning reasons.

In the example in Table 5 , the land could be transferred at the adjusted cost base or at the FMV and the capital gains exemption used. If the exemption was not available, a capital gain reserve could be used that would spread out the gain over a number of years if the parent held a mortgage.

If land and the principal residence are transferred to the corporation, a loss of the principal residence exemption for capital gains may result. As well, the corporate-owned house could result in a taxable benefit to the shareholder living in the house. Some advisors specifically exclude the house in the land transfer and then charge the shareholders rent for the land that the house sits on. In this way, the principal residence exemption is preserved.

On farm properties with two houses only one can be claimed as the principal residence. A farmer can transfer quota into a corporation and claim the capital gains exemption on the increase in value. If farms were managed with more of a corporate mindset, there would be a heavier reliance on timely and accurate financial information, more authority granted to key people, and more time spent in the office chair rather than the tractor seat.

A farm corporation is good if you reach a reasonable size and can leave a certain amount of money in the corporation. Meanwhile, every year your tax return is more expensive to prepare. As farm size and complexity increase, there can be good reasons to incorporate. Deciding whether to incorporate should be a business-driven decision.

There are pros and cons to incorporating. My experience is that the pros significantly outweigh the cons in three situations:. Certainly, the income tax savings in a corporate business structure can be substantial.

Skip to main content. Shareholders must be related individuals or one of the following: A trust for the benefit of an individual or a class of individuals who are related to every shareholder of the limited liability company within specified degrees of kinship. An estate of a decedent who was related to every shareholder of the corporation within specified degrees of kinship.

However, at the time the articles of incorporation or certificate of authority is filed with the Secretary of State, the farm corporation must also provide a report disclosing the following: Name of the corporation Name and address of the registered agent in North Dakota With respect to each shareholder: Name and address of each; Names and addresses and relationships of trusts and estates that own shares; Number of shares or percentage of shares owned by each; Relationship of each; Statement whether each is a citizen or permanent resident alien of the United States; Statement whether each is actively engaged in operating the farm or ranch; Statement whether each resides on the farm or ranch; and Statement whether each depends principally on farming or ranching for a livelihood.

To find out more about how we can support your business, take 15 minutes to connect with us so we can get to know each other. Request a consultation here. Canada-wide Toll Free: Last updated: Oct. Well, you may also consider these other reasons to incorporate: Your corporate tax benefits outweigh the costs of extra administrative duties, You want to reinvest portions of capital into expansion, Your debt servicing demands a large portion of profits; or You want greater flexibility for closing or selling your business.

In addition to tax benefits, incorporation offers several other benefits: Limited liability As a shareholder of a corporation, your liability in that business is limited to the amount you have invested in it.

Fiscal year flexibility You can choose a non-calendar fiscal year for income tax reporting. Income tax deferral Incorporation may allow you to defer income taxes by delaying when you take payments from the company from one year to the next.

Group insurance and retirement benefits Corporations can create a registered pension plan and obtain tax-deductible group health and life insurance plans for their employees and family members.

Read more: How to use income splitting to reduce your tax bill Additional means of compensation You can take money out of your incorporated business in various forms, including rent, capital dividends and loans.

Succession Planning Transferring ownership of the farm to the next generation can be a complicated process. The benefits of incorporation decrease to the extent you must withdraw from earnings to cover personal and living expenses. Initial set up fees, more paperwork, and a complex return called a T2 can result in the need for professional services and bring additional costs. You must leave at least some business profits in the company as retained earnings to benefit at all.

Or you can reinvest some profits in the business or purchase other investments.