Estate Planning for Farmers (Part 2) with an Accounting Partner

Bill C208 - what is it, and if you're a farmer, why should you care? We delve deep into this Bill that allows for intergenerational farm transfers (with some rules, of course!) in Part 2 of our Estate Planning for Farmers series. Jen McArthur, CPA, CA, chats about what has changed and what has not since the Bill was introduced in 2021 and how you might be able to use it to your advantage.

Make sure to like this episode and hit that follow button to be kept up to date on all our new episode releases. If this episode raised some questions for you, we would love to chat. Give us a call or send us an email any time - links are on our website here.

Transcript

00;00;06;13 - 00;00;33;04
Speaker 1
Hello and welcome to Integrating for Success, a Ward & Uptigrove podcast. My name is Amy Noonan and I will be your host. We're excited to bring you part two of this three part series on estate planning for farmers. In our last episode, Chad Martin talked about farm transition and succession planning and if you listened to that episode, you may now have an understanding of why estate planning and succession planning is so important.

00;00;33;13 - 00;00;48;09
Speaker 1
And hopefully you're wanting to know more. So Jen McArthur, partner here at Ward & Uptigrove, is back with us today to elaborate on a topic she kind of touched on in her first episode of Intergenerational Farm Transfers back in 2023. So thanks for coming back, Jen.

00;00;49;06 - 00;00;51;26
Speaker 2
No problem at all. Hopefully I can make this episode a little longer.

00;00;53;13 - 00;01;20;26
Speaker 1
So. Well, I think we've got lots to talk about. I think there's no no worries there. Like I mentioned in the last episode with Chad, he was and he was able to elaborate on. There's just so much to take into consideration if you want to move on from your farm. And likewise, a lot of rules too. You briefly touched on Bill C-208 in your last episode, and since then you've also penned an article on the topic.

00;01;20;26 - 00;01;38;02
Speaker 1
And we're not sure when this episode is going to air exactly, but it's available in the CAFA magazine. Mm hmm. Going back to basics as we explore this really important and relevant for farmers topic, maybe you can elaborate on just what Bill C-2 oh eight is.

00;01;39;10 - 00;02;05;09
Speaker 2
Okay. So Bill C208 has a little bit more than just what we're going to talk about today. But the stuff we're going to talk about today is is the most relevant part to succession planning and especially succession planning with children. So this bill itself was introduced in 2021 and it allows for intergenerational transfers of either qualified business shares or qualified Farmer Corporation shares from parents to a child's corporation.

00;02;06;02 - 00;02;24;22
Speaker 2
And that is key. It has to be a child's corp. It can't be a child individually. It does have to be a corporation that they have incorporated. And so basically what that allows is the same tax treatment as if they were selling to a third party. Previous to this, if there is a sale to a child's corporation, it can be set up.

00;02;24;28 - 00;02;56;17
Speaker 2
There's actually an advantage to sell to a third party versus a child's corporation. So CRA has gotten rid of that discrepancy. So that's good. And this also allows parents to use their capital gains exemption, which they couldn't before if they were doing this as process. So those are good things to do if they'll seat your rights. As I mentioned, it was introduced in 2021, but we actually had some updates that were released in 2023 and those changes are effective as of January 1st, 2024.

00;02;56;29 - 00;03;15;11
Speaker 1
Okay. And and Chad touched on the lifetime capital gains exemption. So if you're not sure what that is, I would suggest you go back and listen to that episode. He's got lots of information there. So what what kind of things didn't change as of January 1st? What what is the same?

00;03;16;09 - 00;03;37;08
Speaker 2
So there's a few things that are same again. Child's corp has to still be a child's corp and it has to be controlled by them. That has not changed from the previous release. Okay. And the children have to hold the shares of that corporation for at least 60 months. You can't amalgamate the company, so you can't join the two companies together.

00;03;37;08 - 00;03;59;20
Speaker 2
So you can't join Mum and Dad's farm corporation with their controlled corporation for at least six months. Five years. Right. And the other part that didn't change was you need an assessment of value of the shares. So the company being transferred, there needs to be an assessment. Usually for farm companies, we do structure it so that it is farms.

00;03;59;20 - 00;04;21;00
Speaker 2
So it's just a farm corporation. It just has a farm in it, maybe a few other assets in relation to that farmhouse barn, maybe some equipment. So getting a valuation or an assessment of value is not a complicated thing. Banks will possibly require it for financing anyway, so you might actually have an assessment evaluation on hand that you can use for this purpose as well.

00;04;21;16 - 00;04;29;09
Speaker 1
Okay. And then what did change as of January 1st? What should our clients and farmers in general be aware of?

00;04;30;15 - 00;04;53;05
Speaker 2
There is a lot of changes. They made the rules a little bit more restrictive. So what they have done now is transfers are now grouped into two categories. You have an immediate transfer, which is a transfer that's going to occur in the next 36 months. Okay. Or you have what's called a gradual transfer. So that means that the transfer transfer is going to happen between five or ten years.

00;04;54;07 - 00;05;24;18
Speaker 2
So they've divided those into two categories, and then they've actually tacked on another five specific rules that need to be followed in order to use this or these rules. So rule one is transfer of control. So in the bill situate, it now says that if you're doing an immediate transfer to a 36 month transfer, permanent transfer of control, that's both legally and factually must be permanently transferred to the child.

00;05;25;22 - 00;05;51;21
Speaker 2
It also states that the majority, which would be greater than 50% of all issued voting shares. So kind of controlled. It's how we view voting. Shares have to be transferred now or immediately. And then there has to be a plan to transfer the rest of those shares in 36 months. And that also has to do with all classes of voting shares, sometimes you have different classes of voting shares.

00;05;51;21 - 00;06;14;01
Speaker 2
They might be common shares. They might be what are low cost? What are usually called class B voting shares. Just to give control to somebody. And so the majority of all of those classes has to be transferred to the child based on those rules. And then if it's a gradual transfer, if you just slightly and they said only legal control has to be transferred.

00;06;14;10 - 00;06;38;22
Speaker 2
So that would be on paper legal control, but factual control, which is the other part, is really hard to define. And currently it hasn't been defined really clearly. And the new rules and the new updates. So it's something we can't offer a whole lot of suggestions on. It's going to have to wait until things happen and people actually use these rules and sadly, that they get challenged in order to figure out what does factually mean.

00;06;39;04 - 00;07;01;14
Speaker 2
Right. But for gradual similar to that to the immediate transfer majority of the voting, shares have to be transferred immediately. And then again, it's over 36 months. So not a huge difference between gradual and immediate, but there is slight differences like wording differences, I guess surreal to find these just so that there's.

00;07;01;20 - 00;07;03;03
Speaker 1
A real buckle up.

00;07;04;15 - 00;07;37;01
Speaker 2
And it's a real to us transferring economic interests. So if you're doing an immediate transfer, that means you need to transfer 50% of the gross shares. These are usually common shares and you have to transfer those immediately. And again, a plan for the rest them to be transferred over 36 months with gradual transfer, same rules as the immediate, but within ten years you have to reduce your interest in the business to below 50% of the value at the time of the initial transfer.

00;07;38;10 - 00;08;04;04
Speaker 2
If it's a family farm and it's actually below 30%, if it's a qualified business. Yes. Again, not clear definitions. What we believe this could mean is that preference shares or fixed value shares, which may have been issued in the past 50% of those may have to be transferred to the child within ten years. It could also mean shareholder loan or other debt that might be owned back to mum and dad from this corporation.

00;08;05;17 - 00;08;34;10
Speaker 2
50% of it may have to be transferred. Again, Ross aren't clear at this time what this does mean. This is purely speculation based on what we know, what we know as economic interest. But again, it could change, but it also could be a substantial hurdle because there is a substantial amount of value sitting in either debt or preference shares just too due to the increased land prices recently as well as quota values.

00;08;34;20 - 00;08;54;08
Speaker 2
There's a lot of value sometimes sitting in those shares and debt. So it is possible that 50% of that needs to be transferred to the next generation as well. Right. Some people are ready for that. Some parents are completely ready for that to happen, but some are not. So it's just something to be aware of for sure. So real three this is transferring management.

00;08;54;24 - 00;09;25;22
Speaker 2
So on the immediate transfer management of the corporation has to be transferred within 36 months. They also tacked on this lovely thing that says it can be longer than 36 months, if reasonable. But again, we talked about the first two rules. Not a lot of clarity on what, if reasonable means. Sure. Again, to wait for further guidance on that, to be able to fully maybe use these rules, but hopefully some is coming and then gradual transfer.

00;09;25;22 - 00;09;48;19
Speaker 2
So transfer management has to be within 60 months. But again, a tax on that or longer, if reasonable. Right. So hopefully we can get some guidance before it goes to court cases where things are examined by Ciaran. We don't know at this point. It's a wait and see. Right. So I'm actually going to group rules four and five together because they're fairly similar.

00;09;48;20 - 00;10;15;11
Speaker 2
Okay. So rules four and five say that a child has to retain control of the company that's being transitioned to them and they have to actually be involved. So on an immediate transfer, they have to retain legal and factual control and one of the child so you can transition to multiple children. But one of the child has to be involved in the farm for 36 months.

00;10;15;17 - 00;10;43;04
Speaker 2
Okay. So that that is the rule for that for the immediate transfer and then for gradual transfer. And the child has to retain legal control and be involved. Again, one child has to be involved for 60 months or until the transfer is complete because this transfer could happen between five and ten years. So basically until that transfer is complete, the child has to maintain legal control and has to be involved or one child, sorry, has to be involved in the business.

00;10;44;25 - 00;11;08;11
Speaker 2
And the last kind of caveat or the thing that they've attacked are attached on during this transition time. So either 36 months to ten years and the company has to actually continue to operate a similar business sold a farmhouse to continue. So that means no sale of a farm in its entirety. That that doesn't mean that you can't sell one property and purchase another.

00;11;08;11 - 00;11;29;04
Speaker 2
But the the farm itself has to continue kind of as it is. Right. So it can't change from a farm to an investment corporation and you wouldn't be able to sell all of your farms and kind of get out of farming until after these transition are these rules. So 36 months or ten years, depending upon what your transition timeline is.

00;11;29;12 - 00;11;31;04
Speaker 2
Right. You would have to continue to farm.

00;11;31;17 - 00;11;51;19
Speaker 1
Sure. Wow. Okay. Lots of rules to to think about. Yeah. And I and I just. I know I feel like a broken record saying this almost every episode, but, you know, looking at these timelines, three years, ten years, like you literally cannot plan early enough by the sounds of it. You know, it's never too early to think about these things.

00;11;52;10 - 00;12;16;16
Speaker 1
You also mentioned qualified farm property and lifetime capital gains. And if anyone listening isn't exactly sure what that is, I suggest you go back and listen to Chad's episode, the first episode in this series. He does a really great job explaining that. So definitely suggest having a listen to that. Okay. So were there were there any positive changes to the these new rules?

00;12;17;17 - 00;12;42;00
Speaker 2
So there is one positive change. So what they did one silver lining to these rules, the definition of a child. So when it was initially when Bill Citrate was initially brought out, it said that this transition could be to a child, which was basically just children and grandchildren. They actually expanded that definition. So it now includes nieces, nephews and their children as well.

00;12;43;08 - 00;12;58;02
Speaker 1
Okay. That's it. Yeah. Okay. So, I mean, looking at all these caveats and the the amount of planning all of this. So is there still a benefit to using these rules?

00;12;59;12 - 00;13;30;11
Speaker 2
So unfortunately, my answer is maybe there might be a benefit to you using these rules. It's not something you have to use if you are transitioning to your children next generation. You don't have to use these rules. But there definitely could be a benefit to using these rules. And so I would suggest you talk to your tax advisor and proceed with caution because they might have a different a different way or a different tax effective way to complete the transfer.

00;13;31;07 - 00;13;43;02
Speaker 2
But your tax advisor knows your situation best. They know whether or not these rules are the best way to follow for yourself. They know if there's a different way that might be better for you. Tax adviser is very helpful in the succession planning process.

00;13;43;12 - 00;14;03;27
Speaker 1
Yeah, that makes a lot of sense. And I. I know we'll, we'll have another episode with Brad Barker going over some more information. So hopefully we can just get as much information as possible out to our clients so they're a bit more prepared to have these conversations and they kind of understand how many layers there are getting into this.

00;14;04;17 - 00;14;37;15
Speaker 1
But yeah, absolutely. Julie Talking to a professional 100% suggested. Okay. Jen So I think that is all we have for today. Lots of information. And, you know, maybe you want to give this another listen, go through it because these are important things to think about, you know, big changes to lifestyle, big changes to your business. So like I said, it's never too early to plan.

00;14;37;15 - 00;14;40;25
Speaker 1
And I just really appreciate you taking the time to come on again today.

00;14;41;25 - 00;14;44;09
Speaker 2
No problem at all. And hopefully I'll see you again in the future.

00;14;44;09 - 00;14;48;03
Speaker 1
I am sure we will.