by Vern Faulkner
More red tape and more taxes for Canada’s farmers: that’s the impact of tax changes now in force, and two more proposed by the federal government.
Previously, small businesses – including farms operating as corporations – were allowed to earn upward of $500,000 at a favourable tax rate aimed at aiding small businesses. However, that’s now subject to a wealth of new restrictions, as explained by Jason Rideout, an accountant with the firm Archambault, Neathway and Rideout in Saint Stephen, N.B.
“Before, if a farmer had two businesses, say a cattle farm and a butcher shop ... those two companies shared that small business limit,” said Rideout. “The way it works now, there are a large series of rules and tests the operations have to go through to determine if they are eligible for the small business rates.”
“The same two companies that had access to the $500,000 limit, may not have access now,” said Rideout.
Those rates amount to 14 percent for the first $500,000 earned in New Brunswick, 13.5 percent on the first $350,000 earned in Nova Scotia, 15 percent on the first $500,000 earned in P.E.I., and 13.5 percent on the first $500,000 earned in Newfoundland and Labrador.
If there was a third related business owned in whole or part by the farmer, say a steak and barbecue restaurant obtaining meat from the butcher shop supplied by the farm, the restaurant would lose any exemption entirely.
Further, the government now considers businesses to be linked even if they are operated by relatives. Thus, if a farm has its equipment serviced at a local garage that happens to have the farmer’s brother-in-law or another relative as a principal shareholder, the garage may be considered a “related business” and have some or all of its first $500,000 exposed to greater tax.
Rideout said this shows the federal government does not understand the nature of rural communities, where the businesses one deals with are often owned by a relative.
SUCCESSION AT RISK
In addition, the federal government is proposing three more changes in future legislation, two of which will make farming more complicated, Rideout said.
Should current proposals become law, family trusts will face more paperwork to prove family members receiving income are involved in the business. Additionally, investment income held in a private company could be exposed to immediate capital gains taxes, affecting those who currently opt for a small year-over-year payout.
Chris van den Heuvel, president of the Nova Scotia Federation of Agriculture (NSFA), dislikes the regulations now in place as well as the ones proposed, and is sharply critical of the federal government.
“They start making changes just when you start feeling comfortable on how you run your operations from a tax law, accounting law point of view,” he said, adding that while the intent is to “make sure that people are legitimately claiming wages,” the government too often “makes these changes without understanding the impact.”
Proposals to burden family trusts with more tests and paperwork are worrisome, particularly the government’s concern over family members being legitimately involved in the farm, said van den Heuval.
That, he said, shows Ottawa is out of touch with the nature of family farming.
Children and grandchildren of farmers “are out there, working right beside us,” said van den Heuval, who operates a dairy farm in Port Hood, N.S., in partnership with family members. “I remember when I was six, seven, 10 years old, and I was out there working with my father. They have to realize the unique situations that farms are often in.”
Further, the government’s language of a reasonable test of value on labour is not defined. “We have no idea what that means,” said van den Heuvel. “Does that mean I am not able to pay my son, grandson or granddaughter fair compensation? They are out there doing their work.”
Family trusts are considered a wise vehicle for succession planning while allowing older farmers to plan for a secure future, and van den Heuvel fears the proposed restrictions on family trusts and capital gains makes succession – already a complex task – even more complicated.
Farmers, he said, always seem to be “fighting red tape.”
Ottawa has set Oct. 2 as a deadline for input. According to van den Heuvel, farming groups across the country will first educate farmers on the nature of the changes and then urge farmers to contact their MP.
“I would imagine that we’ll probably be putting some sort of survey together,” he said of the NSFA, stressing that farmers must make their views known before Oct. 2. “Silence could be a killer in situations like this.”
Rideout is also calling for small business owners to learn about the new and proposed rules, and the potential for “substantially more work for either the bookkeeper, accountant, or the year-end accountant preparing the tax returns.”
He is not impressed with the changes now in force or those proposed.
“The government is saying that all small business owners are tax cheats,” said Rideout, adding that “government doesn’t understand the risks involved” by small business owners who drive the nation’s entrepreneurial spirit.
In the meantime, while farmers tackle the latest government-created hurdle, van den Heuvel asks one favour: “Buy local and look for good Canadian farmers’ products on the grocery shelves.”