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tax changes

Grant Compton examines some potatoes on his farm outside Morell, P.E.I.Nathan Rochford

The Compton family has been farming on Prince Edward Island for more than a century. Grant Compton, one of the current caretakers of the 2,000-acre potato farm, took over from his father in the late 1990s. And his father took over from his father before that.

The expectation had always been that when the time came, Mr. Compton – along with his brother and cousin – would pass on the business to the next generation. Until last month, they had been planning to do just that. The family had been meeting with lawyers and accountants to draw up measures that would see the farm passed on to their children.

In farming, the 51-year-old Mr. Compton said, "you've always got to be looking ahead."

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Those plans are now on hold. Under Ottawa's proposed new tax rules, they fear the business the family has spent several lifetimes building will instead become a burden.

The intent of the new tax plan, according to Finance Minister Bill Morneau's proposal, is to close loopholes that "result in high-income individuals gaining tax advantages that are not available to most Canadians." The proposal aims to limit a number of practices used by business owners to reduce their overall tax bill: income "sprinkling" to adult family members who may not be working for the business; using private corporations as a means for making passive investments not related to the business; and converting income into capital gains.

But since its release, small-business owners have rallied together against the plan – everyone from doctors and lawyers to tech CEOs.

Farmers, too, have joined the fight, taking to social media and town halls to voice their frustration. Farming groups, meanwhile, have encouraged their members to fill their MPs' inboxes with warnings about the "severe negative impacts" of the plan.

In particular, farmers such as the Comptons are speaking out against the impact the changes could have on their succession plans. But what that specific impact will be is still unclear – including to many of the farmers protesting.

Ottawa's plan was released during the harvest season, meaning that many farmers haven't yet had time to read through the proposal in detail or to meet with their accountants. Those who have read it say they're left puzzled.

Before returning to the family farm, Mr. Compton spent years working as a chartered accountant. He's read through the proposal, but still isn't entirely clear on what the changes would mean for his family. All he's been told is that it could suddenly become a lot more expensive for his younger relatives.

Even tax experts appear to have differing interpretations.

"I reached out to some of my friends, and a few different accounting firms. They're all saying these proposals could affect you in different ways," Mr. Compton said. "There's a lot of uncertainty."

Altogether, it's touched off a wave of anxiety across the farming community. The new tax plan is still subject to consultation, but in the meantime, rumour and speculation run rampant. So much so that accountants say they've been getting calls from farmers asking whether they should sell off their businesses now to pre-empt changes.

"The phone calls I've taken are very concerned," said David Inhaber, a tax analyst with Farm Business Consultants. "I'll use the word 'alarmist,' because it's lack of knowledge at the onset."

Of biggest concern to many are proposed changes on the taxation of capital gains. Currently, farmers can transfer to a child "qualified farm property" without being taxed on capital gains up to $1-million. And, if the child goes on to sell that property after three years, that child is also exempt.

But the proposed changes would narrow the list of who would be eligible for the exemption.

Under the new rules, the younger generation would now be subject to taxes on any gains that accrued before they turned 18, said Graham Heron, a tax expert specializing in farm businesses at MNP LLP. So, for a child selling a $1.1-million piece of land, if $1-million of that accrued before they turned 18, they could face a tax bill of more than $200,000.

The changes would also affect the eligibility for any children selling shares or interest in a business that was once considered split income, he said.

The median income of farm families as of 2010 was about $74,000.

Some, such as Jan VanderHout, have done the math and say that under the new rules, it would cost more to transfer his farm in the Hamilton area to his own children than if he were to sell to an outsider.

"This is exactly the opposite of how it's supposed to be," he said.

A spokesperson for the Finance Minister said the department has heard similar concerns from farmers worried the changes will prevent them from passing on their businesses.

"I can tell you that for hard-working, middle-class family farmers, this simply isn't the case," said Mr. Morneau's director of communications Daniel Lauzon. "Our focus is on fixing a tax system that benefits the wealthy over the middle class."

He said the proposal looks to "prevent the use of complex transactions designed to circumvent existing rules restricting the conversion of dividends to capital gains. These are sophisticated transactions, not simply about the transfer of family farms from one generation to the next."

Still, he added that the government has been listening to all of the concerns expressed, in order "to avoid any unintended consequences … "

The government's proposal comes amid continuing concern about the future of family farming. The total number of farms across Canada has, for years, seen a steady decline, to about 193,000 last year. Meanwhile, the average age of the Canadian farmer continues to creep up, to 55 as of last year, according to Statistics Canada.

Farming groups and government officials have worked to combat this, putting in place measures to attract young people to farming – including investments to create "green" agriculture jobs. But if these proposals go through, they say it could undo that work.

Farmers are also concerned about changes to limit "income sprinkling." Current rules allow families to "sprinkle" income to family members in lower tax brackets.

The changes would put in place tests to assess these relatives' contributions to the business. But farmers worry these tests will not be flexible enough to take into account the often informal ways that work is divided between farm families.

"On family farms, the works is intertwined with their lives," Mr. Heron said. "If there's farm work to be done, you get it done."

At best, he said, the changes would require additional administrative work – paperwork and documentation to measure these contributions.

Groups such as the Canadian Federation of Agriculture (CFA) have taken part in consultations and are hopeful that the concerns they've identified are unintended. "I think in the last week we've seen some statements [from government] that the intent is not to hurt the farm family," CFA president Ron Bonnett said. They're also asking the government to extend the Oct. 2 deadline for consultations.

In the meantime, tax experts such as Mr. Inhaber say they'll continue to talk his clients down from making drastic moves.

"At the end of the day, this is not great legislation and it's taking a shot at the industry and at small business," he said. But he, too, is hopeful the government might make further exceptions for farmers.

"With proper planning, I think we can plan our way out of this," he said. "The devil's in the details."