The Liberal government’s proposed tax changes will likely cause the greatest destruction of wealth for Canadian farm families since the 1980s farm crisis. But unlike the crisis of the 1980s, from which farmers eventually recovered, the proposed changes are a permanent, structural change that will cause a drop in farmers’ income and net worth from which there will be no recovery.
Finance Minister Morneau and Prime Minister Trudeau have said that the proposed tax changes are aimed at wealthy Canadians who use “tax loopholes” to unfairly pay less tax than “middle class” workers. But the legitimate small business tax planning tools, which the Liberals plan to change, have been used for decades by small business entrepreneurs in all sectors across Canada to help manage and mitigate the financial risks associated with starting, building and selling their businesses.
The implications of these changes for all small business entrepreneurs are huge, but given the unique nature of farming, the impact on Canadian farm families will be especially severe. Farming, more so than most other businesses, rely on the entire family’s participation and support to succeed. Children, spouses and extended family members typically support the farm business, whether directly in the farm’s operations, or indirectly in unpaid, but essential ways. Canadian farm families typically incorporate as small businesses to enable them to efficiently share the income from their farm operations among family members. But the proposed tax changes will severely restrict a farmer’s ability to split income among family members, even though the reality for most farmers is that the entire extended family participates in one way or another in supporting the business.
Moreover, for most farm families, their primary (and sometimes sole) source of wealth for their retirement is their land. Because of the capital-intensive nature of farming and the volatility of most farm incomes, farmers often do not have significant other sources of retirement savings such as TFSAs, RRSPs and investment savings. By incorporating as small businesses, and having multiple family members as shareholders, farmers have been able to use legitimate tax planning tools to maximize capital gains exemptions and reduce the tax burden when it comes time to sell the farm to finance their retirement. The proposed tax changes will eliminate farmers’ ability to use multiple capital gain exemptions and will thereby dramatically reduce their retirement savings.
The extent of this pending wealth reduction for farmers is hard to estimate and is based on individual circumstances, but it is not hard to imagine that for a typical farm family like those we deal with every day at Bonnefield, the proposed tax changes could destroy a third, maybe even half, of the wealth they have accumulated over their career through land price appreciation.
Bizarrely, the proposed tax changes will make it far more advantageous from a tax perspective for a farmer to sell their business to a large conglomerate, rather than sell the farm to the next generation and keep it in the family. The 2016 census showed that the average farmer in Canada was 55 years old. So, over the next decade a substantial portion of Canadian farms are going to change hands.
At Bonnefield we often work with young farmers to help them finance the transition of their parent’s farm and expand their operations. The proposed tax changes will dramatically reduce the amount of after-tax cash available to retiring farmers and make it harder to transition the farm to the next generation.
For anyone concerned about the disappearance of family farms in Canada, the pending tax changes are a looming disaster.
Everyone agrees that tax fairness is an essential principle for a civil democratic society like Canada. But one’s tax burden should not only be proportionate to one’s income. It should also take into account the risk and sacrifice entrepreneurs incur to earn their income, as well as the benefit to society that results from their entrepreneurial spirit. Canadian farmers represent the best of that entrepreneurialism and risk taking, and all Canadians benefit from a thriving agricultural sector.
I urge you to contact Minister Morneau, Prime Minister Trudeau and your local MP and urge them to stop these ill-conceived, disastrous tax changes.
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