High price of land why farmers fighting Morneau tax proposals

CPAs and farming families across Canada are waiting to see how the Department of Finance will tweak proposed tax changes that directly affect them. “This thing is affecting our clients big time,” says Chartered Professional Accountant Fred Mertz of Calgary, Alberta. “I’m very vocal about it. I’m hoping there will be some change.”

Mertz says the high cost of farmland is driving the fears of farmers over the proposed changes. As the principal of Fred Mertz Professional Corporation, “Focusing on Family Farms,” Mertz is perfectly attuned to the business of farming in Canada. His accounting practice is one of the few in Canada that also sells agricultural real estate and Mertz himself grew up on a family farm. 

The farm sector has warned that the government’s proposed tax changes will harm the succession planning of family farms. “Out of all our clients, [only] 12 to 15 per cent will take over the family farm. One of the main reasons is they can’t afford to,” explains Mertz. 

“Farmland has gone up just as much as commercial and residential in Canada. The biggest competitors for farmland are farmers themselves. Today you cannot buy land for its productive value, meaning its cost at fair market value keeps returns extremely low, in the range of anywhere from two to five per cent.” 

Mertz explains that the capital gains exemption has allowed farmers to pass down the family farm through successive generations. “It’s got nothing to do with wealth,” he says. “It’s continuing the family farm.” 

Capital gains exemption supports succession

Under the Income Tax Act, farmers and fishers receive unique tax treatment, in the form of a capital gains exemption that allows them to indefinitely defer the tax liability on their business when it’s passed down to their children. Third party sales outside the family can and will attract tax liability. 

Chartered Professional Accountant Michael Cadesky is co-chair of the public policy committee of the Canadian chapter of the international Society of Trust and Estate Practitioners (STEP Canada). He says succession of the family business is the “central theme” and the issue of most concern to the tax changes. 

“Under the new rules, there is a very significant bias to selling the family business to an unrelated person, rather than transferring it to your children,” says Cadesky. “On a $6 million sale, there is over a million dollars of tax difference between transferring a business to an arm’s length company rather than to children. 

“This would affect traditional businesses such as the family farm. There would be a large incentive to sell the company rather than pass it down.” 

Asks Mertz, “When you can sell the farming business corporate shares to your neighbour with no questions asked, but when you sell to your kids and some of that capital is turned into income, what’s going on here? Do they want to protect and preserve the farming families in this country?” 

One area of less concern to Mertz is a proposed “reasonableness test” to income splitting to determine whether a business owner’s children actually contribute to the business. “Let me tell you. As a kid growing up on the farm, I can assure you that I had chores every day. They started in the morning and then I went to school. To me, income splitting is not an issue, the difficulty will be documenting it. Families on the farm all work.” 

What is Mertz advising his clients? “Sit back and let’s wait. A knee-jerk reaction is not a smart thing. We do have clients that have already put into place plans to transfer shares or land, and we may accelerate that.” But making decisions now, says Mertz, “may cause more harm than good.” 

Indeed, the government appears willing to exempt farmers from at least some of the changes, due to concerns about succession planning. In an op-ed written for the Western Producer in September, Finance Minister Bill Morneau wrote, “I want to reassure Canada’s farm families that this isn’t about you. 

“I’ve heard from farmers concerned that our proposals could negatively affect the transfer of farms to the next generation. Let me assure you that this is not our intent.” 

Mertz reminds Canadians that farming is unique among businesses. “Farmers deal with perishable goods, 24 hours a day, seven days a week. If you make an error in judgment, your crop or your livestock is gone. And farmers never leave their place of employment, or their home, because they’re one in the same.” 

He believes politicians and stakeholders should start instead with an adequate food policy. “Do they want to protect and preserve the farming families in this country? There’s no doubt there’s some tax breaks, but when farmers make money they pay their taxes.” 

Pictured above, Sandra Harasymuk, Fred Mertz and Cortina Kereluk-Bird of Fred Mertz Professional Corporation in Calgary, Alberta. Visit the blog section at Farming Families for more on this and related farm business planning, including a radio interview with Fred Mertz on Alberta’s Newstalk770.

Colin Ellis is editor-in-chief of Canadian Accountant.