Four Things to Remember for a Successful Farm Succession

Farming as a profession is unique in the way it places “overwhelming significance on lifestyle over profit.”1 Where the ability to function without a founder is testament to the strength and value of small or medium size businesses, a successful family farm is often made stronger by the full participation, sometimes for generations, of an entire family.

Farming can be as much a way of life as it is a way of making a living. For those men and women whose senses of self are informed by being a farmer, thinking about transitioning into retirement and determining a successor is no small feat. But, like every other Canadian business owner, farmers need a clear succession plan in place if they want to give their farm the best chance at surviving into the next generation.   

The 2016 Census for Agriculture anticipates that while “three out of every four Canadian farms will change hands in the next decade – that’s approximately $50 billion in farm assets – fewer than 10% of farmers have a transition plan.” This is an alarming statistic given that those farms without one “have a 66% chance of failure.”2

Whether you are just getting started or are well into farm succession planning, here are four things to consider.

Start Early

Ideally, a farmer should be thinking about the transition process years in advance of actual retirement. On average, “a full farm succession takes [about] eight years.”3 If children are involved in running the farm, starting to plan early will give a farmer time to teach best practices, establish specific roles and responsibilities, and involve them in the different day to day aspects of running a business. The more time a farmer has to plan – and involve their family in planning – the more valuable their biggest asset will be when it comes time to transition or sell.

Be Realistic

When children are involved in operating the farm, it can become clear that some are more invested in the business than others. For parents, it can be tempting to assume asuccessor based on a child’s work ethic and personality however, doing so can lead to all sorts of internal and external conflict for everyone involved. Having periodic, open conversations as a family will give both parents and children time to reconcile their visions for the future and be realistic about whether transitioning within the family is something worth seriously considering or if they should anticipate selling to an outside party.

Seek Professional Advice

Did you know an individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $1,000,000 lifetime capital gains exemption (LCGE) when the farm property is sold?  The actual capital gains deduction is 50% of the capital gains exemption.

The 2015 Federal Budget increased the maximum Lifetime Capital Gains Exemption (LCGE) for qualified farm property dispositions on or after April 21, 2015 to the greater of:

  • $1 million; and
  • The indexed Lifetime Capital Gains Exemption applicable to capital gains realized on the disposition of qualified small business corporation shares.

This means that once the LCGE exceeds $1 million for Small Business Corporation (SBC) shares through indexation, the LCGE for farm property will be the same as the LCGE for SBC shares. 4

Part of creating a strong succession plan means keeping abreast of tax provisions and benefits. Seeking professional guidance from key advisors – financial planners, accountants, lawyers, etc. – will ensure your plan is tailored toward maximizing business value and actualizing your plans for the future.

Equity Not Equality

Inheritance is a common point of contention in farming families with multiple children. When only one child is set to inherit the farm operation, parents often struggle with the notion of equality – “what can we leave our other children so they don’t feel lesser?” In these kinds of situations, it is necessary to aim for fairness, not equality.

A farmer’s greatest asset is his or her farm so naturally, there will be an imbalance when passing it down to only one child. Explore how other options, like life insurance, might help mitigate inequalities between children.Ultimately, open communication early on helps to establish expectations and mitigate potential surprises down the road.

Like any other Canadian business owner, farmers need a succession plan to ensure the continuation of the farms they and their families have spent decades – sometimes generations – establishing. For help creating or modifying a farm succession plan, connect with us.

Sources

1 – Price, L. and R. Conn., 2012. “Keeping the name on the land’: patrilineal succession in Northern Irish family farming. Pp. 93-110 in Farm succession, inheritance and retirement: Challenges for agricultural futures. International Farming Systems Association (IFSA), 2012, pp. 2-16.

2, 3 – Farm Management Canada; 2016 Census for Agriculture in AgriSuccess, pp.20.

4 – Income Tax Act s. 110.6(1), s. 110.6(1.3), s. 110.6(2)

5 – Canada, Growing Opportunities, et al. “A Legal Guide to Farm Estate Planning in Manitoba.” Manitoba Agriculture, 202, pp. 1-64.

What Makes a Farmer?

Where the famed work/life balance is an aspiration of many business owners, it can be virtually unattainable – and even undesirable – for farmers. “Farming life throughout the world is characterized by the almost inseparable, intimate integration of home, work, memories and family.” [1] More than just a job, farming is the locus of many families; a foundation that informs identity and gives purpose. 

As with anything business related, the financial side of farm succession often eclipses the equally valuable, personal side of the process. If you were to ask Revenue Canada Agency, a farmer is “the person who is assuming all of the risk in a farming operation.”[2] While useful for tax purposes and estate planning, this definition grossly understates what it means to be a farmer.

Agriculture and farming contribute an impressive amount to the Canadian economy – roughly 6-7% or $111.9 billion of gross domestic product (GDP) annually.[3] The economic importance of farming, coupled with the “greying” of farmers as a demographic (globally, not just in Canada), means intergenerational farm succession is increasingly lauded as the key to future agricultural viability.

Much of a farmer’s assets are in the form of physical capital – land, animals, and machinery – which tend to have substantial sentimental value.[4] Some farmers may shy away from transition planning given how emotionally and personally invested they are in their farming identities.

How does one begin to answer questions about what life after farming might look like when it is all life has been? For many, answers to these difficult questions come only after seeking outside help.

Financial advisors who understand farm succession is equally an emotional and financial process can help farmers envision and plan for a life after farming that invokes feelings of comfort, even excitement, and ensure the continued success of the family farm.

If you have questions about your farm succession plan or if you need help making yours, connect with us.

Sources

1, 4 – Whitehead, I., Lobley, M., and Baker, J., 2012. “From generation to generation: drawing the threads together”. Pp. 213-240 in Farm Succession, inheritance and retirement: Challenges for agricultural futures. International Farming Systems Association (IFSA), 2012, pp. 2-16.

2 – Canada, Growing Opportunities, et al. “A Legal Guide to Farm Estate Planning in Manitoba.” Manitoba Agriculture, 202, pp. 1-64.

3 – “An Overview of the Canadian Agriculture and Agri-Food System 2017.” Statistical Overview of the Canadian Fruit Industry 2017 – Agriculture and Agri-Food Canada (AAFC), 10 Nov. 2017, www.agr.gc.ca/eng/about-us/publications/economic-publications/an-overview-of-the-canadian-agriculture-and-agri-food-system-2017/?id=1510326669269.


[1] IFSA pp. 4

[2] Legal Guide, pp. 4

[3] “Overview of Canadian Agriculture”

4 IFSA pp. 4