By Jeanine Moyer in Country Guide, January 2023
In many cases, Canadian farms are being transferred to the next generation. But that’s “many,” not “all.” And if you’re in a situation where transition is unclear, or if you know your final plan will be to sell out, it’s time to get thinking about your options for building a farm exit plan.
And, most important of all, are you in a frame of mind to begin making decisions? When you think of planning an exit from your farm, the task can seem like a roller-coaster. After all, you’ve probably spent a lifetime creating your farming legacy, possibly building on previous generations of work. How do you slow down and take a bow?
The job can also seem daunting, not surprising since the details can be so complex.
Tax planning should be your first priority, so your first call should be to your accountant. Bud Arnold, tax partner with Baker Tilly GWD says his first order of business would be to establish the status of the farm and land for tax purposes.
“Another easy way to ensure qualification for tax opportunities is to restart active farming, taking the land that may otherwise be rented out and resume actively farming it yourself,” Arnold says.
Arnold recommends farmers approach their accountant at least three years ahead of any anticipated sale or transition, allowing one year to establish a course of action and the remaining two to ensure the farm qualifies for select tax benefits, like capital gains exemptions or the intergenerational rollover.
Next, call your lawyer to work directly with your accountant to review the plan and identify any concerns. A financial advisor and farm succession facilitator round out the recommended list of advisors to call on.
What questions should you ask your advisor?
The first question to all advisors should be the same: what is the process I need to follow? Each advisor will have a basic outline of tax-and business-related questions to work through, but ultimately, the process should be dictated by your desired outcome.
Working with an accountant and financial advisor to establish how much money you will need for the next stage in your life is the first step in building a foundation for your new situation. Combining the necessary financial requirements from a farm sale or transition with your desired goals will help you understand what you want out of the process and set you up for successful conversations with fellow advisors, family or business associates.
“You need to know how much you need to meet your lifestyle needs post-farming. Build a plan with parameters and use that when you have conversations about your decision. Having a solid foundation to build on will help keep emotion out of conversations with family or neighbours,” advises Leach.
When it comes to the legal side of wrapping up a farm business, Shaun Wetmore, partner at McCuaig Desrochers LLP, says the first question farmers should ask is how to wind down their business. There could be additional considerations if a farm is incorporated versus a sole proprietorship or partnership. Knowing the details ahead of any necessary action or decision-making can make the process smoother.
“The next question should be ‘how can I eliminate any potential for future liability,’” says Wetmore, citing financial liability as a common concern for farmers. He says that in some cases farmers should consider other things like environmental liability for past acts on the farm, such as clearing wetlands or material disposal. Having a solid plan in place to mitigate liability exposure after the sale of your farm is not only recommended, it may help you sleep better too.
What do you need to watch out for?
“Every situation is unique and there’s no prescribed formula for selling a farm,” says Wetmore. “But there are some areas of concern we like to field with clients from a legal perspective in the early stages of exit planning.”
Wetmore encourages farmers to review their farm business situation with a legal advisor ahead of a sale or transition to identify any red flags. He watches out for concerns like jointly held assets or agreements that aren’t in writing that could create problems at sale time. For example, if land is jointly held, someone will need to sign off on it in order to transfer the farm. And having those conversations sooner than later can eliminate surprises or difficult situations at sale time.
The same goes for equipment, which can be more challenging since equipment ownership isn’t often clearly documented. Wetmore says farm owners also need to account for the impact the farm sale or transition will have on any long-term employees, and consider what your obligations are to those individuals. Guarantees on bank loans or other agreements should also be disclosed to a lawyer as part of the planning process.
Leach reminds farmers they also need to be prepared for the emotional side of exiting the farm. He says that in many cases a farmer’s identity is intertwined with the farm, its activities, and its successes and challenges, and it’s no wonder farmers can come to feel like the farm is who they are.
Exiting a farm in any capacity will shift how a farm owner and farm family see themselves and their roles. “My advice is not to act on emotion. Your best foot forward will be a plan that is built with the help of a neutral party that does not have an emotional attachment to the farm. Utilize your professional teams to navigate the tough conversations and build a plan without bias,” says Leach.
Should I figure out my estate plan first?
Exiting the farm is a major life event and should trigger a review of an owner’s estate plan. Waiting until after the farm sale or transition can give owners a clearer picture of assets and help draft the most up-to-date plan for allocation or disposal. Consideration should be given to when to allocate assets (during life or wait until death) and how to manage new forms of assets. “Exiting the farm likely means farmers will have more cash assets from a sale. Cash is easier to manage during life or when it comes to estate planning and makes for less complex and labour-intensive administration for estate executors,” notes Wetmore.
When it comes to estate tax planning, Arnold says that some people prefer to dispose of assets during their lifetime because they like to have full control over where, how and when the assets are shared. “Farmers often like to align their values, especially if someone is carrying on the farming legacy and could benefit from a cash infusion today rather than sometime in the future,” says Arnold. Distributing assets during life also removes them from probate (estate tax) after death.
Wetmore recommends adding estate planning to the farm exit process. If left, your estate plan may become outdated leading to certain gifts or bequests listed in a will failing because the assets have been disposed of or are no longer part of the estate.
For those who prefer to leave the distribution of an estate until after death, this approach can also minimize tax implications because you don’t have to pay alternative minimum taxes on capital gains deduction claims on death. Some may prefer to retain control over their assets and leave a detailed administration plan, Arnold adds. “The choice of when to settle estate plans is yours, but no matter your preference, creating a thorough plan is essential,” says Arnold.
What do you tell the family, and when?
This isn’t a job you can delegate. It has to be you who talks to the family, says lawyer Shaun Wetmore of McCuaig Desrochers LLP, who notes that lawyers sometimes get put in the position of being the go-between.
“Sharing your intentions and wishes with your family goes a lot further in person than putting it on paper and expecting them to accept it,” Wetmore says.
In fact, it even goes further than that. The professional consensus is that bringing family into the conversation as early as possible is always your best course of action.
But there’s an important wrinkle, Wetmore tells his farmer clients.
“Family doesn’t necessarily need to provide input, but they do need to listen to you.”
Farm advisor Andrew Leach agrees. “There’s a difference between family having a voice and a vote in such situations.”
So, be prepared. This is another reason why it can make sense to work with advisors to establish your goals and to understand what you will want out of the farm for yourself. It also helps to make your messaging to the family very clear.
Bringing in a facilitator might also be helpful, even if the farm is going up for sale and not transitioning to the next generation. “Any change in ownership or accessibility to it (the family farm) is a serious life event,” says Leach, noting there are always a lot of emotions to work through with family.
Plus, if there’s a sudden change in direction, like a non-farming child unexpectedly expressing interest in taking over the farm, having a third party at the table can help the family regroup.
Again, Leach reminds farm owners that family can have a voice, but if they start making unrealistic requests or demands on the ownership or disposal of farm assets, knowing what you need out of the farm sale and what your goals are will be key to navigating those conversations. “It can be hard to say no to family sometimes, but you don’t want to jeopardize your life’s work and your future well-being,” says Leach.
Do I have to tell the neighbours too?
Rural and farming communities are known for tight-knit relationships with neighbours, so any change in farm management or ownership becomes a popular discussion topic. Everyone feels they have a right to an opinion.
“People often want to keep farms in their community,” farm accountant Bud Arnold says, which might mean they’ll seem nosey even if they mean well.
Arnold advises farmers they are under no obligation to share details of their farm exit with their neighbours, but if they are in a position where they want to sell the farm, sharing that news can be favourable.
Adds Arnold, “If you want to keep your farm legacy within the community, sharing the news could help you find someone you would like to sell the farm to.”