Farming Corp Changes Coming?


The Canadian Finance Department just released a discussion paper about proposed changes to various aspects of our current capital gains tax regulations with public input until Oct 2nd.

About 25% of all commercial Canadian farmers are incorporated. The corporation is a separate legal entity in which a business can operate or assets can be held. The corporation has a much lower income tax rate for qualified small businesses. With a tax rate of only 11% up front, the corporation has taxing savings to re-invest and grow quicker, deferring the rest of the income tax burden until the end. Due to the capital intensive nature of operating a farm, many owners opt to incorporate their farming enterprises.

The Canadian government has looked favorably on incorporated farmers, giving them additional flexibility in when and how they pay their income taxes, particularly in passing on the farm to the next generation.

The discussion paper is likely to focus on how capital gains rules are applied to estate and succession plans using intricate structures to fully utilize the capital gains tax exemption on company shares.

An interesting news article from Brian Plett goes into further detail:

After the fall harvest, Canadian farmers could face huge tax hit from new rules

Economic update

An interesting news article was published last week noting that European Junk Bond investments now have an average interest rate of 2.42%. Coincidentally, this is very close to the current rate offered for a 10 year US Government bond. By definition junk bonds are issued by a corporation who cannot get bank credit hence the “junk” label. Normally junk bonds are priced with 10-20% interest rate incentive above an equivalent US Government bond due the high default rate of junk bonds.

There is an overwhelming supply of investment money chasing interest bearing investments, pushing the rates down. Most European Government bonds now have either very low rates or negative rates leaving European investors looking for some return to purchase junk bonds.

In Canada we are unlikely to see any effort to increase investment interest rates here. If Canadian rates get too high relative to the US and Europe, we are likely to see a flood of money come in from those locales with lower rates. This will bid up our Canadian dollar, making our exports less competitive in the global market.

Photo by Tim Mossholder on Unsplash

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