This article was originally published in Grainews. Grainews is an agricultural based publication written for farmers, and often by farmers, in a style they understand. Don and Erik work closely with author Andrew Allentuck, providing the background financial plans and theoretical analysis for Andrew’s Farm Financial Planner column.
The Farm Financial Planner column has recently come to an end in the Grainews publications. However, we have had requests to continue on with the content, so we intend to post it here regularly.
With No Farming Children and Little Income Flowing In From The Farm, it’s Time to Sell
A couple we’ll call Harry, 74, and Anne, 72, have been farming in central Manitoba for four decades and would like to retire. They have 1,600 acres — 600 for grain and the remainder for pasture and hay. Their children, two sons, and two daughters have careers away from the family farm. The problem: [ay off the debt, and plan for retirement income.
Harry and Anne are still recovering from severe operating losses related to BSE two decades ago. They’ve downsized their beef herd from 100 cows to just 20 and have suffered from recent low crop yields. The farm earns just $30,000 a year. It’s a case of a currently unprofitable farm with good capital.
Harry has been working full time off the farm to generate additional cash flow to service farm debts of $245,000 on a home mortgage, $40,000 on a trailer loan, $4859 to the Canada Revenue Agency and $26,000 on a credit card.
The farm has $2.7 million worth of real estate. Harry and Anne could sell, pay their bills and retire. If they don’t creditors could force a sale and that could be at an inappropriate time. The first move is to develop a plan.
The couple should aim to pay income tax in a range of 26 to 33 percent each year rather than defer the maximum amount of income until death where, through the estate, it would be taxed at 50 percent or more. They are eligible for the $1,000,000 Personally Owned Farm Land Capital Gain tax exemption. The can also exempt their personally owned home and one acre, say $600,000.
The solution is to sell; One quarter with an estimated market value of $490,000 and an original price of $28,000 has a nominal capital gain of $462,000. The credit will cut the tax to zero on this sale. However, for a year, there would be a loss to the Old Age Security clawback and some provincial tax payable.
With $420,000 available for debt management, $70,850 can be used to pay off credit card, Canada Revenue Agency and trailer debt; $250,000 can be used to pay off the mortgage. The balance can be invested in Tax-Free Savings Accounts and anything left over could go to an ordinary taxable investment account. That takes care of immediate problems.
The remainder of the farm with the estimated market value of $1,610,000 and a book value of $128,000 has a capital gain of $1,482,000. Harry and Anne would have a remaining Farmland Capital Gains Exemption of $1,482,000, subject, of course, to some provincial tax payable, loss of Old Age Security for the year when the gain is taken and the Alternative Minimum Tax.
After paying off creditors and some taxes, Harry and Anne would have perhaps $2 million in remaining assets, most of it in cash, given that they can only put $63,500 each into new TFSA’s. Some of the remaining assets could go to their non-farming children. If the transfer to the children is to be in the near future, it could be at a low purchase price to provide them a tax-free transfer.
It would be possible for the parents to take a zero percent promissory note on the land. That would protect the parents’ future retirement cash flow if any of the inheriting children were to get into financial difficulties through insolvency or divorce. In that case, creditors or an estranged spouse could seek to capture farm assets, but they would have to pay the parents before their claims would be considered.
This plan to clear the family farm of debts, to provide potential money for the children, and to boost the incomes that Harry and Anne will have is simple and workable. There are a few hurdles, such as the sale of the land, but we have priced the property conservatively. Moreover, they will keep their farmhouse and an acre of land and could, in the future, sell that too in order to complete a move to town. Our solution takes care of their financial problems and lays a foundation for transferring wealth to the kids. It is simple, solid, and effective.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.