NFU Submission on Tax Planning Using Private Corporations

NFU input to Department of Finance Canada public consultation, September 29, 2017.

The National Farmers Union (NFU) welcomes the opportunity to provide input to the Department of Finance public consultation on Tax Planning Using Private Corporations.

The NFU is a voluntary direct-membership, non-partisan, national farm organization made up of thousands of farm families from across Canada who produce a wide variety of food products, including grains, livestock, fruits and vegetables. Founded in 1969, the NFU works toward the development of economic and social policies that will maintain the family farm as the primary food-producing unit in Canada. The NFU is a leader in articulating the interests of Canada’s family farms, in analyzing the farm income crisis, and in proposing affordable, balanced, and innovative solutions that benefit all citizens.

In our comments we would like to provide some useful context to the public debate around this consultation, as concerns regarding the future of the family farm were often given a high profile in media reports. We believe these concerns were over-stated.

1. Most family farms are not incorporated, and thus have no access to the tax planning measures under discussion. According to the 2016 Census of Agriculture, only 43,457 farms less than 25% of Canada’s farms are family farm corporations.

2. The tax planning measures would affect profits – that is, net income left after all expenses are paid, including inputs, wages and salaries – and in order to benefit from these measures, profits would need to be substantial. Most farms do not reach the approximately $200,000 year profit level that would make it worthwhile to pay the various legal and accounting fees required to benefit from the tax planning measures under discussion.

According to the most recent Statistics Canada report available (2014), the average farm net operating income was less than $50,000. Even if we only consider the biggest farms (31,000 farms with gross revenues over $500,000), their average net income from the farm adjusted for capital cost allowance was $72,081, and of that income, $16,420 was from government program payments.

3. The Department of Finance consultation document notes that by 2014 there were 1.8 million private corporations in Canada that could access the tax planning measures addressed by this consultation process. Canada’s 43,457 incorporated family farms comprise only about 2.4 % of corporations that could potentially be affected by changes.

4. The $1 million lifetime capital gains exemption for farmers is not under discussion in this consultation process. In the media, there have been many irresponsible reports that have made the erroneous suggestion that this lifetime capital gains exemption for farmers is the target of the third tax planning measure in question. In fact the loophole being discussed is a wealthy private corporation owner’s ability to convert income to capital gains by running money through a series of shell companies.

We would now like to examine some of the underlying issues that have heightened apprehension among farmers in regard to the proposed tax system changes.

Farm income crisis

Canada is in a long-term and continuing farm income crisis. Gross income – the value of what farmers produce – has gone up steadily for decades, yet realized farm income – the amount farmers get to keep after paying expenses, has not increased. Adjusted for inflation, farmers net income has actually gone down.

Farmers are the weak link in the agriculture value chain – we are price-takers when we buy inputs and price-takers when we sell our product. Farmers lack income due to the imbalance of power in the market place. Each individual farmer is small in comparison to the corporations we have to deal with or compete with, whether it is a multinational grain company, a retail conglomerate, a railway company or a big seed company. This power imbalance cannot be corrected by having wealthy individuals avoid paying taxes.

The NFU advocates for more fair agriculture policy and for strong institutions that make it possible for farmers to work together in the marketplace. Please visit our website at www.nfu.ca to find many policy recommendations that, if implemented, would lead to better incomes for farmers, more economic activity in rural communities and a stronger Canadian economy.

Farm succession

The 2016 Census of Agriculture shows that only 8% of Canadian farms have a written succession plan. The majority of those with plans would pass the farm on to a family member. The current $1 million capital gains exemption facilitates within-family succession. However we also know that family sizes are smaller, sons and daughters often pursue non-farm careers while parents continue to farm, and most farms do not return enough to support three generations (older parents with adult children raising young children). Adult or middle-aged children may not want to return to the farm when their parents are ready to retire. There are also older farmers who do not have children. Canada’s total farm debt outstanding is close to $100 billion. This means that retiring farmers generally need to sell their farms to pay off debt and have an income to live on in retirement.

At the same time, there are increasing numbers of young people who want to farm and whose families do not farm or are not in a position to pass land on to them. Farm size has also increased significantly over recent decades. To compensate for lower margins, more land is needed to make the same income as in the past. And farmland prices have gone up – partly driven by demand from farmland investment companies that are speculating on further price rises while collecting cash rent from the people who farm the land. The barriers to entry for young farmers are massive.

We would like to see a genuine a national farmland succession strategy that is inclusive of non-family members, goes beyond the capital gains exemption and which safeguards against potential abuse by people who claim the intention to farm but later flip the land in speculative deals.

We recommend that the Government of Canada and the provinces set up mechanisms for farm family intergenerational land transfers that do not rely on loans and interest payments. Governments must find ways for young and new farmers to gain secure access to farmland that does not require massive indebtedness. Such mechanisms could include:

  • Community-owned land trusts and land banks to ensure food production by local farmers
  • Community-based financing options (that retain interest-payment dollars within local communities).
  • Government agencies that support seller-finance options. (Sellers and buyers could self-finance, and the role of the government agency would be to step in to address rare instances when transactions go bad and there is a need to return the land to the seller.)
  • An income-assurance plan for beginning farmers to assist them in becoming established and support their long-term success.
  • A retirement savings program or pension plan specifically designed for farmers that would reduce their need to rely on selling land to fund their retirement.

We believe it is worth exploring an increase to the lifetime capital gains exemption amount for farmers in light of the increase in farmland prices, but only if there are effective controls to prevent farmland investment companies and foreign buyers from continuing to accumulate land and promote speculation. See the NFU report Losing Our Grip – 2015 Update for more information on this topic.

We would like to see more fairness in the tax system in general. The proposed measures in this consultation do not address the many strategies big businesses use to avoid paying their share of taxes (for example paying their CEOs stock options and structuring their company so that most of their profits go into off-shore tax shelters instead of being taxable in Canada). We urge the government to amend the Income Tax Act and use other tools to ensure that large corporations and their shareholders pay their fair share of taxes too.

Respectfully submitted by
The National Farmers Union