B.C. TRANSITION TOOLKIT FOR NON-FAMILY FARM TRANSFER – Stage 1
Considerations: Current Farmer
There are many pathways for current farms transferring a farm business and/or land to an entering farmer, depending on your vision for finances, your family legacy and what you want to see happen to the land in the future.
Different scenarios will offer different levels of financial compensation, and may offer different levels of security in knowing that the land will continue to be farmed into the future. Understanding your vision and needs will help you choose a pathway. Ultimately, your vision will be shaped by what you want your retirement lifestyle to look like, your finances, your family, and the legacy you want to leave for the future.
WEALTH MANAGEMENT: Retirement and financial needs are at the heart of transition planning. Owning land is a valuable asset, as the land can be sold to fund retirement. For many farmers, a land sale will be the main source of retirement income. It’s important to understand what you want your retirement lifestyle to look like, what funds you’ll need, and how important a family financial legacy is to you so you can develop a transition plan that meets those needs at this crucial stage of life.
Selling the land, and/or farm business, at market value, whether to an individual or a community group, offers the highest level of financial return to you. If a high financial return is not your priority, selling the land below market value or donating the land can create opportunities for young farmers.
STAYING ON THE LAND: There are few things as heartbreaking as pouring decades into nurturing a piece of land, only be forced to move away from that land when you retire. Many current farmers want to stay on their land after someone takes over the farm business, and there are a number of options to achieve this. The exact mechanism for staying on the land will be different depending on the transition model that fits your needs. It’s important to consider what housing is available on the land and what changes may need to be made to accommodate both current and entering farmers.
PRESERVATION OF FARMLAND: For many current farmers, ensuring that their land continues to be farmed is a primary goal for any exit strategy from the farm. This is a key driver that leads farmers to look at alternatives to putting the land on the market. If long-term farm use is at the core of your vision for the future, the ecological and social value of the land may feel more important than the financial value.
QUESTIONS TO ASK YOURSELF:
- What do you want your retirement to look like?
- What is your timeline for retiring from farming?
- What does retirement mean to you and your relationship to the farm going forward?
- What are your financial needs in order to retire from farming?
- Where is your retirement income coming from?
- What are your living expenses? How will those change over time?
- Do you have a financial cushion for unexpected expenses?
- Where do you want to live in retirement? Will this require you to purchase real estate?
- What income do you need from the farm? What other ways could you create income?
- What assets will you leave to the entering farmer? To your family? What will you sell?
- How will the farm transition affect the profitability of the farm?
- What elements of the farm culture (e.g. traditions, division of labour, ideals, values) do you want to pass on to the next generation? What don’t you want to pass on?
- How do you want the land to be stewarded in the future? Should certain areas be restored and/or protected?
- What elements of your legacy on the farm are most important to you?
- How will you communicate with the next generation of farmers?
- What is your conflict resolution style?
- How involved do you want to be in the management of the farm once you retire? How might that change with time?
- How do you want to commemorate the history of this farm?
- How do you want to spend your time on or off the farm when you retire?
- Do you want to spend time on the farm when you retire? If so, which parts of the farm would you like to access?
ESTATE PLANNING & FAMILY LEGACY: Inheritance is often a sticking point in family transitions, where one heir wants to farm and the off-farm heirs expect their “fair share” of the financial legacy. In non-family transition, this is even more complex! The question becomes, how do you balance leaving something for your heirs while passing on the farm outside of the family?
Off-farm heirs might be counting on an inheritance to get themselves set up in the world, and many parents want to provide that to their children. Many children of farmers don’t go into farming themselves, but cherish memories of growing up on the farm and feel a close connection to the land.
Any transition plan should consider how the family may want to remain involved in the farm for the future. In one example, Lohbrunner Farm on Vancouver Island is held in a land trust and managed by a farm co-operative, but the children of the previous farmers retain the right to visit the farm. This allows them to stay connected to their family legacy without having to manage the farm business.
Engaging the whole family early in the process is essential to ensuring that everyone has had the opportunity to share their voice. Everyone impacted by a transition plan should be on board with the result to avoid future complications, such as children contesting a will. Mediators can be helpful to ensure everyone’s voice is heard while navigating these conversations. Counselling after mediation is recommended to overcome potential feelings of loss or not living up to expectations.
QUESTIONS TO ASK YOURSELF:
- What values do you hold as a family around the farm? What do your children want to see happen to the farm in the future? What do they think about your vision?
- What role do they see themselves having related to the farm in the future?
- What are the needs of your heirs? Do they need a financial benefit? Legacy access to the land? Will your children inherit the land, but not the farm business? If so, what would they do with the land, and how would that impact the farm business?
- What is equitable? This might not be the same thing as equal.
- What are the off-farm assets (e.g. life insurance, RRSPs, investments)?
TAXES: Whenever selling land or a business, there will be tax implications. Consult with qualified advisors to ensure you are structuring deals advantageously. There are detailed sections on Capital Gains and Property Transfer Tax in Appendix A of this toolkit. Here are a few important tax considerations for current famers:
- Some of the tax provisions require that planning to make use of such provisions be done early. For example, the ability to have a property as a Qualified Farm Property has specific stipulations that may need to be in place for a number of years, which need to be planned for.
- When selling property, you may qualify for the lifetime capital gains exemption, which currently exempts up to $1 million of capital gains for qualified farm property (the amount of the exemption is subject to government regulation changes).
- Careful planning several years in advance of a sale may enable using the capital gains exemptions of other family members (e.g. spouse).
- To claim the Capital Gains exemption, the sale and exemption must be reported in the tax return. Failing to report the disposition can result in loss of the exemption and the sale could be fully taxable as an ordinary capital gain.
- Estate planning should happen early and deal with the full implications of taxes due upon death. Sometimes simple planning can help alleviate unnecessary taxes upon transition.
- Probate fees possibly apply if ownership of the land is transferred through a will (as opposed to a transfer in the current farmer’s lifetime). In 2020, probate fees were 1.4% in B.C.
- Property Transfer Tax potentially applies, unless a family farm exemption provides relief.
- Some current farmers are interested in sharing ownership of the land with an entering farmer and adding the entering farmer to the title. Adding someone who is not a family member to the title means that Property Transfer Tax would be due based on the percentage of ownership.
- The death of a farm owner may trigger a liquidity event in which a tax liability is created that may be avoided with timely planning. This will enhance the likelihood of keeping a farm property in the family, as property will not have to be sold to fund tax liabilities.
- See Appendix A for details on Capital Gains and Property Transfer Tax.