If you carry on-farm business and have significant income, transferring the farm business to a corporation may benefit as tax planning opportunities become available to you by simply incorporating. You become the shareholder and employee of a separate taxable entity by transferring your canadian farm business to a corporation.

Advantages of Incorporation:

  • Small Business Deduction & Tax Deferral – If you earn income as an unincorporated farmer, taxable income is taxed at your tax rate. Suppose your Alberta farm corporation earns the farming income. The taxable income is considered active business income for tax purposes and is subject to the general corporate tax rate at both federal and provincial levels. Suppose your taxable income is below the ‘small business limit,’ $500,000 at the federal level and for all provinces but Saskatchewan (the limit is $600,000). In that case, the small business deduction can significantly reduce your corporate tax rate (the combined corporate tax rate on income up to the small business limit is 14% or less in all jurisdictions). This lower tax rate creates a tax deferral opportunity and can allow the corporation to retain more of its earnings for reinvestment (certain restrictions apply to the small business deductions, please consult your Bilyk Financial Advisor for more information).
  • Limited Liability – Unlike a sole proprietor, a shareholder is not responsible for debts or other liabilities incurred by the corporation (unless personally guaranteed or in certain circumstances). In general, personal assets are protected from creditor claims and lawsuits arising in a corporation.
  • Employment Benefits – As a shareholder, individuals must pay tax on earnings distributed to them as a dividend; advantages can arise where the corporation can provide benefits more efficiently from a favorable tax perspective; some examples are below:
    • An automobile lease;
    • Health care premiums;
    • Individual pension plans; and,
    • Insurance.
  • Estate Freezes – Incorporating your farm can allow families to freeze the value of the farm at a certain point in time and allow future growth to occur in the hands of future generations, minimizing taxes upon transfer.
  • Income Splitting – Income splitting is redirecting income within a family group to take advantage of lower tax brackets, deductions, and credits available to each shareholder.

Disadvantages of incorporation:

  • Costs – Initial and ongoing costs of incorporation can be significant. Legal and financial advice will be required. Constant tax returns and other filings will most likely be needed.
  • Use of losses – If you are incorporated, farm losses must be applied to the corporate income and cannot be used to offset personal income.
  • Complexity – Incorporating requires more legal documents, government filings, and other records.

Incorporating the family farm requires consultation with professional advisors as the rules are highly technical and complex. In addition, each individual's situation will be unique in many respects requiring the expertise of a professional. Your Bilyk Financial Investment Advisor can help you identify your needs and refer you to the appropriate Alberta professional(s) for further assistance.