Why new federal tax changes will hurt Canadian agriculture

Farmers and other small business owners across the country are worried that planned changes to the Income Tax Act pose a direct threat to the viability and profitability of their operations.

Why small businesses are concerned

Federal Finance Minister Bill Morneau announced the plan to update the act on July 18. The planned changes, however, will subject small businesses to higher taxes and eliminate many of the exemptions that make it possible for them to operate and build their businesses.

As with all small business owners, farmers take on tremendous risks and are subjected to much more income and financial volatility than a typical salaried taxpayer. The risk assumed by the small business owner is not always met with a matching reward.

Small businesses account for 30 per cent of Canada’s GDP. A tax structure that helps them weather financial downturns and survive challenges makes sound sense for individuals and for the Canadian economy.

How the changes will affect farmers

There are four changes – two proposed and two scheduled for introduction. Because agriculture is a unique industry and families are typically so heavily involved in operations, farmers stand to be particularly harmed by the changes.

Income splitting: Starting Jan. 1, 2018, income splitting with relatives is subject to new restrictions and a “reasonableness” test. Even though children often do a significant amount of farm work, the rules will make it harder for them to be paid via a dividend, leaving less cash in the farmer’s pocket, and making it harder to fund their business in a capital-intensive industry.

Lifetime capital gains exemption (LCGE): Starting Jan. 1, 2018, rules regarding this exemption will penalize children under 18, eliminate eligibility for capital gains from a family trust, and introduce a “reasonable” test that will be difficult to follow.

Holding of passive investments: Increases to corporate tax will leave less cash in the farmer’s pocket to fund future business operations and capital investments.

Transferring the business to the next generation: The proposed changes will make it more profitable for farmers to sell their business to a third party than to the next generation.

NCFA Submission to Minister Morneau

Like all agricultural operations, cattle feeders are worried about the impact these changes will have on their operations, on their families, and on their long-term prospects for profitability.

On Oct. 2, The National Cattle Feeders’ Association (NCFA) highlighted the negative impacts in a submission to Morneau and the Department of Finance. The changes will leave farmers under undue financial stress, the submission argued, limiting their ability to expand their operations and making it even more difficult to transition farming operations to the next generation. It strongly urged the minister to reconsider the proposed changes and amendments.

You can learn about another taxation issue in Why Lethbridge County cattle feeders could be leaving via new roads.