Succession Planning
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A formal succession plan should be part of the exit strategy for any type of business, but it’s particularly important for farms, as the majority of farms involve multiple family members. Yet, industry averages show that less than 25% of farm operators have a formal succession plan in place.
The Central Okanagan Economic Development Commission, in partnership with the BC Ministry of Agriculture, recently held a one-day workshop on the topic as part of its agricultural programming. The workshop was facilitated by Chartered Professional Accountants Chris Henderson and Nathalie Merrill, partners at Rossworn Henderson LLP who work extensively with farm businesses on taxation and succession. Approximately 20 farm operators attended including multiple generations of several families. The participants found out a good succession plan addresses not only financial and legal considerations, but also the sensitive issues that are frequently associated with family dynamics.
This first of two articles provides highlights from the workshop and an overview of what’s involved in preparing a farm succession plan, how to get started, and factors that help achieve an optimal outcome.
The first requirement is having the right mindset, says Merrill. “People often approach succession planning with an expectation of perfection. A successful plan results in everyone coming away slightly unhappy with the end results. The participants need to come to the table knowing they will likely have to compromise on some issues in order for the final plan to be fair for all concerned. The entire process to get to a tangible plan will likely take months to complete, and the goalposts may continue to change throughout the process. Factors such as marriage, divorce, changing land values and profitability of the farm are just some of the things that can influence the plan.
The process begins by looking at the “big picture,” says Henderson. Gather the necessary financial information and prepare to set goals. You will need this information to share with advisors and to support family discussions around transitioning the farm.
This includes such information as:
- The approximate value of your farm
- Debts (i.e. mortgage)
- Original cost of land and buildings, and legal description
- Structure of the farm business i.e. sole proprietor, partnership, spousal partnership or corporation
- How you use your farm assets, for example are they or have they been farmed by you or somebody else?
- Financial statements for the last three years
- Recent personal income tax returns
- Off-farm assets, such as life insurance policies, RRSPs, or other real estate
You will also need to assemble details about the family including the number of children, their ages, marital status, addresses and present involvement in the farm. You will need information about the non-farm children including their current employment and the need for continuing support from you. Finally, recent wills, lease agreements, shareholders’ or partnership agreements, valuation day appraisals and the most recent appraisals should also be assembled.
The next step is to review personal and financial issues and make decisions that will be affected by income tax.
These critical issues fall under five broad headings:
- Ownership
- Control
- Security
- On-farm living
- Equal versus equitable treatment of children.
Reviewing the critical issues areas is a considerable exercise where you will put a number of ideas or goals under each area as a basis for discussion with family members. During this process, it is often easy to fall into a trap of focussing on the details of “how” you will transition your assets to your children instead of concentrating on the “what” you want to have happen to those assets. The most efficient way to proceed through this process is for you to keep your preliminary goals (the “big picture”) top of mind and leave the finer details of “how” to achieve those goals to your advisor(s) who know the tax and legal landscape.
Your advisor will be key to completing the final phase of the succession plan in terms of “putting it all together” on paper. In the process, there are three important areas of taxation that can have significant impact on a farm transition that will be looked at to determine the most efficient tax structure that meets the overall goals. They are the Capital Gains Exemption, Intergenerational Farm Rollover, and the Principle Residence Exemption. These areas are addressed in detail in the publication Loopholes for Farmers, downloadable from www.farmtax.ca.
In our second article, we will address the importance of effective communication and how to approach family discussions around succession clearly and effectively.
“Every farm operator engaging in succession can improve their understanding of the many succession planning tools that are out there,” says Henderson. “Before you even start the process, meet with your advisor, attend a succession planning workshop or do some internet research to familiarize yourself with the terms and processes involved.”
