SHAREHOLDER LOAN ACCOUNT MAKES A GOOD RETIREMENT TOOL
Originally published on February 2, 2012
Farming corporations have been a growing phenomenon on the Prairies.
Lured by the low corporate tax rate on the first $500,000 of taxable farming income, farmers have been quick to transfer machinery, equipment and commodity ownership to a corporate entity while keeping their farmland in their personal names.
The farming company captures all income and expenditures relating to the farm business.
To compensate for the use of the personally held farmland, the company pays the farmer and his spouse rental payments equal to the interest paid on any farmland loans plus the municipal property tax expense.
When the couple decides to retire, the retirement plan is three-fold:
• the last harvested crop, hopefully a big one, is sold within the farming company
• the farmland will be sold to a third party, which will allow for the retiring couple to each claim their respective $750,000 capital gains exemption
• while the shares of the farming company could also be sold outright, it is probably more likely that an auctioneer will be called in to disperse all of the remaining machinery, equipment and moveable bins.
• because farmers use the cash method to report income for tax purposes, the cash receipts from the sale of the last harvested crop will have to be included in the farm company’s income for tax purposes
• the sale of farmland will be largely tax-free because of the farmers’ available capital gains exemption
• there could be additional costs associated with the sale of the farmland, specifically the Old Age Security claw back and Alternative Minimum Taxes at the federal and provincial levels
• the auction sale will trigger “recapture,” which is the amount by which the auction sale proceeds exceed the remaining pooled tax value or undepreciated capital cost allowance. This recapture i s included in the farm company’s income for tax purposes.
In short, the farming company’s income will be at record levels. There will be no offsetting input costs because they would have been deducted in the previous year.
So we are left with sale proceeds in the company that have to be paid out to the shareholders as dividends or salaries at high tax rates.
In my experience, these “catchup” management salaries or bonuses result in some regret as to why more remuneration wasn’t paid out of the farming company in the earlier years.
For example, if the farming company paid a final dividend of $500,000, then the tax bill would be $125,000.
Let’s assume this same farmer had recorded a $50,000 dividend in each of the 10 years before his retirement.
The annual tax would be approximately $3,300, and the dividend would accumulate each year in his shareholder loan account. After 10 years, the shareholder loan account would be $500,000 and the total tax paid $33,000.
Contrasting this to the previous example, the total tax savings is $92,000, which is significant tax savings generated by simply using up the lower individual tax brackets that are available.
Farmers, not unlike other business owners, have a strong aversion to taxes of any kind.
This aside, the lower individual tax rates are available only once. They cannot be re-visited if you decide not to take advantage of them.
The message is a simple one: don’t forget about your available individual tax credits when it comes to corporate tax planning.
Your shareholder loan account is your tax-paid bank
account within your company.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.