1. Lower Tax Rates
In Canada, your personal tax rate falls anywhere between 26% to 47.5% (2021). The corporate tax rate on active business income is 10%. This means that by incorporating, you can retain between 16% to 37.5% within your company to put back into operations – and help your farm operation grow more quickly.
2. Tax Deferral Opportunity
There is an opportunity to defer taxes when you incorporate. For example, an 11% tax rate means that 89% of your earnings will stay inside the company – allowing your business to grow, pay down debt, increase capital, and so on.
Because personal tax rates are significantly higher (26% to 47.5%), there‘s an immediate and significant deferral opportunity to pay out corporate funds and generate a personal tax rate. Canada, whether income is earned corporately or personally, the same amount of tax is paid in the end – so incorporating your business enables a tax deferral, which in turn allows your corporation to grow.
3. Capital Gains Exemption
Every Canadian has a Lifetime Capital Gains Exemption (LCGE), but few are able to utilize it in the shelter provided by a corporation. Farmers who own land personally are able to roll their land into their corporation and “crystalize” the capital gain on the land. Crystallization is the selling of security to trigger capital gains or losses.
This has two benefits.
- The corporation can present the land at its value when it was rolled into the company, rather than at the historical purchase price. This helps strengthen the corporation’s balance sheet.
- Crystalizing the capital gain creates a tax-free payable from the corporation to the individual that is available in the corporation and can be drawn as cash. Because the capital gains are sheltered under the LCGE, this transaction triggers lower taxes.
Another advantage to incorporating is credibility. Lenders, advisors, customers, vendors and other professionals look differently on a corporation than they do a sole proprietor. Incorporating also shows a long-term commitment to your business, and lenders will appreciate the professionally prepared financial statements and tax returns from a corporation.
5. Liability Protection
Incorporating your farm as a business provides a certain level of protection from liability, due to the fact that a corporation is a separate legal entity. Any creditor or legal action would affect the corporation instead of the shareholder.
If you have further questions about incorporating your farming operation, we encourage you to reach out to your legal advisor.
5 Advantages to Incorporating your Farm
This article was written by Matthew Anhalt, CPA, Senior Manager with Virtus Group.