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Transferring Farm Assets

A version of this article originally appeared in the October issue of Country Guide.
Transferring farm assets including the transfer of the land, buildings, equipment and quota that make up the farming operation can be thought of as the “meat and potatoes” of transition planning. Typically, once a plan has been developed for succession, there are assets that need to be transferred from one generation to the next. This can take the form of a simple transfer of a farm from parents to child or it may be a multi-step process spanning many years.
There are many different ways to transfer farm assets and the method depends on the type of asset, preferences of the parties, and tax considerations. Many farming operations are run through one or more corporations, which adds additional layers of complexity for transferring the underlying assets.
Below, we discuss some of the legal considerations when transferring a farming operation by directly transferring assets or by transferring the shares of the farming corporations.
Transferring Shares of a Corporation
A common approach to transferring the farming operation is to transfer the shares of the farm corporation. Many of our farming clients are becoming better versed in corporate law. Nevertheless, a critical understanding is often lost in the details; the corporation is a separate and distinct legal entity. The Canada Business Corporations Act provides that:
15(1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
It may seem odd to think of a corporation as a person, but it is helpful for understanding how corporations work and how they are treated in the eyes of the law. Shareholders ultimately have control of the corporation by owning shares. The shareholders then elect a board of directors to oversee the corporation, who in turn appoint officers to run the corporation’s business activities. In many farming operations, the same people fill all these roles. In a succession plan, changing the individuals in these roles over time is a useful planning tool.
Share transfers can be relatively straightforward and there are specific tax exemptions for transferring the shares of farming corporations that defer the taxes payable on the shares from generation to generation. Appropriate advice from an accountant is required to complete the share transfer and to file the necessary returns with the Canada Revenue Agency. The plan should be discussed with the different advisors involved, including bankers, lawyers and accountants.
Once a plan has been developed, we as lawyers draft the necessary documents in order to implement the transferring of shares and to update the corporate minute book. This is typically referred to as a reorganization of the corporation.
A reorganization of shares can involve freezing the corporation to bring in new shareholders, selling the shares of the corporation to new shareholders, or gifting shares. The decision is based on the parties, their status and any tax implications.
Shares can also be split into different types and classes. Generally, there are two main types of shares, common and special or preferred. Common shares are what you typically think of when you discuss shares in a company. Common shares increase in value as the company becomes more valuable. Tthey also typically have voting rights and are the default shares that are issued on incorporation. Special or preferred shares are generally fixed in value and have priority over common shares. The different types and classes of shares can be useful in implementing succession plans in larger farming organizations with multiple families involved.
With share transfers, there are additional issues from a legal perspective that may need to be addressed. For example, if there is a shareholders agreement in place it will have restrictions on the transfer of shares and the management of the corporation. It could contain a right of first refusal, a right of first offer, or other restrictions on share transfers. We will discuss shareholder agreements in greater detail in a future article.
Transferring Assets
The other general category of transferring a farm operation is through the direct transfer of assets. We tend to look at these transfers in four different categories for both tax and legal considerations. Assets can be transferred:
- from person to person;
- corporation to corporation;
- person to corporation/corporation to person; or
- among partnerships.
When transferring assets personally to a another person or to a corporation, the transfer can be completed on a tax deferred basis and, when dealing with land, there is typically an exemption from land transfer tax. For example, in Ontario, when transferring farms land from a personal name to a family farm corporation, an exemption from land transfer tax may apply if certain conditions are met.
Transferring assets from a corporation to another corporation creates additional legal and tax issues that should be addressed with an advisor prior to undertaking. From a legal perspective, it must be investigated if there are shareholders agreements that would prevent the transfer, the availability of land transfer exemptions should be considered, and restrictions with any marketing board will need to be addressed for quota transfers. Mortgages and security agreements also need to be reviewed and the bankers consulted to ensure the transfers will be permitted without triggering any pre-payment penalties.
If a person is holding real property in its personal names, generally there are two different ways that the lands are held — either as joint tenants or tenants in common. Joint tenancy is where people hold title all together and there is no undivided share in the property for any one of the owners. If an owner is to pass away, there is the right of survivorship, where the surviving owner(s) will continue to own the entire property. If people hold title as tenants in common, then each owner has a divided interest in the ownership of the property and they can do what they wish with their interest. For example, if three owners own the property with 33\ per cent each, an owner can sell their 33 per cent to someone else. There can also be different ownerships with tenants in common. One owner can hold 70 per cent and another can hold 30 per cent. A corporation can also own a portion of the property as a tenant in common, but not as a joint tenant. Transferring property into joint tenants with the next generation can be an effective tool to minimize probate costs while retaining some control over the lands.
If transferring farmland, lawyers will draft the necessary documents and register the transfer online. For transferring other assets, lawyers will draft asset transfer agreements, bills of sale and any other required documents to make effective the transfer of assets. Quota transfers need to be completed through the appropriate marketing board to be effective.
Combined Transfers
Often, a succession plan will involve a combination of asset and share transfers to give effect to the intentions of the parties, especially when there are multiple children or other parties involved in the farming operation. Certain farm assets may be transferred to another corporation, and shares from existing corporation transferred to a child. Often, to ensure unintended tax consequences, there needs to be a delay between the initial transfer of assets and the eventual gifting of shares to the next generation.
As stated throughout, tax implications need to be considered for any of the methods used. A person’s capital gains exemption will typically be utilized and any other tax advantages should be considered when determining the method of transferring assets.
Every farming operation is different and poses its unique challenges and considerations. Engaging knowledgeable advisors from the outset is important in determining these considerations and how they can be leveraged for a successful succession plan. When it comes to the transfer of assets, this can result in substantial tax savings and avoiding headaches down the road from improper agreements being put in place that do not address the concerns of the individuals involved.
About The Authors
If you have any questions with regard to transferring farm assets or this article, please contact Jon or Ashley.
Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ontario with offices also in Guelph. Both have extensive experience with agri-business and succession planning. You can contact them at ashley.podolinsky@mckenzielake.com or jon.barnett@mckenzielake.com.
If you require assistance with any legal matter, speak to a lawyer at McKenzie Lake Lawyers LLP by calling 519-672-5666.