Family Farm Business

Succession Plan Checklist

.…approaching the porcupine

Family Farm Business
Succession Plan Checklist

.…approaching the porcupine

Original written by

Derek J. Fryer, FCA (Retired)

Modified and re-published by

British Columbia Ministry of Agriculture (2011)

Funding provided by: Growing Forward, a federal-provincial-territorial initiative
Acknowledgements

The publishers acknowledge with thanks the contributions made by the following:

Derek J. Fryer, FCA, a (retired) partner in the Chilliwack office of KPMG, who wrote the
publication.

Howard Joynt, British Columbia Ministry of Agriculture, Fisheries and Food, who initiated and
led the project.

Merle Good, Alberta Department of Agriculture and Rural Development and Mike Pylypchuk,
Saskatchewan Ministry of Agriculture, for their contributions and review of the publication.

The farm families who reviewed the publication to ensure it meets the needs of the farming
community.

For additional information, contact:

British Columbia Ministry of Agriculture

Agri-Food Business Development Program
Toll Free: 1-877-702-5585
Email: [email protected]
Website: www.smartfarmbc.ca
Table of Contents

INTRODUCTION ................................................................................................................................... 1
THE FAMILY FARM TRANSFER PROCESS........................................................................................ 2
STEP 1 - COLLECTING THE DATA ..................................................................................................... 4
STEP 2 - REVIEWING THE CRITICAL ISSUES ................................................................................... 6
STEP 3 - SETTING YOUR GOALS ..................................................................................................... 11
STEP 4 - BECOMING FAMILIAR WITH SUCCESSION PLANNING "TOOLS".................................. 14
TAX TOOLS AND ISSUES.................................................................................................................. 15
BUSINESS ARRANGEMENTS .................................................................................................................................. 17
LIFE INTERESTS ................................................................................................................................................... 19
SECURITY............................................................................................................................................................ 19
METHODS OF OWNING PROPERTY ........................................................................................................................ 19
LIFE INSURANCE .................................................................................................................................................. 21
SOME EXAMPLES OF HOW THE TOOLS MIGHT BE USED ......................................................................................... 22
WHERE DO YOU GO FROM HERE? ................................................................................................. 25
APPENDICES ..................................................................................................................................... 26
APPENDIX A - COLLECTING THE DATA................................................................................................................... 26
APPENDIX B – W HAT ARE YOUR INCOME NEEDS................................................................................................... 30
APPENDIX C – W HAT CAN THE FARM AFFORD TO PAY YOU?................................................................................. 31
KEEP IT GOING .................................................................................................................................. 32
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Introduction
For many people, dealing with succession planning and farm transfer
arrangements is sort of like taking on a porcupine - it's prickly and hard to
approach - a creature one would just as soon avoid entirely.

It's our hope that the Succession Planning Checklist will make your
porcupine easier to handle. It has been written for the parents in a
farming family, and deals mainly with the transfer of the farm to the next
generation during their lifetime.

This publication should also be useful to the child who is planning to take
over the farm. This is important because in some farm families it's the
child who takes the initiative and begins the discussion with his or her
parents.

While it's not possible to make succession planning entirely painless, it

will be less overwhelming if it's approached carefully, step by step. We
encourage you to use this publication as a starting point in your planning
process.

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The Family Farm Transfer Process

An estate plan usually results in the transfer of a farm from one
generation to the next. The entire family farm transfer process can be
divided into two parts, each consisting of four steps:

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The Family Farm Transfer Process
Look at the big picture This publication deals with the first four steps in the succession planning
process. These steps deal with information gathering and goal setting.
The best way to approach them is with the "big picture" in mind. In other
words, don't get too involved in the details, particularly in regard to
income taxes. Deal with these details in Part II of the process with the
help of your adviser.

Step by step Succession planning will take more than a few days. Your plan may take
several years to finalize. In the course of your discussions you will run
into issues that are difficult to resolve and objectives that may conflict.
Some of your goals may need to be re-considered when circumstances
change or as a result of the financial analysis you will carry out in Part II
of the process. Don't be dismayed when you encounter these
"porcupines" on the path to a completed estate plan. When your plan is
finalized, you will have the satisfaction of knowing that you have done
your best to meet the needs, goals and wishes of everyone involved.

Communication is vital In the first four steps the discussion will be with you and your spouse.
From time to time you may need to consult a professional advisor or find
information beyond this publication. Once you have the information and
some comfort with your plan involve all family members. A successful
succession plan is one that involves all your family.

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Step 1 - Collecting the Data

The first step in the succession planning process is to collect financial and
other information to help in family discussions and assist your advisers.

The data that you will need is as follows: space is provided for your
information in the appendices on pages 26-31.

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Financial Information
 The approximate value of your farm.
 The nature of the security for any farm debts (e.g. mortgage or
agreement for sale.
 The original cost of your land and buildings, their valuation-day
value, if you acquired them before 1971, and the legal description.
 How is your farm business held? Example; sole proprietor,
partnership, spousal partnership or corporation?
 How are your farm assets registered? Is this consistent with whom
you think owns them? Example; joint tenants, tenants in common,
partnership or corporation.
 The manner in which your farm assets are used now and have
been used in the past. In other words, are they (or have they
been) farmed by you or somebody else?
 Your recent financial statements for the farm (say last three
years).
 Do you own quota? What is the amount of your quota write-offs
since 1971? (This is something you may wish to leave to your
accountant).
 Your recent personal income tax returns (your accountant will
probably want to see them for the last ten years) details of
significant non-farm assets such as investments.
 Details of life insurance policies.

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Step 1 - Collecting the Data
Personal Information
Details about the family, including:
 The number of children, their ages, marital status, address and
present involvement in the farm.
 Additional details about the non-farm children including current
employment and the need for continuing support from you.
 Any special circumstances or needs.

Agreements and Other Documents

 Your most recent wills. Do they match your current ages and farm
assets?
 Your partnership agreement, if applicable.
 Lease agreements.
 Your company's Articles and Memorandum (your lawyer will have a
copy of these documents).
 Your valuation day appraisal, if you had one prepared.
 Your latest appraisal. This may be a good time to invest in an
appraisal!

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Step 2 - Reviewing the Critical Issues

This step is an important one. You will need to review a number of
personal and financial issues to decide on some broad objectives
regarding the transfer of the farm.

In both this phase and the next you will be making financial decisions
which will be affected by income tax. You may need your financial adviser
to help you work through the calculations, so we recommend that for the
time being you think on an after-tax basis. In other words, when you
estimate what you will need to receive from the farm after retirement,
make your estimate on an after-tax basis. Take the same approach when
you estimate what the farm can afford to pay you.

The issues critical in most farm transfer arrangements are listed below
under five main headings:

Ownership
Control
Security
On-Farm Living
Equal vs. Equitable Treatment of Children

Under each issue, we have provided some points for your consideration.
There is space provided on pages 12 – 13 to write your ideas.

Ownership
1. Are you looking for an "interim" arrangement at this stage, or are
you considering a full sale (examples on pages 22-24)?

 Are you prepared for a complete change from farmer to creditor

(or, if a company is involved, to a passive investor)?
 Are you sure which children want to be involved in the farm?
 Are there one or more children who may want to become involved
later?
 How important is it that you retain ownership of some of the
assets?

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Step 2 Reviewing the Critical Issues
 If there is an "interim" arrangement, how concerned are you that
the farming child might not have sufficient "comfort" as to how the
overall plan will ultimately unfold?
 Could you work with your child?
o Do you communicate well together?
o Could you treat your child as a business partner?
o Does your child have formal and practical education?
o Does your child have management experience?

2. Are you concerned about the stability of your farming child's

marriage?

This can be a significant issue because if there is a marriage breakdown a

son- or daughter-in-law could acquire a larger share of your estate than
your own non-farm children.

 Would you like a business structure that ensures long term security
of the farm assets?
 Would you prefer not to transfer significant assets at this time?

Control
1. Is it important that you control the farm for a period of time?
 Is it important that you have some element of control while you still
have a significant investment in the farm?
 Is it sufficient that you have some influence over major decisions
such as the future purchase and sale of assets?
 Do you want to continue to have some management of the farm?

Security
1. What importance do you place on security?
 Are you prepared to act as banker on a sale to your child or will
you expect him to cash you out in whole or in part? If you do act as
banker, will you want interest in the first few years of the
agreement?

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Step 2 Reviewing the Critical Issues
 Are you prepared to guarantee any bank indebtedness that your
farming child might incur to buy you out?
 Do you want to remain on the titles to the land until the child pays
what is owed to you?

2. What future income (or debt repayments) do you need to receive

from the farm? To help you in deciding this matter, estimate the income
you will need to meet your living costs using Appendix B - page 30.

 What financial commitments do you have to your other children?

 Do you want to receive lump sum capital payments either at the
time of sale, or in the future?
 Will you want a return on any funds owed to you by your child?

3. What is the farm's ability to make payments to you and support

your child? To help you decide this, use Appendix C - page 31.

 Should the farm be expanded?

 Can the farm be down-sized?

On-Farm Living
Will you want to stay on or move off the farm?
 Does your child need to move onto the farm?
 If an additional home is needed, will you or your child move into the
new house?
 Can your home be sub-divided from the farm?
 What is the cost of housing in town?

Equal vs. Equitable Treatment of Children

In families where there are non-farming children, the issue that often gives
parents the most difficulty is deciding what type of arrangement will be
equitable to all of their children. An equitable arrangement is not
necessarily an equal one. In many situations, the equitable arrangement
will be one in which the farming child receives a greater portion of the

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.Step 2 Reviewing the Critical Issues
parents' estate so that he or she is able to continue running the family
business

The arrangement that you consider to be equitable might be completely

different from your neighbour's even though your situations might be fairly
similar.

1. What assets will ultimately pass to your non-farm children?

 Are there non-farm assets which they might inherit?
 Are there any insurance policies which they might inherit?
 Will you be able to build up non-farming assets from the payments
that the farming child might make to you?
 Will non-farming children have to try and collect money owed from
your farm child as part of their inheritance? Will non-farming
children be obliged to hold an interest in the farm along with your
farm child?
 If so, how important is it that your farm child's ability to run the farm
not be put at risk?

2. On the assumption that you want your overall plan to be equitable -

how do you decide what is equitable?

 Should you be guided primarily by the resale value of your assets?

 Should you be guided primarily by the profit that your farming child
will make from the farm in relation to the value of the labour that he
contributes to it?
 How important is it that your farming child receives the farm intact?
 How important are the following:
o The standard of living and prospects of the non-farming
children.
o What you have given to them already? (university tuition,
loans, etc.)
o What your farm child has contributed to the farm?
o The opportunities your farm child has foregone.

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Step 2 Reviewing the Critical Issues
3. Are you concerned that one or more of your children might
challenge your overall succession plan, after your death? Even
though this should be possible only where one or more of your children are
not provided for adequately, there is the potential for trouble in many farm
situations because children do not necessarily share in their parents estate
in an equal manner. If you are concerned, you will want to consult with a
lawyer.

 Do you have non-farming children?

 Are they likely to disagree with your plans for the farm?

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Step 3 - Setting Your Goals

In this step, you should continue to focus on broad objectives or goals -
the details will be worked out later after you consult with your advisers.
What you want to do here is arrive at some decisions based on your
discussions of the five critical issues in Step 2.

There are several points to consider when you are setting your goals:

Avoid the "cash trap":

Keep in mind that farm profits must provide for a number of competing
interests illustrated below:

The family farm cannot usually be transferred to the next generation at

fair market value without jeopardizing the ability of the farming child to
meet the various needs depicted in the "cash trap" diagram. Some form
of subsidization is usually necessary, in the form of a deferred withdrawal
of the parents' investment, reduced interest rates, or a reduction in the
transfer price. The real question to be answered by you is whether
the amount of subsidization required to make the transfer feasible is
consistent with your goals.

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Step 3 - Setting Your Goals
Separate "wants" and "needs":
Your wants might be sacrificed (or deferred) in order to complete an
arrangement, but your needs must not be. Don't put your comfort or
security at risk to transfer property to your children.

Ensure the arrangement is "bankable":

If one of your objectives is to receive a lump sum payment from your
farming child, it will be important to ensure that the arrangement is
"bankable". Your child may want to have a discussion with his or her
financial institution at this stage so there is a general understanding of the
security the institution would require and the approximate borrowing cost.

Treat your decisions as being preliminary:

Remember that until all of the tax calculations and other details have
been worked out by your advisers you will not be certain whether all of
your goals can be achieved.

The goals that you establish will become the basis for negotiation with the
family. Initially you might discuss them with your farm child only but
eventually all of your children will need to be involved.

Review previous questions you have written down and write your
conclusions here.

At this time there may be more questions than answers or there may be
different approaches from each spouse to be considered. There is no one
answer. Write down your best ideas.

Ownership ______________________________________________________
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Step 3 - Setting Your Goals
Control ___________________________________________________________
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Security __________________________________________________________
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On-farm Living ________________________________________________

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_______________________________________________________________________

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Equal vs. Equitable Treatment of Children _______

_______________________________________________________________________

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_______________________________________________________________________

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Step 4 - Becoming Familiar with Succession

Planning "Tools"
What are These Tools?
This is the final step in the first part of the process. You have assembled
all the information needed to develop the final plan; you have reviewed
the critical issues and have reached tentative conclusions about the
general direction you should be headed in. Now you need to gain an
understanding of the "tools" that can assist you in getting where you want
to go.

It's important to keep in mind that you are not trying to become a tax
expert, a lawyer or a financial planner. You are simply trying to improve
your understanding of the business arrangements or techniques that
might be of assistance to you. The intention here is to prepare yourself for
the analysis that will be carried out in Part II of the Process. This analysis
will likely be carried out by your adviser but if you take the time to
complete Step 4 you will be better able to discuss the various options with
that person.

The "tools" we have described for you have been grouped under the
following headings:

Tax Tools and Issues

Business Arrangements
Life Interests
Security
Methods of Owning Property
Will Planning
Life Insurance

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Step 4 - Becoming Familiar with Succession Planning "Tools"
Tax Tools and Issues
"Rollovers"

Certain types of farm property can be "rolled over" from a parent to a

child. This is an extremely valuable tax concession because it means the
property can be transferred from one generation to the next without tax.

In essence, the child "steps into the shoes" of the parents and inherits the
parents' tax cost (original cost not fair market value). A "child" for this
purpose includes a son- or daughter-in-law.

The type of farm property that is eligible for "rollover" includes the
following:

Land
Buildings
Machinery
Quota
Shares of certain farm companies
Interests in certain farm partnerships

Your adviser will review with you several conditions which must be met
before this "rollover" can be obtained.

Note that the property eligible for "rollover" to a child does not include
livestock. Despite this, livestock can be transferred to a child without any
immediate tax consequences provided the purchase price is not paid at
the time of sale. Where this happens, the parent usually receives a note
from the child as evidence of the unpaid sales price which describes
when the parent can demand payment or the dates on which payments
are to be made.

Property can also be "rolled over" to a partnership or company. Here the

"rollover" is obtained by the filing of a special election with Revenue
Canada. The property eligible for this sort of "rollover" includes all the
assets that can be "rolled" to a child, plus livestock as well. This type of
"rollover" can be useful if it makes sense to transfer your farm to a

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Step 4 - Becoming Familiar with Succession Planning "Tools"
partnership or to a company as the way of bringing your child into the
business. Again, important conditions must be met which will be reviewed
with you when you begin to develop your plan in detail.

Capital Gains Deduction

Farmers can realize up to $750,000 of capital gains on qualifying farm

property without being subject to tax by offsetting their gains with the
capital gains deduction (CGD). Note, that only one half of your capital
gains is subject to tax. Thus only half of the CGD or $375,000 can be
applied to offset your capital gains. If both parents own the farm property
jointly, each of them may be entitled to this tax-free gain

The CGD applies only to the gains on certain assets. Generally speaking
these assets are:

Land
Buildings
Quota
Interests in certain farm partnerships
Shares of certain farm companies

There are very complicated rules which determine which gains are
eligible for the CGD and which individuals can use the deduction. This is
an area that will have to be explored in depth with your adviser at the time
your options are examined.

You should bear in mind that certain types of income that might be
created on the transfer of your farm to a child (or to a partnership or
company) will not be eligible for the CGD. These include:

 The income created on the sale of your livestock.

 The recaptured depreciation on your buildings and machinery.
 The recaptured write-offs on your quota.

Clearly this is an important area in farm succession planning.

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Step 4 - Becoming Familiar with Succession Planning "Tools"

Capital Gains Reserves

If a farmer sells his land or buildings, an interest in a farm partnership or

shares of a farm company and receives the sales proceeds over several
years, he is usually able to spread his capital gain over a period of up to
ten years by claiming a reserve in respect of the unpaid sales price.
Depending on the circumstances this can be a useful way of reducing the
overall tax cost or preventing the alternative minimum tax (example; the
untaxed portion of your CGD) from applying.

Other Tax Issues

 Other potential tax issues that your adviser will have to discuss
with you include the following:The possibility of your being subject
to the alternative minimum tax if you realize a large capital gain.
 The possibility of the B.C. Property Transfer Tax applying on the
re-registration of your farm land.
 The B.C. Provincial Sales Tax and Federal Sales Tax.

Clearly this tax commentary is very general and highlights only a few of
the tax rules that might affect your final plan. However, it should give you
a better idea of how you might achieve the general objectives you
established in Step 3.

Business Arrangements

There are several different business arrangements you can use to

transfer the farm to your child. The best arrangement for you will depend
on factors such as:

 Whether you want to continue to exercise some control over the

farm. This control could be limited to major decisions such as the
purchase or sale of significant assets or could include the day-to-
day management of the farm as well.

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Step 4 - Becoming Familiar with the Succession Planning
 Whether you are looking for a temporary arrangement or an
outright sale.
 The value of your farm.
 The number of children interested in farming.
 Your current business arrangement.

If you now carry on business as a sole proprietor you have tremendous

flexibility in structuring an arrangement with your child and can consider
any of the following:

 A direct sale of some or all of your assets.

 A joint venture arrangement under which you contribute the use of
your assets to a venture with your child. Under this arrangement
you would continue to own the principal assets of the farm.
 Various types of leasing arrangements.
 A partnership arrangement under which the child is taken in as a
partner and there is a sharing of net profits.
 A transfer to a company under which some or all of the growth
accrues to the child and the control is held by you.

If you now carry on business as a partnership, you could consider any of

the following:

 Bringing the child in as a partner. The child could share in the

future growth in the value of the assets on a full or restricted basis.
 A transfer to a company.
 Winding up the partnership and;
 Selling or leasing assets to your child.
 Entering into a joint venture arrangement.

If your farm is owned by a company, your options are more limited. You
might consider selling some or all of your shares to your child.
Alternatively, if you do not want to transfer any of the existing value at this
time you can arrange for the share capital to be reorganized so that future
growth accrues to your child and the existing value (and control) remains
with you.
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Step 4 - Becoming Familiar with the Succession Planning

Life Interests

If you own your land directly and are considering a sale of the property to
a child but want to preserve your interest in your home, you can
accomplish this through a life interest. This life interest would entitle you
to the use of the property throughout the remainder of your lives. Your
interest would be registered so that it cannot be taken away or disposed
of without your consent. Your child would receive what is called "a
remainder interest", which guarantees ownership subject to the rights
contained in your life interest.

Security

You can secure amounts owing to you as a result of a sale of land and
buildings by:

 Carrying out the transaction through an agreement for sale and

retaining legal title until the debt is paid off.
 Taking mortgage security.

In British Columbia there is also a Personal Property Security Act which is

intended to provide a uniform system for secured transactions other than
real estate.

Methods of Owning Property

Where property (such as land) is owned jointly with another person, it can
either be held by them as tenants in common or as joint tenants. There
are important distinctions between these methods of ownership:

 If property is held in a tenancy in common, each co-owner is able

to bequeath or otherwise dispose of their interest in the property
independently of the other co-owners.

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Step 4 - Becoming Familiar with the Succession Planning
 If property is held in a joint tenancy arrangement then, on the
death of one of the co-owners, the deceased owner's interest
passes automatically to the surviving joint tenant(s), outside of the
deceased's estate. Because the deceased person's interest
transfers in this manner:
 There are no probate fees.
 The transfer cannot be defeated by other members of the
deceased's family.
 The interest in the property is not available to the creditors of
the estate.

Will Planning

Your will is a legally enforceable document which takes effect on your

death. It describes your wishes regarding the property in your estate and
deals with a number of other matters. It is important that both spouses
have up to date wills. Your will should match your ages and farm status.
Provisions in your will that might enable you to complete your farm
transfer include the following:

"Purchase option" - If you have concluded that one or more of your

children should have the ability to acquire your farm, but you have not yet
completed the transaction, you could consider putting an "emergency
plan" in your will so that your child will have an option to complete the
purchase from your estate if you were to die suddenly. Your will would
state how the price and the interest rate, if any, is to be determined and
the basis upon which it would be paid.

"Trusts" - You could request that a trust be created through your will if
any portion of your estate passes to a beneficiary who is a minor. The
trustees you name will look after the assets in the trust until the
beneficiary becomes an adult. You can also arrange for property that
would be inherited by your spouse to be transferred to a trust for that
person. This removes the possibility of your children being disinherited if
your spouse survives you and remarries.
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Step 4 - Becoming Familiar with the Succession Planning
"Forgiveness of debt" - You might decide to sell certain farm assets to a
child during your lifetime at an amount which is higher than the amount
you want to receive. You might do this if you were concerned about the
child's marriage and didn't want to give your child a significant equity in
the farm assets that could be claimed by his or her spouse. In this
situation, you could bequeath the excess purchase price back to the child
in your will and there would be no adverse tax consequences.

Life Insurance

You might use life insurance to create a pool of non-farm assets for your
non-farm children. Insurance might also be purchased by the family on
the life of the farm child (with the parents as the beneficiaries) as a means
of securing the amount that is owed to the parents by the farm child as a
result of his purchase of the farm.

Naming beneficiaries or alternates in the life insurance policy itself (rather

than having the proceeds paid to the owner's estate and dealt with by the
will) can reduce probate costs.

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Step 4 - Becoming Familiar with the Succession Planning
Some Examples of How the Tools Might be
Used
Example #1 - A Sole Proprietor

Situation

A dairy farmer wants to sell the farm to his son but is uncomfortable
transferring all of his assets at this time.

Possible Solution

The farmer might sell his machinery, livestock and quota to his son under
an agreement for sale and enter into a lease of his land and buildings.
The machinery would be sold at its undepreciated capital cost (so as to
avoid tax), and the livestock would be sold at fair market value. The quota
might be sold at a value that results in a total package which seems
reasonable to the parents and financially manageable to the child.

The farmer should be able to use his CGD to offset the taxable capital
gain on the sale of quota (assuming, of course, the CGD had not already
been used). He would still, however, be taxed on the recaptured quota
write-offs. The farmer might defer the tax on livestock by arranging for
there to be a separate note evidencing that the unpaid sales price for
livestock is paid only after the remainder of the sale price has been paid
in full. The farm child might be given an option to purchase the land and
buildings in say five years and, if so, this option might be incorporated in
the parents' wills.

Example #2 - A Sole Proprietor

Situation

A farmer wishes to begin involving his son in the management of the farm
but does not want to transfer any value at this time.

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Step 4 - Becoming Familiar with the Succession Planning
Possible Solutions

The farmer and his child might enter into a partnership arrangement
under which the child shares in the future profits of the farm. All the
assets could be transferred to the partnership in a manner that would:

 Ensure the existing value accrues to the farmer

 Defer recapture on the machinery and buildings
 Defer any income on the value of livestock
 Lock in the parents’ Capital Gains Deduction

A partnership agreement would be prepared that would determine the

extent to which the child would share in any future increases in value in
the partnership's assets.

The farmer could vary the above by retaining ownership of some or all of
the assets outside of the partnership.

As an alternative to a partnership the farmer might consider a joint

venture arrangement under which he contributes the use of all or part of
his assets to a new venture with his son. They would decide the basis on
which the revenues would be shared between them and the expenses
that each of them would be responsible for. As a final step, the farmer
might alter his will so that if his son does not buy the farm assets during
the farmer's lifetime, he has, under certain conditions, an opportunity to
purchase them from the farmer's estate.

Example #3 - A Partnership

Situation

The parents already have a partnership and want to sell the farm to their
child so that they can use the CGD.

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___________________________________________________________________________
Step 4 - Becoming Familiar with the Succession Planning
Possible Solutions

The parents could sell their partnership interests directly to the child and
offset some or all of their taxable capital gains by claiming the CGD. They
would structure the transaction, as much as possible, to avoid the
refundable minimum tax.

Alternatively, if the sale price to the child would produce a gain that is far
in excess of the available CGD or, if the parents wanted to continue to
exercise some control, they might consider the following:

 Incorporating a company, in which the farm child owns all of the

growth shares and the parents own a class of non-participating,
voting, fixed value shares, through which they can control the
company

 Selling their partnership interests to this company (or arranging for

the partnership to sell its assets) in exchange for a combination of
debt and non-voting, fixed value shares and arranging the
transaction so that:

a) For tax purposes, the parents realize a taxable capital gain

equal to their available CGD and, where individual assets
are sold, they avoid realizing other income
b) They receive debt equal to the tax-free portion of the sale
price
c) They receive non-voting fixed value shares equal to the
balance of the sale price (e.g. the tax deferred gain)

 Arranging for the debt owed to the parents to be gradually paid out
over their lifetime

 Bequeathing the non-voting, fixed value shares to all of the

children on the death of the survivor of the parents

 Gifting or bequeathing the voting, fixed value shares to the farm

child

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___________________________________________________________________________

Where Do You Go From Here?

Now that you have completed Part I of the process you need to decide
how to get started on Part II. There are a number of options available:

 Attend a succession planning seminar

 Obtain assistance from your:
 Accountant
 Financial planner
 Lawyer
 Insurance agent

The assistance your accountant can provide will depend on his or her
experience and qualifications. Some have a great deal of expertise in this
area and will be able to oversee the entire process as well as provide the
detailed income tax information you will need. Others will have much
more limited skills and should be prepared to refer you to an accountant
who has greater experience.

Your lawyer will of course become important when the final plan begins to
take shape and you need to consider the form of the agreement, your
security, the updating of your wills and other similar matters.

If you have carried the process to this point you should keep the
momentum going. You've successfully dealt with the "porcupines" in
Part I; however, if the discussions stall for any length of time you may find
that you have to go back over the same ground and face those prickly
creatures again.

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___________________________________________________________________________

APPENDICES
Appendix A - Collecting the Data
What is the Estimated Value of Your Farm?

YOUR ASSETS
(1)
Land ______________
(1)
Farm buildings ______________
(1)
Farm residences ______________
(2)
Machinery and equipment ______________
(3)
Livestock ______________
(3)
Quotas ______________
(3)
Inventories ______________
Timber and Woodlot Rights ______________

Other ___________________ ______________

________________________ ______________
________________________ ______________

YOUR TOTAL FARM ASSETS _______________(A)

NATURE OF
YOUR DEBTS SECURITY
Mortgages ____________ _______________
Bank loans ____________ _______________

Bank overdraft ____________ _______________

Finance contracts ____________ _______________
(4)
Future tax liability ______________
Other _____________ ____________ _______________
__________________ ____________ _______________
__________________ ____________ _______________

YOUR TOTAL FARM DEBTS _____________(B)

VALUE OF YOUR FARM ((A) - (B)) $_______________

Notes:
1. Estimate the value of these assets based on recent appraisals and/or information
from other farmers and business contacts. Write down the land’s legal
description on Appendix A – page 27.
2. List your machinery and equipment on a separate sheet and estimate its value by
talking to your local dealer.
3. Write down the details of your livestock, quotas and inventories on a separate
sheet and estimate its value.
4. Do not attempt to calculate at this time but bear in mind there is likely to be a
future tax liability which will have to be taken into account in establishing the sale
price to your child (or children).

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___________________________________________________________________________

Appendix A
Details Concerning Your Land
Land
Legal Description Registered Current Original Value end
And Acreage Owner Value cost of 1971 or
date acquired

______________ _________ _______ _______ _________

______________ _________ _______ _______ _________

______________ _________ _______ _______ _________

______________ _________ _______ _______ _________

Buildings and Residences

Current Original Value end

Description Value Cost of 1971 or
date acquired

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

Quotas
Registered Current Original Date
Description Owner Value cost Acquired

_________________ _________ _______ _______ _________

_________________ _________ _______ _______ _________

_________________ _________ _______ _______ _________

_________________ _________ _______ _______ _________

_________________ _________ _______ _______ _________

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___________________________________________________________________________

Appendix A
What are Your Non-Farm Assets?
Investment Certificates
Certificate
Financial Institution Number Owner Amount

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

Registered Retirement Savings Plans

Account
Financial Institution Number Owner Amount

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

__________________ _______ ________ ________

Stocks, Bonds, Loans Receivable

Details Owner Amount

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

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___________________________________________________________________________

Appendix A
Non-Farm Assets Continued
Household, Vehicles, Other
Details Owner Amount

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

Life Insurance
Policy Face Life
Name of Insurer Number amount insured Beneficiary

_________________ ________ ______ _______ ___________

_________________ ________ ______ _______ ___________

_________________ ________ ______ _______ ___________

_________________ ________ ______ _______ ___________

Non-Farm Debt
Details Owner Amount

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

___________________________________ ________ ________

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___________________________________________________________________________
Appendix B – What Are Your Income Needs
PER MONTH PER MONTH IN
NOW 10 YEARS

YOUR EXPENSES $ $

Automobile

Debt payments (principal plus interest)

Food

Gifts and donations

Insurance

Medical

Property maintenance

Property taxes

Utilities

Vacation

Other ________________________________

_____________________________________

TOTAL (A)

YOUR NON-FARM INCOME

Canada Pension

Investment Income

Old Age Security

Rental Income

Other __________________________________

_______________________________________

TOTAL (B)
PAYMENTS YOU NEED FROM YOUR
FARM CHILD, NET OF TAX ((A) – (B)) $ $

Notes:
1. Estimate what your monthly living needs will be immediately after retirement and what they might
be in ten years' time.
2. Remember that if the annual rate of inflation is 2%, your income needs ten years in the future will
be approximately 25% higher than they are today. If the inflation rate is 4% your income needs will
be approximately 50% higher.
3. Make sure there is a "cushion" for unexpected expenditures. Your security and comfort should be
your foremost concern.
4. The payments you need from your farm child, as calculated above, represent the amount after
deducting income tax on all of your income.

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___________________________________________________________________________

Appendix C – What Can The Farm Afford to Pay

You?

IN THE FUTURE

NOW 3 YEARS 5 YEARS 10 YEARS

The farm’s annual income $ $ $ $

Add: depreciation (A)

Less:
- Annual principal payments
on existing debts
- Future annual capital
expenditures
- Cushion for other expenses
(B)

CASH FLOW AVAILABLE

FOR (1) YOUR NEEDS AND $ $ $ $
(2) THE TAX PAYBLE ON
THE FARM PROFITS ((A)-
(B))

Notes:

1. Review the financial statements for your last fiscal year and:
 Adjust for any unusual incomes or expenses.
 In a proprietorship, use the income after deducting the salary paid to the child who is
taking over the farm.

 In a partnership, start with the income that was allocated to you and ignore the profits
allocated to the child who is taking over the farm.

 In a company, start with the income after deducting the salary to the child who is taking
over the farm but before deducting the company's tax and the salary to you.

 In the columns for future years, take into account the increased profits that will arise as a
result of the gradual repayment of existing debt and, where applicable, the reduced
principal repayments on the existing debt.

2. In situations where the child who is to take over the farm is not currently being supported by the

farm, a deduction will have to be made for the salary, share of profits etc. that will be required to

meet the child's living costs and taxes. In these situations you might also want to take into account

the child's off-farm income.

3. At this stage, it's probably not worthwhile attempting to estimate the future tax on the farm

profits or the future tax that will be paid by you. Much will depend on how the transaction is

structured. Leave this until later.

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___________________________________________________________________________

Keep it Going
 Start and label a binder of succession materials.
 Practice a bit at time.
 When an event or opportunity on succession plans shows up
do a little bit.
 Set yourself a date:
 Pick a time when the farm is less busy and mark it on the
calendar.
 When the family gathers for special occasions set a future
“special time” to talk about succession.
 Build a foundation:
 Complete “Collecting the Data” Appendix A in this booklet. This
will provide a strong foundation for other steps.
 Give it your best estimate.
 Remember collecting the data is only an estimate. You most
likely have most of the data at your fingertips.
 Have a current Will:
 Does your Will reflect your age and family status.
 Let your farm advisors know that you want to update your Will
to match your succession plan.
 Without a Will:
 Your estate will be settled under BC’s Estate Administration
Act.
 Settlement will be costly and time consuming.
 Choose advisors:
 Choose someone apart from the family who will let you talk out
your thoughts and ideas.
 Present the information you have gathered in this book to your
technical advisor. This will help in your discussions and
negotiations of fees.

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