Following the recent release of the 2019 Federal Budget, our agriculture team would like to share some details that will affect the agriculture industry. We focus on five areas in particular:
- Small business deduction
- Further support for supply-managed farmers
- Better support for the transfer of farms to the next generation
- Review of legislative and regulatory framework for Canadian grain farmers
- The Canada Food Policy
Small business deduction
The Federal Budget eliminates the requirement that farming and fishing businesses’ sales must be to a farming or fishing cooperative to be excluded from the specified corporate income rules.
The specified corporate income rules, in general terms, disqualify certain income of a Canadian-Controlled Private Corporation (CCPC) from being eligible for the small business deduction. In particular, the exclusion will apply to a CCPC’s income from the sales of farming products or fishing catches of its farming or fishing business to any arm’s-length purchaser corporation.
However, consistent with current rules, amounts allocated to a CCPC as patronage payments from a purchaser corporation will not qualify for the exclusion. This measure applies to tax years that begin after March 21, 2016. Therefore, this opens up the possibility of amending previous corporate tax returns where it is beneficial to do so.
Let’s look at a simple example where this new provision would help:
- A farm corporation owned by a farmer carries on a cash-crop farm business
- It sells the majority of its crop to an elevator business, owned by a private corporation
- The farmer’s sibling is a minority interest shareholder in the elevator corporation
- The farmer is not related in any way to the majority owner of the elevator
Prior to this budget, the farm corporation’s net income from the crop sales to the elevator would not be eligible for the small business deduction. However, with this budget change, the net income of the farm corporation from the crop sales to the elevator will now be eligible for the small business deduction.
Further support for supply-managed farmers in Canada
The Federal Budget update also proposes up to $3.9 billion in support for supply-managed farmers. This is subsequent to the recent ratifications of CETA (Comprehensive Economic and Trade Agreement) and CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). The following was taken directly from the Federal Budget, highlighting this support:
- While $250 million has already been provided to support dairy farmers as a result of CETA, a further $2.15 billion will be available to eligible dairy, poultry, and egg farmers in coming years to deal with income losses associated with these trade agreements.
- $1.5 billion has been earmarked for a Quota Value Guarantee Program. The program will protect against reduction in quota value when dairy, poultry, and egg quota is sold.
For the rest of this year, the Canadian government will be working with anyone involved in supply management to focus on how processing is affected. They will also be following any potential impact of the Canada-United States-Mexico Agreement.
Farm transfer to next generations
Farm businesses have a significant family component. Transitioning a farm business to children and grandchildren is commonplace in the industry, which the Canadian government has recognized. Better proposals are being planned this year that adequately integrate transfers between family members and consider the implications of the tax system. Moreover, the government is looking to amend the Income Tax Act to make intergenerational transfers more tax efficient.
Grain farming in 2019
Supplementary to the Federal Budget updates, the Canada Grain Act, as well as the operations of the Canadian Grain Commission will be thoroughly reviewed to ensure an adequate update to the legislative and regulatory frameworks for Canadian grains. This includes addressing redundant inspections and issues with the grain classification process that restricts Canadian exporters.
Canada Food Policy
In addition, Budget 2019 proposes $134.4 million in new cash investments to support existing initiatives. Among these are helping Canadian schools and communities develop programs that nurture healthy eating; supporting food security in indigenous communities that protects hunting and harvesting activities; continued efforts for food waste reduction; and addressing food infrastructure and fraud issues. Further, there will be support for Canadian food processers in the initiative to eat and export locally grown and produced food.
Mark Verwey - Partner, National Agriculture Leader
Kurt Oelschlagel – Partner, National Agriculture Tax Leader