Farmers, consider selling your quota to avoid Alternative Minimum Tax
Whether selling milk, eggs or other produce, farmers working in supply management use a quota system to take their product to market. Dairy farmers, for instance buy a quota, which then makes them eligible to produce a specified amount of milk.
For a farmer who operates as a sole proprietor or in a partnership and holds the quota individually or in partnership with someone, a new challenge will be introduced on January 1, 2017. At the moment, if you sell your quota the gain portion will be taxed as business income, not as a capital gain. Even though it’s taxed as business income, it’s offset by the lifetime capital gains exemption that everybody has – for farmers, it’s a million dollars – so you get an offsetting deduction without issue. Starting January 1, however, this same income will be treated as a capital gain. As a result, alternative minimum tax (AMT) could kick in.
AMT is a CRA calculation that may apply if you’ve got high dividend income or you’re using your lifetime capital gains exemption, whether for small business shares or farm property. It’s an alternate calculation of personal taxes by the federal and provincial government. AMT is problematic because it’s an outlying cost. This is an out of pocket cost that most farmers are not expecting.
For instance, say you have a dairy farmer in Ontario who owns 55 kgs of quota and is considering getting out of dairy farming. The farmer’s gain on the quota is $885,000. Under the current rules the gain is reported as business income and is offset by the lifetime capital gains exemption resulting in no additional taxes. If, however, the farmer defers selling the quota to 2017, the gain is reported as a capital gain and although it is offset by the lifetime capital gains exemption similar to current rules, AMT will result in an approximate amount of $32,000 (assuming a base income of $150,000 which includes the recapture of quota).
AMT is like a tax installment that you have paid to the government. If you’re taxable in the next seven years, the AMT paid will offset the taxes owing. But if you’re not, you will not recover the AMT paid and it becomes a sunk cost. For more information on AMT read our May 20, 2014 Farm Alert titled The ‘Evils’ of Alternative Minimum Tax.
If you are seriously considering selling your quota, perhaps due to medical reasons, difficulties in finding hired hands or lack of a successor to the farm, 2016 is the ideal time to go for it.
Kathy Byvelds is a partner at Collins Barrow WCM LLP. Her primary focus is in the area of tax, and her industry experience includes Farming & Agriculture, Professionals and Owner Managed businesses.
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Kathy Byvelds
Kathy Byvelds