by Jessica Izard, winner of the 2023 Wills, Estates and Trusts Section Essay Contest
I. Introduction
$53 billion worth of land is due to change hands as farmers retire over the next decade, 1 and yet 88% of farms do not have written succession plans. 2 Succession planning is now more important than ever because of the aging farm population and lack of young people entering the industry to replace retirees. Canadian farm succession policy must evolve to better suit the current challenges facing family farms.
Succession planning is the process of contemplating personal and financial goals to make decisions about how a business will continue after the owner retires. 3 Succession planning for a family farm is unique because it is complicated by the interplay of ownership (persons who own and profit from the business), management (persons who make the day-to-day decisions), and family interests. 4 Moreover, family farm succession is often governed by values and relationships rather than pure economics. 5 At times, this challenges farmers to weigh financial objectives for their retirement against value-oriented objectives about the legacy of their farm. Ultimately, succession in the family farm context requires a careful balancing of goals and interests.
The government is actively promoting farm succession planning and rural economic development. 6 Investments in resources and attention to the issue successfully increased farm succession planning by 4% since the 2016 census. 7 However, much work remains to be done. The insight this paper provides has the potential to inform the government’s next policy decisions about one of the biggest labour and ownership transitions of an industry in Canada’s history. 8
Given the magnitude of the transition, this paper aims to investigate existing federal laws around farm succession planning and comment on whether they are well designed for modern family farms. 9 The analysis examines the relevant considerations in family farm succession planning, specifically the informal features of stakeholder relationships and transfer of knowledge and values, as well as the formal features of laws and finances, and how they affect the choice of successor. The examination demonstrates that Canadian policy favours family successors, which may prove inadequate given the financial and demographic challenges facing the agriculture industry. This paper recommends engaging youth in farming, expanding financial resources and adapting tax incentives in a data-informed manner, and growing acceptance of worker cooperative successions. These changes are necessary to meet the challenges Canada faces as 40% of farmers prepare to retire over the next 10 years. 10
II. Context
a. Characteristics of a Family Farm
In 2016, three quarters of Canadian farms identified as family farms. 11 The literature describes a family farm as an “independent farm operation in which the majority of labour and capital is provided by a family unit”, 12 a definition which aligns with provisions in the Income Tax Act. 13 However, in the farmers’ view characterization is less about size and ownership than community relations. For them, values and the reciprocal relationship between the farm and its rural community play a central role in defining the family farm. 14 Ultimately, which definition policy makers embrace will shape the country’s response to the wave of farmer retirement.
b. Financial and Aging Challenges
Globalization and consolidation throughout the agri-food chain have fundamentally changed the financial landscape in the agriculture industry. 15 In 2016, less than 3% of farms generated 44% of Canada’s agriculture revenue. 16 Farming is increasingly capital intensive, and success depends on technology and advanced management skills. 17 Globalization and economies of scale encourage farmers to lower their sale prices to remain competitive. 18 Small farms have lost market power to negotiate input costs and sale prices because of the concentration of suppliers, processors, and retailers. 19 Moreover, high land values represent a barrier to entry into the agriculture industry. 20
To deal with financial pressures, nearly half of farm operators now pursue secondary work off the farm, a 10% increase since 1991. 21 Having an off-farm occupation reduces risk and income variability, and is a major determinant of well-being for farm families in OECD countries. 22 These financial pressures not only make it challenging for farmers to save for retirement, but also disincentivize potential successors from taking over the farm business.
Canada’s farm population is aging. The latest census shows 60% of farmers are over 55 years old. 23 The percentage of farmers under 35 years old has decreased from 20% in 1991 to 8% in 2021. 24 This suggests that fewer young Canadians are interested in pursuing a career in agriculture. Young people view farming as an unattractive option because of its low societal acceptance. 25 They perceive it as an underappreciated occupation that does not provide a fair return on investment or an adequate living. 26 If Canada fails to attract and retain young farmers, it could have serious implications for the future of rural communities, where farmers represent one tenth of the population, 27 and the future of the family farm sector.
c. The Modern Farm Reality
By 2033, 40% of Canadian farmers will retire, placing agriculture on the cusp of one of the biggest labour and leadership transitions in Canada’s history. 28 Farmers face financial pressures and struggle to get young family successors to take over the farm business. To address this reality, modern family farms must consider the possibility of a non-family successor.
III. Successor Options
Contemplating a succession plan should occur early. Proactive and collaborative planning is preferable to leaving succession decisions to the will or intestacy laws because it enables the farmer to clearly communicate their wishes and minimize ambiguities or interpersonal misunderstandings. 29 The first step in succession planning is to form a list of potential successors. Given the modern farm reality, this list should contemplate both family and non-family successors.
a. Family
Family successors are attractive because they are more likely to share the farmer’s vision and belief systems, and show long term commitment to the farm and community because of psychological ownership. 30 “Psychological ownership is the feeling of possessiveness and of being psychologically tied to an object.” 31 This phenomenon explains why family members might feel like farm owners regardless of their legal ownership status. 32 Keeping the farm in the family allows the farmer’s legacy to live on; however it may lead to family conflict. 33 Ultimately, successfully transitioning the farm to a family member requires a balance between family interests and sensible business planning.
There is no one way to achieve this balance hence the law offers flexibility around family successions. For example, tax laws interpret family broadly. “Child” has an extended meaning for tax purposes. It includes the farmer’s natural or adopted children, the children of the farmer’s spouse or common law partner, the farmer’s grandchildren or great grandchildren, a person who while under the age of 19 was in the farmer’s custody, or a spouse or common-law partner of the farmer’s child. 34 Additionally, tax law recognizes special business structures for family farms through the family farm partnership (FFP) and family farm corporation (FFC). A FFP is a partnership and a FFC is a corporation wherein the farmer, their spouse, child, or parent is actively engaged in farming on a regular and continuous basis, and all or substantially all of the fair market value of the property of the FFP or FFC is used principally in farming. 35
b. Non-Family
Anyone who is not related to the farmer constitutes a non-family successor. Examples include farm employees, a neighbouring farmer who wants to expand their operations, or a buyer who is unfamiliar to the farmer. Formal succession considerations are consistent for all non-family successors, but informal considerations may change depending on the successor’s connection to the farm or community. In general, non-family successors offer strong financial compensation and a clean exit for the incumbent farmer but bring their own vision and values, which may not align with farm’s past practices. 36
c. Worker Cooperative
One type of non-family successor is a worker cooperative. The worker cooperative is a business structure collectively owned by its workers and democratically governed on a one-member, one-vote basis. 37 Its primary purpose is to provide employment for its members. 38 Seven principles guide the worker cooperative’s practices, including education and concern for community. 39 Several research groups advocate for the transformation of privately owned business into collectively owned business like a worker cooperative to resolve the gap left by retiring farmers. 40 Because of its guiding principles, the worker cooperative presents a good alternative to a family successor for farmers prioritizing values and community in their succession planning. 41
IV. Considerations
Succession planning involves weighing both formal and informal considerations. The formal factors, namely law and finances, tend to be easier to obtain professional guidance on. The informal factors of emotions, relationships, and the transfer of knowledge and values present greater challenges because they are unique to each family business. 42 This section outlines the relevant formal and informal considerations and explains how they may affect the farmer’s choice of successor. Ultimately, how the farmer prioritizes each consideration is a personal choice.
a. Informal Considerations
1. Acceptance by Stakeholders
Proactively considering each stakeholder’s interests, concerns, and psychological ownership in the farm facilitates a smooth succession by allowing the farmer to foresee and address potential stakeholder resistance to the succession plan. Table 1 summarizes Sund et al.’s research on stakeholder interests. 43
Table 1: Stakeholder Interests
| Stakeholder | Interest |
|---|---|
| Incumbent Farmer | To successfully transition the farm to new ownership, the farmer must be willing to relinquish control of the business. This can be challenging because they are losing their central role in the farm. If the farmer wishes to stay involved, a clearly defined exit role should be established. |
| Successor Farmer | The successor must be willing and committed to taking on the farm business. Concerns such as anxiety about shouldering responsibilities and stakeholder pressures can be addressed through transparency and proper training. |
| Family | Family health, rather than absolute harmony, is the goal in succession planning. Family members have a variety of interests and concerns about the transition which are further complicated by family dynamics and personal values. Cultural identity or dependence on the farm to preserve a family member’s lifestyle can cause reluctance to the succession plan. |
| Management and Employees | Positive employment relationships are essential to the farm’s viability. This can be challenging when management or employees have difficulty adjusting to new leadership or doubt the successor’s farm experience. Reassuring them that their economic wellbeing, career stability, and values will be preserved through the transition can assist in obtaining their support. |
Beyond the interests listed above, stakeholder acceptance may be influenced by feelings of psychological ownership. This feeling of possessiveness, reinforced by the farm’s traditions and the individual stakeholder’s contributions to the business, can stir up emotions and conflict especially when stakeholders are forced to break their ties to the farm. 44
Impact of Stakeholder Acceptance
The rural environment inherent to farming requires greater stakeholder cooperation than business in urban environments. Rural community members tend to be tight knit and co-dependent because they rely on each other for basic functions that are limited in small towns. 45 Corporate oriented or migrant successors may encounter social isolation or even animosity from stakeholders who perceive them as a threat to this traditional rural way of life. 46
Stakeholder acceptance facilitates a successful transition to new ownership. Supportive stakeholders help the successor establish a foundation for long-term viability by offering guidance and assistance. Typically, stakeholders are more likely to trust and embrace successors that they have existing relationships with, like the farmer’s family or employees. 47 On the other hand, stakeholders may perceive unfamiliar successors as a valuable resource to revitalize the farm, or as threat to familiar ways of life and business. 48 Fortunately, there are strategies for gaining stakeholder support, such as communication and compromise. 49
2. Transitioning Knowledge and Values
The chosen successor determines the farm’s future direction. How they make decisions depends on their knowledge and values. Therefore, the farmer must contemplate what skills and values an effective successor should possess and how to train them.
Values are best transferred through exposure to the farm’s existing practices. Involving potential successors while they are young offers good exposure and can instill commitment and ambition; however, to be successful early involvement must afford the successor autonomy and room to develop. 50 Alternatively, offering mentorship after the successor expresses an interest in the farm can also help to transfer the appropriate values. 51
Farming knowledge is more widely available than specific sets of values. Potential successors may gain experience on other farms or increasingly Canadian farmers pursue a college education, such as trades, agriculture, or business programs. 52
Impact of Training Decisions
If the retiree prioritizes a simple exit from the business, a non-family successor is most attractive. Depending on the terms of the sale, the successor is independently responsible for their training thus requires no mentorship or involvement from the farmer during the transition.
If the retiree wishes the farm to continue the way that they managed it, a family or value-oriented successor is attractive because they are more likely to align with and commit to preserving traditional practices. 53 Because greater investments in training and mentorship may be required to fully instill the relevant knowledge and values in the successor, farmers who want the farm to continue under a similar management style should start the training process well-ahead of their planned retirement date.
b. Formal Considerations
Most farmers reinvest profits back into the farm business, which means that much of their wealth is tied up in the farm and that the proceeds from its sale provide the farmer’s primary funding for retirement. 54 Formal considerations surrounding the farm’s sale price, how and when it is paid, and the amount the farmer must give up through taxes dictate the amount of money the farmer has for retirement.
1. Financing: Financial Institutions
It is unlikely that a successor farmer will be found who can afford to purchase the farm outright. Most successors will need to pursue some form of financing. Borrowing money from a bank is one way to fund the farm purchase. Section 427 of the Bank Act permits banks to advance money to farmers without actual delivery of the collateral. 55 In exchange for the money, the bank obtains full ownership of the property described in the security and any property of which the borrower may thereafter become the owner (e.g. crops grown from the seeds purchased with the money). 56 While these security rights encourage farmers to pursue other financial channels first, s.427 offers flexibility to successor farmers, particularly those who do not fit squarely within traditional credit schemes like worker cooperatives.
2. Financing: Instalments
The incumbent and successor farmer may agree that the farm be purchased in a series of installments. Generally, when the farm is sold the incumbent farmer is liable for capital gains tax in the year of the sale. But if the farmer agrees to receive payment in instalments, they can defer the tax through a reserve. The reserve spreads tax over a maximum of five years for non-family successors, or ten years for family successors, so that the incumbent farmer can achieve a lower marginal tax rate. 57 Although reserves on sales to family successors result in greater tax savings, reserves provide some tax benefits regardless of the type of successor. Reserves will especially appeal to incumbent farmers who have already exhausted their lifetime capital gains exemption (the LCGE is further discussed below). 58
3. Financing: Federal Programs
The successor’s ability to fund their acquisition of the farm is supported by government financing programs. Federal programs include the Canadian Agricultural Loans Act (CALA), 59 Advance Payment Program (APP), and AgriInvest. 60 These financing programs support the successor’s ability to access loans and pay the farm’s purchase price. CALA loans, which are 95% guaranteed by the government, are granted for multiple purposes including the purchase of land or a farm business. 61 CALA loans can apply directly to the purchase of the farm, while APP and AgriInvest promote the farm’s year to year financial stability. APP provides short term low-interest cash advances to fund agricultural inputs. 62 AgriInvest is a savings account designed to help farmers manage income volatility. 63 Overall, these programs help to ensure the successor can repay any financing used to purchase the farm. Ultimately, the farmer should encourage successors who fit the eligibility requirements to access these financing programs.
4. Lifetime Capital Gains Tax Exemption
The lifetime capital gains exemption (LCGE) allows an individual to claim a tax exemption for gains realized on the disposition of qualified farming property, fishing property, and small business corporation shares. 64 The criteria for qualified farm property are set out in s.110.6(1) and s.110.6(1.3) of the ITA and relate to the type of property, the use to which it is put, and who uses the property. Each year the amount of the exemption is indexed to inflation; however, qualified farm property merits a $1 million exemption if it is higher than the indexed amount. 65 The LCGE is only available to individuals, not corporations or cooperatives.
The LCGE impacts the incumbent farmer’s actions pre-transfer. It incentivizes managing the farm in a way that satisfies the qualified farm property requirements. Additionally, it encourages holding the farm in sole proprietorship or partnership because the exemption is not available to corporations or cooperatives. The LCGE requirements relate only to the incumbent farmer; but the requirements equally incentivize the successor to hold the farm as a sole proprietor or partnership so that they may qualify for the exemption on future disposition.
5. Taxation of Family Successors
Tax law seeks to prevent tax avoidance by penalizing intra-family transfers of property. However, the ITA carves out exceptions for family farm successions.
Section 73 Rollover
The s.73 rollover is an exception to the general rule that property gifted or sold to family at less than fair market value is deemed to be disposed of at fair market value. 66 Qualified farm property transferred to a child is eligible for the rollover if the property was principally used in a farming business in which the farmer, their spouse or common-law partner, their child, or their parent, was actively involved on a regular and continuous basis. 67 The rollover permits the parties to set the price for tax purposes anywhere between the property’s adjusted cost base 68 (or in the case of depreciable property, the undepreciated capital cost) and fair market value. 69
The flexibility provided by s.73 enables both the incumbent and successor farmer to minimize their tax liabilities. In determining the price for tax purposes, they may take into account factors such as the recapture of capital cost allowance into income, as well as any available capital loss or LCGE to offset potential capital gains. Typically, the parties choose a price that maximizes the incumbent farmer’s capital gains exemptions because a higher price reduces the family successor’s taxable gain when they sell the property in the future. Furthermore, the incumbent can choose to forgive the family-successor’s debt in their will with minimal tax consequences. 70 Overall, s.73 provides a tax advantage to family successors.
Section 84.1(2) Transfers to a Holding Corporation
Until June 2021, selling shares in a FFC to a child’s holding corporation was more punitive than selling to a non-family successor. 71 The capital gains were taxed as dividends, therefore subject to a higher tax rate and ineligible for the LCGE. 72 These punitive rules can now be avoided if 1) the shares transferred are from a qualified small business corporation or FFC, 2) the purchasing corporation is controlled by the farmer’s child, 3) the child does not dispose of the shares for 60 months, and 4) an affidavit attesting to the sale and an independent fair market value assessment is provided to the Canada Revenue Agency. 73
Impact of the Taxation of Sale Proceeds
Sections 73 and 84.1(2) relieve family farm successions from the laws designed to combat tax-avoidance. Section 73 provides a tax benefit that allows both the incumbent and successor to minimize their tax burden and avoid the application of ITA s.69. Section 84.1(2) improves a family successor’s ability to access and utilize all business structures and avoid the application of ITA s. 84.1. These business structures may be strategic to their financing, tax, and operational plans. Overall, these provisions provide important flexibility for family successions.
6. Business Structures
Strategic use of business structures can assist in navigating succession challenges. For example, one case study addressed the challenge of raising sufficient capital by splitting the farm into two different corporations. 74 The first company continued to be owned by the incumbent farmer. It held the farm’s primary assets, like the farmland and machinery. The majority of the second company was sold to the successor. It operated the farm and leased assets from the holding company. This structure benefitted the successor because they only needed to raise sufficient capital to purchase the operating company rather than the whole farm. The incumbent benefitted by retiring from the day-to-day farm operations while receiving a steady stream of retirement income from the leased assets. 75 Business structures such as those used in this example may particularly appeal to successors who do not fit squarely within traditional financing schemes, like worker cooperatives. Ultimately, farmers should consult with their professional advisors to determine what structures may fit their business needs.
V. Recommendations and Evaluation of Legislation
a. Time for Legislative Action
Legislative action is imperative to ensure that farmers have the support they need to plan for the future. Although attention and resources dedicated to the issue have increased farm succession planning by 4% since the 2016 census, much work remains to be done. 76 The policy recommendations presented in this section can help to capitalize on existing momentum. The recommendations align with the objectives outlined in the federal government's rural economic development strategy, including integrating rural perspectives into federal policies, improving access to federal services, and strengthening rural economies. 77
b. The Aging Problem
The aging farm population is a growing concern as younger generations are not adequately replacing retiring farmers. Current policies targeting the transfer stage of succession are insufficient. It is crucial to intrinsically motivate family successors early on by offering autonomy and boosting their self-confidence because early motivation is the strongest predictor of a successful succession. 78 Consequently, to be effective policies must be designed to target potential young farmers while they are developing their identity, social perceptions, and career goals. 79
Negative societal attitudes toward agriculture can discourage younger generations from considering farming as a viable career option. 80 In order to foster greater understanding, interest, and social acceptance of agriculture among Canadians, it is crucial that both urban and rural youth are provided early exposure to the industry. This can be achieved through a variety of means, such as integrating agriculture-related topics into the school curriculum, offering field trips to farms and agribusinesses, providing paid internships to young people interested in farming, and promoting existing programs such as WWOOFing, 4-H, and the Canadian Young Farmers’ Forum. 81 By increasing young people’s awareness of and engagement with the agriculture industry, policy makers can help to ensure a sustainable future for farming in Canada while also fostering greater appreciation and respect for the critical role that farmers play in our society.
c. The Financial Problem
Competition and expensive capital investments hinder entry into the agriculture industry. 82 Canada offers supports for existing farmers but financial resources for new entrants are limited. Moreover, tax incentives are restricted to specific farm operation practices and are too inflexible given the current state of the industry. For example, farm operators increasingly pursue off-farm work because it improves well-being and helps with income instability; 83 however, the ratio of farm revenue to off-farm income is determinative to accessing the LCGE which decreases the cost of transferring the farm. 84 Governments should consider expanding financial resources and adapting tax incentives to suit a greater variety of farm practices and succession plans.
d. The Data Problem
Canada lacks data on who is entering the agriculture industry. 85 Improving data collection on new farmer characteristics, such as their farming experience, financial means, and rural vs urban background, would assist in targeting farm succession incentives and supports. A data initiative could be effectively integrated into Statistics Canada’s new Rural Data Hub. 86
e. Encouraging the Worker Cooperative Option
Policy makers must encourage innovative solutions to the farm succession challenge. Research shows that conversion to a worker cooperative presents a practical solution. 87 However, worker cooperatives and their potential in farming are not well known or understood. Only one quarter of business owners are familiar with cooperatives. 88 Perception of cooperatives as inefficient or radical and confusion about the variety of cooperative models dissuade farmers and their advisors from the cooperative option. 89 To grow acceptance of the option, experts suggest building sector specific resources, knowledge, and capacity to support worker cooperative succession. 90 At a minimum, policy makers should increase awareness of worker cooperatives as a viable succession option by implementing these suggestions.
Worker cooperatives have many benefits, especially for rural communities. Shared ownership retains and secures employment, attracts young people and newcomers, and keeps profits in the local economy. 91 Similarly to family farms, worker cooperatives foster reciprocal relationships with the rural community. Given these benefits, policymakers should consider whether worker cooperatives deserve similar incentives to those provided to family successors.
IV. Conclusion
A review of the informal and formal considerations involved in family farm succession planning demonstrates that existing federal laws, programs, and tax incentives tend to favour family successors. This narrow policy approach is inadequate given the financial and demographic challenges facing the agriculture industry.
Incumbent farmers need to consider succession options outside of the family, but only 4% of farm succession plans do. 92 To enable farmers to use succession planning to meet the challenges that the agriculture industry faces, policy must evolve to encompass a definition of the family farm that centers on values and community relationships. To better suit the needs of modern family farms this paper suggests policy initiatives to engage youth in farming, expand financial supports to suit a wider variety of succession plans, and to grow acceptance of the worker cooperative option.
As the government addresses the extensive labour and ownership transition that will affect two in every five farmers over the next decade, 93 succession planning is a vital tool. Supporting farmers with a revitalized succession planning policy will help to sustain rural communities, the existence of family farms, and the country’s agri-food industry.