SPEAKER_01 0:00

The risk that farmers take is is crazy. Most people can't even handle those kinds of risks and stressors. So I applaud, I commend farmers. I mean, they're putting food on our tables and they're taking risks that most people are not interested in taking.

SPEAKER_00 0:16

Welcome back, everybody. Welcome back to another episode of the Sovereign Capitalists podcast. I'm your host, Jose Atencio, along with George Roth. Today we are going to be discussing farming without the government. What does that mean? What are the pitfalls that farmers in Canada usually encounter when it comes to transferring the farm to the next generation? If you're a farmer and you're listening to us, stay with us because you're going to learn a lot of things and a lot of the challenges that we have seen over and over in this industry that happens when there's not proper planning. George, I know you have had experience with farmers. I haven't had much, but I know you have had along with others, and you have seen way more things than what I've seen. What is the first thing that comes to mind, George, when you think about the farmers and the struggles they see? Before you answer me, there's a threat trifecta for the farmers. First, like the bankers, because usually the bankers and the banks they hold secure debt that these farmers have, meaning that the bankers can come and seize the assets of the farm. Another one is the government, the government equation, meaning the taxes that they're gonna have to pay, and the potential for a legacy destruction. Everything that has been built, it could be destroyed in one of those generational transfers. So, George, what do you know about this?

SPEAKER_01 1:38

So it's no secret, farmers have a lot of challenges, right? They deal with risk on a daily basis. They're dealing with weather and environment and cost increases, unpredictability. Um, the prices for their commodities go up and down. So it's a constant, constant battle, and they're always facing risks. So, what we want to talk about today is some ways that we can reduce some of these risks with proper planning and avoid giving the government more money than they should get. We want to minimize tax. Now, having said that, we want to make it clear we are not tax experts, we are not accountants, we are not lawyers, we cannot give tax advice. You must seek professional advice when it comes to taxes. But what we want to do is open your mind, get you to think differently, and point you in the direction where you can ask the right question. You need to ask the right questions, you need to get the right advice, and you need to plan ahead to avoid future pitfalls because they will come. The deck is stacked against us as Canadians in general, but in the farming community, farmers deal with a lot. I come from a farming community, I grew up in a farming community here in Alberta. I know a lot of farmers, I've dealt with a lot of farmers as clients. There's a lot of issues that farmers deal with that most of us don't deal with. It takes a unique and special person to farm, especially today, in today's age. You know, the small family farm is a thing of the past. Farms are getting bigger and bigger and bigger, and you've got corporations involved, you've got multiple partners, you've got kids. Some kids are in involved in the farm, some are not. You know, how do you deal with that? So those are the kinds of things that we want to get into, and but ideally, what we want is people to change and think and prepare for the future because you don't want to wait until it's too late. Just to kind of reiterate what you what you said earlier. You know, we talk about a triple threat, the trifecta. You know, um, the banks, farmers deal with banks probably more than anybody. They have operating lines of credit, they have lots of cash that's flowing through their corporation or their farming business, their family business. They have a lot of assets, often they don't have a lot of cash. So they're asset rich, cash poor, but there's a lot of cash flowing through. So the idea is you want to try and keep some of that. You want to be able to take back control of that cash and that cash flow. And then there's the succession planning. What's gonna happen to the farm when mom and dad, grandpa and grandpa, grandpa and grandma, mom and dad are no longer able or willing to take on the farm? What's gonna happen? What's that plan? Are the kids gonna take over or are they not? Is one or more? Um so those are the kinds of things we want to talk about. Sorry, Jose, I just wanted to re-emphasize that trifecta. So the banks, the government, and then legacy. How can we maintain our legacy and make sure our kids, our loved ones, our future is taken care of, and we don't give half of our legacy to the government.

SPEAKER_00 5:08

Now, George, for the farmers that are listening right now, it can be overwhelming to think about all the stuff that they need to think about. Like not only their farming operation, their family, the prices of the commodities they're selling, government regulation while they're still in business. On top of that, it you know, they have to think about how are they making sure that the family gets to keep what they have worked out all their lives? Where would you start, George? What would be the first question that you would ask a farmer to think about?

SPEAKER_01 5:40

So, what is your plan? What is your plan for succession? What's gonna happen to the farm when you're done? When you decide it's time to retire? Do you sell? Do you not sell? Are the kids gonna take over? Are the kids not gonna take over? Do you have kids that are willing or able? Um, I mean, that has to be part of the plan because you can't just say, okay, it's yours, go.

SPEAKER_00 6:02

Um so the first thing is to make sure that there's a plan. Because there a lot of farmers don't even have a plan. They just start with a plan.

SPEAKER_01 6:10

Yes, so so it's it's who's gonna do what and how. How's it gonna happen? Because it's one thing to talk about the plan, but the next thing is how are you gonna fund the plan? Where's the money coming from? You need liquidity, you need cash, you need to be able to pay the tax bill as required, when required, because it's not tax-free, it's generally gonna be a tax deferral situation. Even if you're transferring to the next generation, that may or may not be a taxable event. And again, you need good advice for that event. But even if it's not a taxable event, he can roll it over to the next generation, or even to the grandchildren. But you're just deferring that tax bill. You're just kicking the can down the road. Someone is going to pay the tax bill at some point. So do we pay some now, some later? Do we pay a little bit now? Do we pay a lot later? Those are the questions that you want to try and get answered.

SPEAKER_00 7:13

George, and I was doing a lot of research around this before he didn't record on this podcast. And I was shocked because I was already under the impression that, hey, whenever we talk about farm, there's a lot of you know tax-free uh succession or transfer. And I think a lot of Canadians think that. Uh, I don't know how many farmers will still think that they can transfer the property tax-free just because it is a farm. Do you think that's a common situation scenario where the farmers think wrongly that they can transfer tax-free?

SPEAKER_01 7:46

I believe that's probably a misconception or misunderstanding. Yes. The other thing that people often consider is the lifetime capital gains exemption that farmers have. Like right now, it's 1.25 million.

SPEAKER_00 7:59

Is it an index for inflation every every year?

SPEAKER_01 8:02

It it starts, I believe next year starts being indexed, yes. So currently it's 1.25 million, which is higher than non-farmers. But when we think of land prices and equipment prices, I mean, a piece of equipment, a piece of farming equipment these days is hundreds of thousands, and sometimes even into the millions of dollars for a piece of equipment. And they have a lot of equipment. Land, farmland, is extremely high value.

SPEAKER_00 8:35

So especially in the last few years, like there has been like a increase. Yeah.

SPEAKER_01 8:39

So the one after COVID, right, there was Oh yeah. So the 1.25 million uh sounds like a lot, but it can be not a lot, right? When you're talking about a farm of of significant size. Now we're talking about a capital gain, so you know it's on assets that you sell, and there can be a capital gain on on the on the growth between what you paid and what you sold it for. Uh so land is certainly part of that, equipment could be part of that, buildings. Uh any asset that you have as a part of your farm could invoke a capital gain tax. So with a sizable farm, 1.25 million doesn't go very far. Now remember it's a 50% inclusion rate, too. So 50% inclusion rate, lifetime capital gain exemption 1.25 million. Now there's criteria. You have to qualify. There's a list of qualifications for you to get that lifetime exemption. So that has to be taken into account.

SPEAKER_00 9:39

For the corporation to qualify, it's not the individual, but the corporation.

SPEAKER_01 9:43

Well, the farm.

SPEAKER_00 9:44

Farm the farming corporation, that's what I mean.

SPEAKER_01 9:47

Whether it's incorporated or not, either way, if it's incorporated, then it's about the shares in the corporation when they're sold. So there's all kinds of different aspects and different ways to do it, but ultimately there's going to be a tax bill at some point in time.

SPEAKER_00 10:02

And one of the key things to keep in mind when we talk about the lifetime capital gains uh exemption is if your farm has extended revenue attached to it, if there's some cash available or assets that are non-producing, that's the main thing that you need to be aware of. How do you plan for that? Because that's the main thing that will disqualify you from getting that exemption. Is that correct?

SPEAKER_01 10:28

It has to be an active farm, and I want to say it's 90% of your assets have to be going towards active farming. So you got to make sure you qualify. You have to be actively farming. That goes for the rollover and it goes for the capital gains exemption as well, right? So important things to find out.

SPEAKER_00 10:48

Well, and any farmer that would like to understand more of that, we know the experts, we know the people to bring into the conversation to talk about that. So that's not a concern. We just know where the problems are. Yes. We'll point to the problems and they'll take care of fixing that and cleaning up the mess for you. Now, should we talk also about the farming and fishing property uh status in Canada? What why is why would that be important to a farmer?

SPEAKER_01 11:15

Well, again, it comes down to uh being able to qualify for the exemptions and for the rollover. A lot of estate planning for farmers relies on that rollover to children, but it's not really tax solution, it's really a tax deferral. So are you truly giving your child a farm or are you handing them a ticking unfunded capital gains tax bomb? Beyond the taxes, there's also the lack of non-farm liquidity that may force parents to make an impossible choice. Do we liquidate land and pay the non-farming kids, or do we leave the non-farming kids with nothing? You know, how are we fair to the kids that are going to take over the farm versus the ones that are not? So a lot of times this will threaten the farm solvency because you need liquidity. How are you gonna take care of these problems? So we've talked a lot about the problems, and I'm sure farmers understand the problems. Maybe you haven't foreseen some of these problems that are going to be coming down the road, but it's important to understand that these problems are there and it's gonna happen.

SPEAKER_00 12:17

Are these problems just for farms of a specific size, like big, big farms, big farming operations, or this could also happen to the small guy that has, you know, a small quarter section. Like, when do I start worrying? Like, how big should I be until I start worrying?

SPEAKER_01 12:36

I think you start worrying right now, regardless of the size. I mean, this applies to any kind of business, any kind of corporation, right? Any family. If you want to be leaving a legacy to the next generation, you need to plan ahead. And how best are we going to do that? So regardless, if you have a cottage on a lake, if you have a hobby farm, if you have property, you have homes, no matter what, when you pass, all those assets are considered sold on that day at the fair market value. And then that is assessed against what you paid, your adjusted cost basis, and then there's a capital gain associated with those gains. So regardless of size, it's going to be a problem. The bigger the size, the bigger the problem.

SPEAKER_00 13:26

What you're saying is for every property, then we can say that the CRA is like the silent owner of every property until we pay our ransom. Is how that works.

SPEAKER_01 13:37

That is what you could say. Other than other than your primary residence. Yeah. Um, other than your primary response.

SPEAKER_00 13:43

And a life insurance policy. There's two. And a life insurance policy. Life insurance policy.

SPEAKER_01 13:46

There's two things that are tax exempt. We talked about this story about the parents that passed away in the same year and they had a cottage and they actually moved into the cottage and made the cottage their primary residence. They were still forced to pay capital gains from the time they purchased it to the time they moved into it. They paid that capital gain tax. It's just maddening. Like this is it just drives me crazy when I hear about these things. Because who's expecting that? Right? You think you're doing all the right things, and then boom, you get this tax bill, and it can be perfectly legal, right?

SPEAKER_00 14:22

Yeah. Well, well, and and you could also get that general anti-avoidance rule. That one is the most mind-blowing to me. Because it's like, okay, we have a tax code which is like 3,000 pages. If you haven't checked that, I have checked that. It's like 3,000 pages, the tax code. Good for you. And and and for a good reason, it's 3,000 pages because who in their right mind will go and check check that out? Well, I did. Uh it's not good. So not only we have 3,000 pages, but if we don't like what you're doing, even though you might be abiding to what's there, we're gonna call the general anti-avoidance rule on you. That one is uh it's really crazy to me. I know, George, that you had you have had some experience with this. Is there any any story that's top of mind to you when you think about this that you would like to share with one of the farmers listening to us today?

SPEAKER_01 15:20

Yeah, so I've dealt with a number of farmers, and there's three huge issues, generally speaking. So one is operations, liquid operating capital. So often farmers are are getting operating lines of credit in the hundreds of thousands, millions of dollars to operate, to get the seeds in the ground, to buy the cattle, to buy the land, whatever they need to do. And then that has to get paid back. So, and that bank is a secure creditor. So if you can't pay that back, they you have a bad year. Crops don't perform, hail damage, like there's all kinds of things that happen, right? Tariffs and the commodity price goes down. There's so many things that can happen that are outside of the farmer's control. So many. The list is so long. So you want to be able to protect yourself against those ups and downs. So you want to be able to have a liquid pool of capital available to you that you own and control. You use it if and when you choose. And you are not reliant on a bank to fund you through this, through your operation. So this is a huge issue for a lot of farmers. Unless you have a lot of liquid capital at your disposal, you have to use other people's money. Other people's money comes at a great cost and they take security on your farm. So you're putting your entire farm, your entire legacy, your entire family at risk every time you do that. The risk that farmers take is crazy. Most people can't even handle those kinds of risks and stressors. So I applaud, I commend farmers. I mean, they're putting food on our tables and they're taking risks that most people are not interested in taking. So there's the operations, the operating capital, having liquid cash. Then there's the multiple kids, you know. So often one of the children is gonna take over the farm. So what happens with the other kids? How can we fair? Fairness does not mean equal, but we want to be fair and equitable. How can we do that? We have to be able to fund that. So if one son or daughter takes over the farm, what about the other kids? What's going to happen with them when the parents pass away? So the number one way to fund that problem is through life insurance. And the family has to figure out what's the best way and how can we make this as fair as possible. Life insurance is by far the best option in funding and trying to find a solution to that problem. You want to be fair to all the kids. I was dealing with a family that um they had a chicken operation and they had grain, and one of the sons was taking over the farm. But they had all kinds of assets, and they were trying to figure out their succession plan, and they're trying to be fair to all the kids. And life insurance was by far the best solution to that problem. So, yes, this this is real. This happens all the time. Um, and it doesn't matter what operation you have, doesn't matter the size of it, this is generally going to be a problem that you have to deal with. So, yes, I what do you say?

SPEAKER_00 18:28

What do you say life insurance is the best way? Because I know a lot of people might be thinking, well, if I just leave them cash or just tell them to sell a couple of things and get done with it. Why do you say that? What makes it so special?

SPEAKER_01 18:41

So I said earlier farmers are asset rich and cash poor. So generally speaking, there's not going to be a lot of cash available to fund that problem. Um, what are your other options? Your other options are to liquidate. And liquidating, now you're taking away your legacy, right? What are you going to pass on to the next generation if you have to liquidate in order to be fair? So you don't want to liquidate.

SPEAKER_00 19:05

You're paying capital gains on that, on that liquidation.

SPEAKER_01 19:07

You're paying capital gains on liquidation, and you're losing the asset that can no longer produce for you into the future, right? So now you're you're choosing between the farming children and the non-farming children. Do I take away the assets from the farming children so that I can give something to the non-farming children? So you're having to make a choice, and it's not it's a lose-lose situation, right? So you don't want to have to sell assets. And if you're forced to sell, then it can become a fire sale.

SPEAKER_00 19:35

Yeah, because selling land is not like selling a car. Like it can be months until somebody buys, only you do a fire sale. Exactly right.

SPEAKER_01 19:44

Yeah, and you don't want to have to do a fire sale, that's for sure. No, and yeah, and the other option is to go to a bank, right? And use their money and then pay the cost of that, and then they become a secure creditor on your operation. So none of those options are good. The best option is buy a life insurance policy where you pay pennies to get dollars, and those dollars are tax-free, and they become liquid for the children, and then you decide who's gonna get what.

SPEAKER_00 20:13

And that will probably cost you those premiums will probably cost you what you will pay in interest if you were go to a bank and ask to have the funds. Well, you'd be way less in comparison. Yeah. Right. So you decide, you know, because to the bank, when you when and I have I've heard this argument before, I have heard it. They say, Oh, well, uh, we're just gonna go to the bank. Well, first of all, if the farm is going through a rough period where the father passed away and now we are dealing with the next generation, the key person of this operation is not with us anymore. The bankers know that, therefore, they might even reject this whole transaction because there's just too much risk attached to that. Yeah, yeah. So that's one thing that you will have to deal with. When when the key, and that's for any business, when the key man of that business is not in the equation anymore, the bankers are not okay with that. So don't think that the you don't have the same status anymore regarding the bank. So that's the first thing that we need to to remember there.

SPEAKER_01 21:15

And now that the second is going to be a cost no matter what, right? Right? Essentially, what you're saying is there's gonna be a cost. What is the what is the least cost and what is the greatest benefit? So the least cost versus the greatest benefit is by far uh life insurance.

SPEAKER_00 21:32

And yeah, because we see the problem in the horizon, right? We just might as well pay right now.

SPEAKER_01 21:38

And if you put it together correctly, right, this is where we come in with our expertise. You get the correct policy, set it up the right way. You can use it while you're alive. There's cash value, it's an asset that's growing in equity that you can leverage. And farmers understand leverage. And you're gonna have a tax. Tax-free death benefit that goes to the next generation. And you decide who gets what. You can do it with percentages, you can differentiate between farming and non-farming, and you can make it fair. Not necessarily equal, but certainly fair. Because the the the the child or children taking over the operation, that's a huge undertaking. This is this is a lifetime commitment. And they are now going to have to go through all the hardship, all the hard work, all the stress, all the pain, all the unforeseen things that are going to happen. So they need this should have some compensation for that as well. So it doesn't necessarily mean equal, it just we want it to be fair.

unknown 22:41

Right.

SPEAKER_00 22:42

George, for that farmer listening right now, that says, okay, yeah, I know, I know this problem is in the horizon. I have some cash that I could use to buy the solution, that permanent policy. But they are like deciding, okay, should I go by? But I also need to keep working with that capital. That's where we come with with solutions like an immediate financing arrangement. Can you briefly talk about how that works?

SPEAKER_01 23:08

Yeah. Immediate financing arrangement, IFA. Yeah. So it is an option that is available. It is not for everyone, but it is an option to consider where a good size policy with a good size premium, and there are limits on the on the amounts. Um, so you purchase a policy over a 10-year period, there's an annual premium, and then you can turn around and immediately finance against that policy and up to 100% of your premium. So there's way, there are ways to do it. You know, the devil's in the details, and it has to work, it has to work, it has to be right for you, but it is an option and it does work very well for the right people. And farmers definitely fall in the category of being where it makes sense to do an immediate financing arrangement. So essentially, you can get all your capital back immediately and then use your capital. Meanwhile, your policy is growing, and then you can keep leveraging that policy. And the loan, you it can be an interest-only loan, but it is an option that's out there. So if you're afraid of losing your capital for any amount of time, there is the ability to have both. You can do both. You can have your capital, put it to work, buy a policy, and then immediately use it as well.

SPEAKER_00 24:25

And I and I love I love that option because it is solving the issue of capital preservation, which is a lot of what we do here, right? There's a lot of moving parts as George is saying, uh, but it's definitely doable. And there's the kind of stuff that we know about that you might not hear very often. I want to close down, George, with you know, with a farmer that implements the infinite banking concept. They know that it has this problem in the horizon. They also know the cash flow problem, controlling their cash flow, making sure that through the ups and downs, they have some equalization instrument that would be this liquid policy. The way I see it is like this, George. For anyone implementing the infinite banking concept and also being a farmer, they are solving multiple problems at the same time. Not only the estate planning issue, the legacy transfer aspect of it all, but also the immediate need for financing and liquidity that a farming operation has.

SPEAKER_01 25:29

Yeah, the need is the need is immense. You're absolutely correct. That's uh that's an excellent point. You are solving multiple problems. All the problems that we've talked about can be solved with one strategy. Absolutely correct. Um, now how that's implemented and the best way to do it, that's to be determined, right? Every situation is unique, every solution is unique. Uh, it's important to ask the right questions and get the right information and start planning today. Now, another thing, so you know that there's going to be problems that need liquidity in the future. This is a given. This is a this is a certainty. How best are we gonna do that? As long as you're alive. Yes. How best are we going to pay that cost? What is the best, most efficient, most effective way? So we've talked about it. Participating, dividend paying, permanent, whole life insurance is by far the most efficient, most effective way to pay for all of these problems that are being experienced or will be experienced at some point in time. The other thing that's important is it does not pay to wait because who knows what's going to happen in the future? What if you become uninsurable? What if there becomes an issue where you can't choose this option? So you want to do it now while it's available, take advantage, and in addition to you know what could potentially happen to prevent you from doing it in the future, you also want to start that compounding today. Compounding and time go together. The more time you have, the more the compounding takes place. And we're not going to ever interrupt the compounding. That is the key to the strategy. Uninterrupted compounding, tax efficiency, tax-free death benefit that goes to the next generation that gives them liquidity to solve all kinds of problems. As a grandparent myself, as a parent myself, what do we want to do? We want to create and leave for our kids and our grandkids. And we do not want to give half of it to the government. And we want to plan ahead and we want to start today. We want to maximize that plan as best we can.

SPEAKER_00 27:30

George, and I will add to that what you're saying about you know not delaying, but you see the problem in the horizon and your knowledge that as long as you're alive, you're gonna have uh problems that you're gonna have to deal with. Um, one one example that I put a lot of times is I say, hey, you're gonna you know already that you have expenses in your life. There's always something happening. You always need access to capital. Why don't you start building that capital right now instead of waiting until the need arises and then you go, you need to go and rent somebody else's capital? You know already that you're gonna need a credit card, you're gonna need to swipe that credit card to do something, you're gonna need to tap into a credit line. You know that life is gonna keep happening. Why don't you build that right now if you know it? If you know that this is bought with health, life insurance is bought with health, it's underwritten through your health, like you need good health to do so. And one thing is guaranteed, our health is just guaranteed to decline as the years go by. So the more you wait, the more difficult it becomes. And the last point that I wanted to bring up is uh retirement. Uh, what happens with when the person in charge of the farming operation when they cannot keep working? Now you need to take cash or sell assets from the farm to maintain this person. Did you know that you can also do this? When you build this asset, you can access, you can tap into the liquidity that this specially designed dividend-paying whole life insurance policy will provide to you and your family. You can tap into that capital to provide living benefits to that uh aging family member that cannot take care of the operation anymore. And you will recoup all of those costs once that debt benefit is paid. So it's just a wonderful way of tapping into the farming operations equity and all the wealth that has been created by all that work, and to tap into that in a tax-free manner again, there has to be proper planning, proper advice to make that happen, to make that work. But you need to understand that it's absolutely possible. You can absolutely tap into the equity that you have generated into one of these policies held by the farming corporation. If if there's proper planning involved, you can access that equity as a shareholder to fund retirement.

SPEAKER_01 29:56

Yeah, just uh just to add to that, so so we know without a doubt that all you know one of these outcomes is going to happen. Right? We we are going to retire. We are going to pass away. We are there's going to be a time when we can no longer run the operation. So we just need to plan ahead and be prepared for that so that we leave the next generation in the best possible situation, or we take care of ourselves if there's not going to be a next generation. Whichever the case is, doesn't matter what the case is, every situation is unique. The point is plan ahead, ask the right questions, get the right advice, and be prepared. And the sooner you start, the better. It's better to look at it than to be looking for it.

SPEAKER_00 30:48

Thank you, George. I'll see you all in the next episode. Goodbye. Thanks, everyone. See you soon. This episode of the Sovereign Capitalist Podcast was provided with the understanding that the staff and contributors of Asteris Capital Advisors are not herein engaged in rendering tax, legal, or financial advice. For such matters, please consult your own tax legal or financial advisor.