For farmers, the quota system is in place for supply-managed commodities. In Canada, that includes milk, eggs, chicken, turkey and hatching eggs. Essentially, you have to own a license to be able to sell any of those commodities. Under the current rules for corporate businesses (which are still in effect until January 1, 2017), half of the gain is tax-free and the other half is taxed like it's business income. For the 50% that is taxed, you'd probably pay at a rate of 26.5% under the current rules (all rates in this post are Ontario rates). As of January 21, 2017, you will still pay tax on the same amount of income, but instead of it being considered active business income, it will be considered investment income. In light of these changes, here are a few issues farmers planning to sell quota should keep in mind.
Preparation is key
Farmers should take a good look at when they're planning to sell. If you're planning on selling your quota in the next six months, you should do everything possible to sell before the end of December. As of January 1, your rate on the taxable portion is going to increase from 26.5% to 50.17%. While a lot of that is considered refundable dividend tax – over 30% of the original 50.17% for those taking a significant amount of the proceeds out as taxable dividends – this partial refund is only available when the corporation pays out taxable dividends.
The upside of change
When there's taxable capital gains in a corporation, you pay tax on half of it and the other half is tax free. That tax-free half is called CDA (Capital Dividend Account) and that's money that shareholders can take out of their corporation tax-free under the old system. Once the rules change, you will no longer have to wait until the next fiscal year to pay out the tax-free portion of a gain on quota. As of January 1, the CDA on quota will be treated much like it is currently treated on land. The corporation can pay out that tax-free amount on the sale of quota to the shareholders almost immediately.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
