< Previous10 The Canadian Association of Farm Advisors Advice from CAFA’s Board of Directors Shannon Lueke B.Mgt., P.Ag., CAFA® MNP LLP Humboldt, Saskatchewan “What was the 2019 profit (or loss) on your farm? How do you calculate this crucial meas- ure? What have you done with the profits? If a loss, how have you/will you finance it? Do you know? What is your target profit for 2020? How do you determine this? Do you even know? Do your financial targets align with your short- and long-term busi- ness and personal goals? Do you have a written long term and short-term plan for your busi- ness? If not, how do you know you are heading in the right dir- ection? Working with advisors is so important for today’s farm business. They become a regu- lar part of your team, helping you manage a number of aspects of the business. As we all know, first you measure, then almost anything becomes manageable, even the things that we generally feel we have no control of.” Catherine McCorquodale M.Sc., LL.B., CAFA® Monteith Ritsma Phillips LLP Stratford, Ontario “2019 was challenging for farmers; trade uncertainty and weather wreaked havoc across Canada. This is why it has never been more important to lean on your farm advisors. Find a team you can trust and communicate with them regularly. We are here to help, and we have a whole network of CAFA advisors be- side us to provide the best ad- vice to farmers across Canada. And please, farmers and farm advisors, if you don’t already have a will – make it your goal in 2020 to get it done! Your family will thank you for it!” Steven McQueen CCA, CAFA® McQueen Custom Farm Work Ltd. Brownsville, Ontario “My role as a practising farmer and an active agron- omy advisor gives me a slightly different vantage point on this question. Society is more inter- ested than ever in trying to gain an understanding about how agriculture affects them and the environment. This, in turn, influ- ences decisions farmers need to make related to sustainable agri- cultural practices. I would advise farmers to remain open to learn- ing how their practices can be adapted when necessary and to position themselves as leaders in providing guidance as they seek to educate the public and those who set policy.” Rick Gendemann CPA, CA, CAFA® Manning Elliott, Accountants & Business Advisors Abbotsford, British Columbia “In today’s ever-changing competitive farm business en- vironment, issues around con- tinued successful farm operations, growth, and continuity of farm operations to the next generation will take on an increased focus. Over the next five to 10 years many owners will be looking to transition their farming business through either a transition to family or an outside family sale. As farm advisors we have a responsibility to work closely with those farm business owners in helping them develop their transition roadmap. As an owner, it is never too early to begin planning for your ‘end in mind’ and what that may look like for you and your family. CAFA advisors experienced in build- ing business value and business transition planning services can play an influential role in helping today’s producers ensure their fu- ture transition is well planned out. Advisors can make a huge impact on the eventual outcomes with their experience and guidance working through this process with their clients going forward. I en- courage you to be proactive and have discussions with your clients about their future roadmap and how you can help them achieve their visions and goals.” Get Behind-the-Scenes, Members-only Access to videos from past CAFA educational development events. This is ONLY available to members so join now! Members! What is the number one piece of advice you have for farm advisors moving into 2020?2019-2020 / www.cafanet.ca 11 Kim Gerencser BAFS, CFP®, CAFA® Growing Farm Profits Inc. Regina, Saskatchewan “Our clients are more sophis- ticated than ever; your advice needs to match. Build a network of experts who compliment you and your business, because be- ing a generalist in today’s com- plex world is not sustainable. CAFA is the channel to find that network.” James Fehr BSA, P.Ag, CAFA® RBC Royal Bank Steinbach, Manitoba “My best piece of advice is those who set goals to succeed and plan for the worst typically achieve their goals of success! It is not only succession that you should plan on – as busi- ness owners, planning needs to happen on the interruption of business. Interruption can come from a variety of items such as fire, theft, loss of health, loss of life, changes of key employees, weather, disease, and so much more. As CAFA advisors, we understand agriculture and can assist you with your plan to cre- ate long term success!” Ryan Parker B.Comm., AACI, P.App., P.Ag., CAFA® Valco Consultants London, Ontario “Our farm clients deserve top quality advice, and our sole job as advisors is to assist farmers in making and executing good de- cisions. To achieve this, advisors need to recognize their role, per- fect their role, and rely on other CAFA members to provide ad- vice outside their role.” Tom Blonde B.Sc., CPA, CA, CAFA® Collins Barrow, Chartered Professional Accountants Elora, Ontario “My number one piece of ad- vice for farm advisors heading into 2020 is to always be looking for opportunities to provide more value to your farm and agri-busi- ness sector clients. Being an ac- tive CAFA member and learning from other professionals in the industry is one of the best ways to develop the skill set to do this effectively. If you’re always striv- ing to provide more value, you will naturally distinguish yourself from others and be successful in your career.”12 The Canadian Association of Farm Advisors Canadian farmers are some of the most progressive farmers in the world. They remain globally competitive by embracing technological innovations to improve operating effi- ciencies and profitability. Working with their trusted advisors, many have grown their businesses into successful multi million-dollar operations. Most expect to sell their business, either outright or via intergenerational transfer, and to retire on the proceeds. So, what’s the problem? Procrastination! Most farmers we meet for the first time do not have current wills, nor a written business succession plan. Many have de- voted their adult lifetimes to growing and managing their business, without formal- izing their: • Business continuity plan for inter- generational transfer; • Business exit strategy; • Retirement lifestyle funding plan; and • Tax and estate plan, including estate preservation. According to Statistics Canada, “In 2016, only 8.4 per cent of farms nationally reported having a written farm succession plan.” This is a concern, particularly when the average age of farmers continues to rise. According to Stats Canada, the pro- portion of farm operators 55 years and older rose from 48.3 per cent in 2011 to 54.5 per cent in 2016. Concurrently the proportion of farm operators 35 to 54 years old dropped from 43.5 per cent in 2011 to 36.3 per cent in 2016. This trend has continued for the past 20 years and is a growing concern. As Certified Financial Planner pro- fessionals, we understand that some business owners have difficulty plan- ning for the inevitable. This includes po- sitioning their business for transition, selecting and grooming a successor, for- mulating contingency plans in the event of their premature death or loss of health, By Richard Bradford, B.Sc., P.Ag., CAFA®, CFP®; and Edward Turgeon, B. Comm., CFP®, FMA, CIM® Farm Succession Planning: “Best of Intentions… Unfulfilled Expectations?” transitioning management responsibil- ities, and ultimately transferring business ownership. Are these not the responsibil- ities of the “business leader”? While intentions may have been good, failure of the leader to formulate a sound business continuity plan often results in sub-optimal outcomes, family con- flict and unfulfilled expectations. For ex- ample, without properly drafted wills and/ or shareholder agreements, estates can be tied up in probate courts for years, usually resulting in significantly higher legal and accounting costs. The cost for “procrastination” can be steep, especially if family harmony or business continuity are compromised. Irrespective, the farm will ultimately be sold or transitioned, with or without proper planning. How much are you willing to risk? Farm business succession planning is not an event Rather, farm business succession is an ongoing process designed to facilitate the orderly transfer of values, knowledge, skills, management responsibility, and ultimately business ownership to a suc- cessor. The family business model starts with a common vision and a strategic plan to achieve the desired outcomes. This model clearly defines roles, responsibil- ities, and accountabilities. The resulting written plan is simply the by-product of this process and it should incorporate all aspects of the intergenerational transfer. Effective communications between all parties is essential, with provisions in place to manage unrealistic expectations and conflicting viewpoints. Based upon our experiences, a sound planning pro- cess increases the likelihood of a suc- cessful business transition, while avoiding costly mistakes. So, what’s your “vision” for your farm business? Will it be a legacy to be carried on by a family member? If so, has this been communicated ef- fectively with your family? Do you have a formal succession plan in place to ensure 2019-2020 / www.cafanet.ca 13 financial planning practice located in Red Deer, Alberta. LifeLegacy™ provides comprehensive wealth planning services to a clientele of highly successful farm- ers, business owners and professionals throughout Central Alberta. Specializa- tions include farm and business succes- sion planning, retirement planning, estate planning and preservation. This includes corporate, trust and personal planning on a fully integrated, after-tax basis. the orderly transition of management and ownership? Do you and your successor(s) share a common vision for the future of the business? Where will your industry be in the next five to 10 years and what chan- ges will be needed to compete in both do- mestic and global markets? Have you determined roles, responsibilities, and accountabilities? How willing are you to step back and let someone else make key business deci- sions? Have you established leadership expectations and the criteria under which business ownership will transfer? What’s your business exit strategy? These are but a few of the many points to consider when transitioning a farm busi- ness to the next generation. The future of your farm business will depend upon how well you have selected and groomed your replacement. It is your responsibility to ensure your successor has the essential knowledge, skills, and experience to as- sume managerial responsibility? This is a crucial consideration, especially if the quality of your lifestyle throughout retire- ment is contingent upon the ongoing prof- itability of the farm. Richard Bradford is a member of CAFA, a Professional Agrologist and a Certified Financial Planner professional. Edward Turgeon is a Certified Finan- cial Planner professional and a Char- tered Investment Manager. In 2003, Richard Bradford and Edward Turgeon co-founded LifeLegacy Wealth Manage- ment Inc., an independent, fee-based 14 The Canadian Association of Farm Advisors Facing fears and being honest is a double-edged sword. A person’s anxiety escalates when they must provide straightforward advice to family and friends, because the greatest fear is jeopardizing a relationship. This scenario can be equally true with farm advisors and their clients. Tough conversations may trigger a posi- tive or negative response. Let’s imagine ourselves in need of financial direction (succession planning, a major real es- tate purchase, or equipment financing). Because of our solid relationship, what- ever advice our advisor offers, we would consider. We wouldn’t expect our ad- visor to be shaking in their boots afraid of our response. These five major attrib- utes justify why we would consider farm advisors as our valuable resource. Competent Because our advisors pos- sess specialized knowledge, we trust their judgment. We simply cannot know all the fine details about a specific topic. Take tax plan- ning as an example. The Income Tax Act is complicated to understand. Not all the pieces of the tax legislation apply to everyone; we need to filter through the pieces pertaining to our unique situations. Whether it’s tax planning, legal ad- vice, or insurance analysis, we are pre- sented with many possibilities which make our final decision onerous. Choos- ing what’s in our best interest needs to be interpreted by a professional. This leads us to the next required skill. Communicator Because our advisor communicates effectively, we recognize the reasons behind their recommen- dations. They talk at our level of under- standing. Quite often the industry’s jargon will fly over our heads so strat- egies must be explained in easy-to- understand language. Logic dictates that if we don’t understand the plan, we won’t understand the benefits. Our pro- fessional advisor may possess all the textbook knowledge, but the real skill is delivering the information properly, so we really get it. Imagine your accountant saying, “We need to complete the Section 85 Rollover Form,” rather than “We need to complete the Do-Not-Tax-Me Form.” When your accountant uses language that is com- prehensible and understandable to us, they are building trust in our relationship. Because they communicate their rea- sons effectively, we automatically buy into the proposed strategy. Candid Because our advisor is candid, we can trust and believe their advice is in our best interest. As our relationship continues to build, we develop a strong connection. This ideal chemistry allows our minds to be opened to tough conversations when we are told something with sincere hon- esty. For example: “This land purchase that you think you need will financially drag you down. This debt servicing cal- culation proves it.” This takes us to the next quality we should appreciate in our advisor. Courageous Because our advisor is undeniably confident, we can expect them to be fearlessly courage- ous with us. Sitting on the other side of the desk in their office or around our kitchen table, we should expect our ad- visors to be courageously upfront with us even though we may not initially ac- cept what they have to say. “It’s going to cost us how much?” “You’re telling me this can happen if I don’t do that?” Certainly, the expectation is there will be some objections (or pushback) when an idea is first presented. But here’s the reality: we don’t need someone to ap- pease us. When they understand our By Delores Moskal, CAFA®, CFP®, RRC® The Five Cs We Expect from Our Advisors2019-2020 / www.cafanet.ca 15 situation and have the courage to tell us the truth, then we are given the right information to make a wise choice. We don’t have to like what they are saying to understand that what they are saying is for our benefit. For any farm business, the two most difficult topics are succession and es- tate planning. When farm business decisions impact an entire family, an ad- visor’s keen eye is welcomed to shine light on the trouble spots. Committed Because our advisor is 100 per cent commit- ted to us, we feel con- fident in our decisions. They presented all the facts, they com- pleted their homework, they developed potential solutions, they explained the benefits and consequences of actions. They have given their all (skills, know- ledge, and expertise). When they hand in the assignment we gave them, then we can grade them on their performance based on our satisfaction. Most likely, they will achieve a high mark because of their commitment to us. When we are at peace with their advice, we can rest knowing our affairs are in order. It’s a known fact that people in any sales industry (banking, insurance, dealerships, investments, etc.) have sales targets. Advisors earn our re- spect when they set aside their targets in the interest of doing what’s best for us. Knowing our needs matter demon- strates their commitment to us. Togetherness The next time you pick up a coin, pay attention to both sides. You would agree neither side contributes more to its value, but that the value is deter- mined in unison. This truth applies to the relationship between our advisors and us. The value of our joint relation- ship determines our success in our personal, financial, and business lives. Neither of us (the advisor or client) should fear honesty because we are afraid of jeopardizing the relationship. (In fact, the opposite could happen when we are not truthful. Our relation- ship may be compromised.) When intentions are sincere and the advice is solid, the outcome will always be positive. Great advice is directed to help and not harm us. Regardless of whether you are the taker or deliverer of advice, your relationship is built on a foundation of trust and respect and no one should have anything to fear. Delores Moskal is a Certified Finan- cial Planner, Registered Retirement Consultant and Certified Agricultural Farm Advisor in Saskatchewan. She writes a blog called, “Money Matters and So Do You Dreams.” Check it out at www.deloresmoskal.com. Our professional advisor may possess all the textbook knowledge, but the real skill is delivering the information properly, so we really get it.16 The Canadian Association of Farm Advisors Farmers have an advantage few others in Canada have, either as individuals or as business owners. Under the Income Tax Act, farming in- come can be treated on a “cash” basis as opposed to an “accrual” basis. This advantage can substantially change how your income looks for income tax purposes. In the event of a family break up, what is your income? In the event of a family break up, this advantage, however, may prove to be a challenge. Both child and spousal sup- port calculations can become an issue. Determination of farm income has not been an easy process that courts have been fond of. In the case of Koenig v. Koenig, Jus- tice Wilkinson stated, “Finding a fair and principled approach to the determination of farm income for child support purposes is a vexing issue. The court does not have the luxury of simply plucking income fig- ures out of the air, but neither should it assume that in every case, the approach to determine farm income for income tax purposes will satisfy the objectives pursuant to the Federal Child Support Guidelines,” (Divorce Act Regulations, SOR/97-175). Federal Child Support guidelines Under these regulations, the starting point in determining annual income is by using the sources of income set out under the heading “Total Income” in the T1 General form (line 150) of your income tax. The same formulation is used now for spousal support under the Spousal Sup- port Advisory Guidelines. The amount that appears on total in- come however, has net farming income. The Courts have determined that when looking at farming income, they must “add back” some of the advantages that farmers have to lower their income for tax purposes. They do that in two particular main ways. Optional Inventory Adjustment The first way to add back income can be found in the Optional Inventory Adjust- ment. The purpose of this adjustment is to aid farmers in averaging income year after year to avoid large swings in incomes or losses. It is used solely if a farmer elects to use a cash method of accounting. However, courts have taken the view that although this is good for the pur- poses of the Income Tax Act, it may not be good enough for determining support payments. Example (a): Let’s take a total income of $28,000 as shown on an income tax return (line 150). This is the generally accepted in- come used to determine child support. Using this income, an individual will pay base child support of $227 per month in Saskatchewan (this number will vary slightly depending on the province you live in). Upon a closer look at the tax returns, an optional inventory adjustment of $77,000 was made in the previous year. That will be added back to income. In- come has now increased to $105,000.00. Let us further identify that in the current year, there was another optional inventory adjustment of $5,000.00. That will be de- ducted from your income leaving income at $100,000.00 for support calculation purposes. Total income + previous year optional inventory adjustment – current year optional inventory adjustment. At $100,000.00, base child support payments have now increased to $858.00 per month; which is almost a 4X increase. This happens because the optional inven- tory adjustment is meant to take away the swings in income year to year. By making the adjustments above, that income very well may show swings on your tax return. Courts will normally adjust those incomes then by taking the average of the previous three years, once the adjustments have been made. Capital Cost Allowance The second way to add back income is through the Capital Cost Allowance. This is commonly known as depreciation. Farming is equipment and capital inten- sive. Depreciation of assets is a means to allow adjustments to income to allow for replacement of equipment over time. With that being said, it is also a “paper” expense. It is not actually paid by an individual in each year. By Jeff Deagle, Miller Thomson LLP Farming Income for Family Support Purposes The calculation of this support may not be what you think2019-2020 / www.cafanet.ca 17 The Capital Cost Allowance is different than the Optional Inventory Adjustment. It does not get added back automatically. The Courts, in determining farming in- come, attempt to take a flexible approach. They look at the “reasonableness” of the expense prior to adding it back into in- come for support purposes. Example (b): Using the various CCA calculations, an individual in one year depreciates equipment to the amount of $59,303.00. In that same year, they purchase equipment in the amount of $97,610.00. This results in a “net acquisi- tion cost” of $38,307. Under this scenario, no further adjustment would be made to income. However, let us now assume that in the next three years, no further acqui- sitions are made and $60,000 per year is still depreciated. This results in a “net depreciation cost” of $60,000.00 per year. The whole amount, or part of the amount, could be added back to income for support purposes. If the whole amount is added to in- come, child support is then calculated based upon $160,000.00. This results in $1,349.00 per month. If only a portion is added back (say, $30,000.00), the support payment would be $1,111.00 per month. Key takeaways Child support is not tax deductible to the person who pays it. On the other side, child support is not taxable to the person who receives it. Once child support is cal- culated, the same income would be used to determine if spousal support would also be paid. Though based upon Saskatchewan cases, the adjustments in the examples earlier are illustrative of the adjustments undertaken in every province. In the event of a breakdown in a mar- riage, care must be taken when adjusting your cash flow as the income you report for taxes may not be the same income used for the calculation of support. Miller Thomson has a team of family law lawyers strategically located across the country to assist in advising on mar- riage breakdown, cohabitation agree- ments, marriage contracts, unmarried spouses, separation, divorce (including the myriad of issues involving children, such as custody and access, child and spousal support), and property division issues. As a national firm that provides full and complete services to our clients in most areas of law, we have an extensive roster of specialists to provide additional support in areas such as tax, real estate, wills and estates, and commercial transactions. Jeff Deagle is an associate for Family Law at Miller Thomson LLP. For more information on Family Law and Agribusi- ness & Food matters, please contact Jeff W. Deagle, Associate – Family Law, at jdeagle@millerthomson.com; Carol Vandenhoek, B.SC., LL.B, LL.M, Part- ner – Co-leader, Agribusiness & Food, at cvandenhoek@millerthomson.com; or Eric F.W. Johnson, Partner – Co-leader, Agribusiness & Food, at ejohnson@mil- lerthomson.com.18 The Canadian Association of Farm Advisors Farm families face a unique set of challenges as they try to create long term success while main- taining healthy relationships. Just as the preseason preparation, training and teambuilding is critical to the success of any sports team, there are a few keys for ensuring that farm families are well-pre- pared, fit, and ready for managing tran- sition, giving them the best chance for success during the season. Here’s the key: develop a vision and a set of goals first, before getting into legal and accounting strategies. Many farmers and advisors overlook the im- portance of this step; they start with technical solutions and then experience some adversity and a bit of chaos, which can become overwhelming. In reality, the true determinant of successful tran- sition lies in the communication, goal setting, decision making and conflict resolution skills within the family team. Family leaders must be relentless in knowing what matters most to them- selves and their family. Engage mem- bers in courageous conversations or have an experienced advisor assist with this. The Three Circle Model1 is a use- ful tool for beginning discussions. Rec- ognizing where everyone fits now and discovering what the options and opin- ions are for the future structure removes assumptions and guesswork. Each family member should have the opportunity to identify and share their personal goals and aspirations, as well as their vision for the family, the business and the ownership of the family farm. It is important that members understand where they are aligned in their thinking and where they disagree. This allows for productive discussions that can increase understanding, broaden per- spectives and generate better solutions. Given the high stakes and the complex- ity of today’s farm businesses, simply avoiding the issues is just not a viable option. Improving communication among family members is also critical in the transition preseason. It’s a process, so it takes time. Like going to the gym, it might be difficult and it might hurt at Transition Preparation: Setting up for Major League Success By Angela De Groot, BA (Hons Spec), MBA, FEA, CAFA®, Synergize Family Business Consulting first, but with practice it becomes easier. Structures for communication, such as codes of conduct, family participation plans, decision-making processes and roles and responsibilities are useful. A Communication Code of Con- duct establishes the rules of the game. A tough and highly competitive game of hockey, for example, is fun to play and watch because there are rules that govern how that intense competition occurs. A Communication Code of Con- duct also helps the group commit to playing by the rules it has developed, creates awareness and builds trust. Get good at family and business meetings and make these one of your regular team practices. There are bene- fits to having separate family and busi- ness meetings that are done well. The keys here are to think about the before, during and after. Develop and circulate an agenda pre-meeting that includes the background information, who will lead, and the purpose of each item. Consider location, chair, attendees, code of con- duct and meeting length. Decide how proceedings will be documented and distributed afterwards; this doesn’t have to be a traditional document and could be as simple as sending well done flip- chart photos. Overall, be creative in your thinking, do what serves the group best, and focus on being action-oriented. Team players need to learn about the bigger picture before the season gets underway. Farm children have often grown up on the production side of the business, in the field and in the barn, but they sometimes haven’t learned basic financial terms, or how to create a budget, implement a business plan or analyze financial statements. Including kids in discussions about where profits will go or how losses will be financed teaches simple concepts; having them attend meetings with your accountant 2019-2020 / www.cafanet.ca 19 or banker is another way to develop skills for future success. A key consideration in transitioning from a founder owner to a parent-child partnership or a sibling partnership is how the game needs to change. Con- sider that the founding owner has spent the last 40 years playing tennis, an in- dividual sport, but the next generation needs to be trained and prepared to play basketball, a team sport. It be- comes critical that the siblings learn how to be team players, committing to leadership, participation, engagement, decision making and respect. There can be significant stress and anxiety in farming. While stress and anx- iety are a normal part of life, they can eventually become too high. When this happens, the part of our brain that helps with thoughtful response begins to shut down, enabling the reactionary part of the brain to take over. When it comes to transition, many leaders experience stress and anxiety and their mental wellness can suffer as a result. This can compromise the quality of decisions made and slow or halt follow-through. Being aware of, and proactively man- aging, one’s mental wellness is key while preparing for transition. Just as all elite athletes invest in coaching and healthy practices to deal with stress, farmers are encouraged to engage in pleasur- able activities, take care of their body, maintain a positive perspective, laugh, practice relaxation techniques, talk to others and get transition support from a professional advisor. The importance of starting with the family cannot be emphasized enough in farm transition. First, get the help you need to have those courageous conver- sations, develop visions and set goals. From there, your tax and legal plan can map out a route to achieving the family’s goals. This is a much more customized and efficient approach, and the big benefit is that the family has hedged against the so oft-heard stories of family conflict and breakdown resulting from transition done poorly. It takes the family leader stepping off the field and assum- ing the role of coach, but there is no doubt that a strong family team leads to major league success. Angela De Groot, BA (Hons Spec), MBA, FEA, CAFA®, is the founder and President of a growing agricultural oper- ation based in Ontario and Manitoba, which produces pork and poultry, and which recently celebrated its 20th year in business. She is also a Principal Con- sultant with Synergize Family Business Consulting. Angela can be reached at angelad@synergizefbc.ca. Reference 1. The Three Circle Model was first published in the Family Business Review in 1982 in Tagore and Davis’ article, “Bivalent Attributes of the Family Firm.” Read more about this model here: http://www. familybusinessmagazine.com/ how-three-circles-changed-way- we-understand-family-business.Next >