To Incorporate or Not

Over this past year, I have been asked by several clients to do an analysis if incorporation is right for them. I am always intrigued by the views farmers have obtained about incorporation. They are rarely balanced.

Farmers’ thoughts on incorporation come from either an accountant, another farmer, a banker or a lawyer. All of these may have accurate advice but unless you look at all the angles, you will not be able to come to the correct decision for your farm.

Status seems to be another aspect that comes with incorporation. We often equate a farm’s corporate status with success or size. The truth is anyone can incorporate. It has nothing to do with how many acres or cows you have. Nor does it have to do with success or profit.

I want to look at incorporation from the viewpoint of taxes, limited liability, succession and day-to-day management.

Income Tax

The biggest push towards incorporation comes from taxation. Once we get hit with a big tax bill, we look for solutions and often incorporation is suggested. There is no doubt that corporate income tax can be a lot lower than personal tax. Depending on your province it can be around 10 per cent. If you just paid 30 to 40 per cent income tax on a massive profit, it would be very appealing to pay 10 per cent instead. It is not that simple.

An accountant explained corporate taxes to one of my clients very clearly: if you want to take profit from your farm and use it personally, there is zero advantage to incorporate. The government has figured this out to the penny. If your farm made $200,000 profit and you are unincorporated, you will pay around 40 per cent income tax (approximately depending on your province). If your farm was incorporated you would only pay around 10 per cent, but then that profit is not yours to use however you want. That is the corporation’s money to use for corporate operations. If you would like to use that for a motorhome so you can travel, then you have to take the money out of the corporation. Without getting into details like shareholder loans, the only way to get that money is to take a dividend. You will have to pay tax on that dividend. The corporation pays income tax and then you pay a tax on the dividend. Can you guess what this will equal? It will work out to roughly what you would have paid if you were unincorporated.

If you are going to keep the money in the corporation for future operation of the corporation, then you will be better off from a tax perspective. If you want to take the profits out for you to enjoy personally, then there is not much of a tax benefit.

Calculating income tax on a corporation is very simple because you just apply the tax rate to the profit and that is the tax that is owed. If a corporation make $1 in profit, it will owe 10 cents to the government. If you earn $1, you will owe nothing. You can probably earn upwards of $20,000 and pay almost no income tax. With personal income tax, you get exemptions. Corporations do not so you must ensure you use these personal exception benefits.

Another area that is unique is capital gains exemption. Only people get this tax break, not corporations. I know of a farmer who began his venture in his early 20s. The first order of business was to incorporate. He then purchased as much land as he could, spending $30,000 to $50,000 per quarter-section. After 20 years of farming he decided to go in a different direction and he sold. You can image the appreciation that happened to his land. The millions that he sold it for was all taxed because the corporation had no exemption to capital gains. The farmer and his wife paid tax on $2 million more than they needed to had the farm not been incorporated. Accountants will not tell a story like that.

Limited Liability

When you learn about corporations in business school, they preach about limited liability. In theory, this is correct. If your corporation has $500,000 in assets and gets sued, all the plaintiff can get is $500,000 because that is all there is. In reality, the biggest liabilities we will face are the debts we take on. If your corporation buys a $1.2-million combine and takes a loan for $1 million, the shareholders will be asked to personally guarantee that debt. In the event there is a default and the bank is in a loss position, they will come after the shareholders to pay the difference. Limited liability is not a big selling feature in my opinion. Perhaps in the event of a slip and fall situation it may be of a benefit, but not from a debt liability perspective.

Succession

Bringing children into the farm operation with a corporation may be simpler. You can assign a percentage to the child’s efforts and say they are a five per cent shareholder. They share in five per cent of the profits and the equity is partly theirs. You can easily increase, decrease or bring in other children with this method. Rather than have the kids rent land from a neighbour and then maybe buy an auger and a few parts for the combine as part of their contribution. With a corporate structure, you just run everything as one farm and assign the shares accordingly.

Day-to-Day Management

From a bookkeeping point of view, the biggest difference between your farm being personal and incorporated is when you are a personal farm, you record whatever you choose as income and whatever you choose as expenses (obviously you need to have invoices and receipts, but you decide what will be income and what will be an expense). Meanwhile, a corporation needs to account for every penny that gets deposited to the bank account and every penny that leaves the bank account.

Your accounting fees will increase. Your accountant will most likely prepare financial statements plus a corporate tax return. You still have to file a personal tax return. So all of this will be added fees.

Banks and credit unions usually charge more for corporate bank accounts than a personal one so this will cost more.

If your personal farm has been profitable for a few years, you may be starting to defer grain cheques earlier and earlier in the year. You also may be pre-buying upwards of 100 per cent of your fertilizer, chemical and seed in the taxation year prior to the year you are growing the crop. This can make running the farm more difficult. You miss out on marketing opportunities because you are in no rush to sell grain. You risk spoilage because the grain is in the bin for years. These are not strong management practices. If you are always focused on income tax and not business management, then you need to change direction and perhaps incorporation is for you.

Summary

Incorporation can be a great management tool but you need to fully understand it and do it at the right time and the right way. If your farm is financially successful, you will incorporate at some time and it may be at the end of your farming career. This may seem counterintuitive but the last year you farm can be the most difficult because there is no next crop to spend your money on. It may not be 100 per cent inevitable, but it is pretty close that most successful farms will incorporate at some time. There are ways to incorporate that are better than others. There are assets that should go into corporations and others that should not. You need to have an informed team around you to guide you through the process. There are accountants out there that are better at this process than others. Make sure you fully understand the process. It is not something like hip surgery that you just leave to the experts. You need to understand it and if you do not, then that is the fault of the person leading the process. You have to run this business regardless if it is a sole proprietorship or corporation, so you need to understand it.

This is just the tip of the iceberg regarding incorporation. Make sure you consult your trusted experts before making this decision.

Tom Wolf, PhD, P.Ag.

Tom Wolf grew up on a grain farm in southern Manitoba. He obtained his BSA and M.Sc. (Plant Science) at the University of Manitoba and his PhD (Agronomy) at Ohio State University. Tom was a research scientist with Agriculture & Agri-Food Canada for 17 years before forming AgriMetrix, an agricultural research company that he now operates in Saskatoon. He specializes in spray drift, pesticide efficacy, and sprayer tank cleanout, and conducts research and training on these topics throughout Canada. Tom sits on the Board of the Saskatchewan Soil Conservation Association, is an active member of the American Society of Agricultural and Biological Engineers and is a member and past president of the Canadian Weed Science Society.

Drone Sprayers –Are We Ready?

One of the fastest moving new agricultural technologies is spray drones. Hardly a month goes by without some sort of new capability, some new features. It’s truly an exciting prospect to watch.

As with all things, there is good news and bad news to share. First the good news.

Drone capacity is on the rise. The early drones shipped with hoppers of eight to 10 litres. Part of the reason was to keep weight below 25 kilograms. Below this weight, pilot licensing requirements and flight restrictions are easier. Anyone with a basic RPAS licence (remotely piloted aircraft systems) can operate drones up to 25 kilograms. Above this weight, one requires an advanced licence, which is much more difficult to obtain. Current drones such the DJI T40 have a 40-litre hopper capacity, allowing more area to be covered per flight.

Swath widths increase with drone size. The limiting factor for electric drones is still battery power. Flight times of 15 to 20 minutes are possible, depending on the ferrying distance. As a result, larger drones don’t necessarily fly longer, but they spray wider, up to 30 feet for the DJI T30, and 36 feet for the T40.

Atomizers continually improve. The trusty flat fan nozzle works on a drone, but its operation depends on spray pressure. And spray pressure is not currently reported by drones, their application software relies on flow rate. Although the flow meters are remarkably accurate, the operator could operate the drone at a pressure that produces the wrong spray quality for the conditions.

Enter the rotary atomizer. Long a darling of the thinking applicator, these atomizers use centrifugal energy to create a spray with a tighter span, meaning fewer fine and fewer large droplets. Spray quality still depends on flow rate, but can additionally be altered with rotation speed. This means that if a faster travel speed increases the spray pressure, the effect on spray quality can be counteracted with rotational speed to keep everything more uniform.

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Hybrid systems are entering the market. Rotary wings allow for precise positioning of aircraft and they provide downwash that helps spread out the spray pattern. Downwash also improves canopy penetration and could reduce drift, like air-assist, if used properly. However, rotary wings use a lot of energy, limiting battery life. When flown at the wrong height or speed, deposit patterns, drift and swath width will change. That must be managed and requires experience.

In comparison, hybrid drones have fixed wings for flight and rotary wings for take off and landing. The rotors just rotate into the position needed at the time. Fixed-wing drones will fly faster, possibly improving capacity while reducing the effect of the downwash. These systems are new, and much needs to be learned before we understand their various characteristics, but they offer a nice avenue into more productivity.

Drones are multipurpose. Virtually all drones have interchangeable wet and dry hoppers so they can be used to apply dry nutrients or seed as needed. That makes them quite versatile. But the newest spray drones have scouting-quality cameras on board and can take high-resolution images while spraying. At the end of the mission, a very detailed picture of the crop emerges, with much higher resolution than the higher elevation scouts produce. Other sensors on the drones can be used for variable rate application of nutrients, or even for spot spraying weed patches. atb.com/LetsTalkAg

Now for the bad news. It’s still not legal to apply mainstream pesticides using drones in Canada, and it may stay that way for a while yet.

Drone application remains illegal in Canada. The main reason is that the Pest Management Regulatory Agency (PMRA) has declared drones to be a unique application method, separate from ground sprays and aerial sprays from piloted aircraft. This has triggered the need for risk assessment data for spray drift, efficacy, bystander exposure and crop residue. It’s a fair decision—drones produce finer sprays than any other existing system, they potentially use lower water volumes by necessity, they create a less predictable deposit due to rotor downwash and more. Many current pesticide formulations are designed for five to 10 gallons per acre; this creates a certain concentration of surfactants and products that interact with plant surfaces or that change the potency of drift. Altering this by a factor of five can have undesirable outcomes. Yes, aircraft also use lower volumes, but more in the area of two to five gallons per acre. Drones could cut that in half again, and that warrants study.

Registrants haven’t rushed to study drones. Most major manufacturers of pesticides have a small drone program to get their feet wet, and most have applied for research authorization from the PMRA to study them. But the decision to register a drone use for a pesticide has much to consider. Is it worth it to generate the required data set for the regulators? Will drones amount to a lucrative new market for product? Do we have the resources and expertise to service this new market? The answers to such questions are clearly complex and much remains unknown. The registrants’ caution is understandable. There may be a small portfolio of available products. Anyone thinking that a fleet of inexpensive, nimble drones will replace their ground sprayer is banking on the registration of a large number of products by the registrants. The most likely products to be registered are fungicides, for which drones would offer several advantages in canopy penetration and spraying in tight time windows due to, say, wet weather.

Another obvious use is in industrial vegetation management where rough terrain or remote locations make it difficult to use wheeled sprayers. Or vector control with larvicides, which, incidentally, comprise the first pesticide registrations for drones in Canada (two microbial mosquito larvicides were approved for drone use in October 2022).

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But it seems unlikely in the short term that a farmer would have their pick of products to apply by drone any time soon. And this means that a drone would remain a supplementary tool on the farm, not the main workhorse.

Regulatory hurdles are substantial. Not only is a pilot required to be licensed to use drones, a pesticide application also requires a specialized flight operations certificate (SFOC). SFOCs are required if:

• you are a foreign operator (i.e. not a Canadian citizen or permanent resident);

• you want to fly at a special aviation event or an advertised event;

• you want to fly closer to a military airport;

• you want to fly your drone beyond visual line-of-sight;

• your drone weighs over 25 kilograms;

• you want to fly your drone at higher altitudes;

• you want to fly your drone carrying dangerous or hazardous payloads (i.e. chemicals); and,

• you want to fly more than five drones at the same time.

SFOC applications are fairly easy to fill out. Aside from identifying the drone and the pilot, the application needs the purpose of the mission, the location of the mission and the time period of the mission. The problem is that it may take up to 30 days to hear back for simple missions and double that for complex missions. If the SFOC is not granted, you can’t fly. You can’t decide to spray a field at the last minute.

The news is clearly a mixed bag. We have it all—exciting technology, obvious niche in the marketplace, significant regulations, slow process. In the meantime, spray drones are legal to purchase and relatively inexpensive. And we know they are being purchased. Canada doesn’t have a strong compliance system within the PMRA, so it’s hard to know how much pesticide spraying is being done illegally, or how perpetrators will be treated by the law.

The reputation of the industry once again rests with hope that good decisions are being made by conscientious individuals.

Tammy Jones B.Sc., P.Ag

Tammy Jones completed her B.Sc. in crop protection at the University of Manitoba. She has more than 15 years of experience in the crops industry in Manitoba and Alberta, with a focus on agronomy. Tammy lives near Carman, Man., and spends her time scouting for weeds and working with cattle at the family farm in Napinka.

Cleavers

An Emerging Problem

A weed that seems to be gaining the upper hand across Western Canada is cleavers. Cleavers are problematic for multiple reasons: they are a serious contaminant and downgrading factor of canola, and they can reduce crop yields, cause lodging and impede harvest. Not only can cleaver plants climb up and then weigh down a crop resulting in lodging, but the plants will also wrap around equipment which impairs how the crop swaths or feeds into the combine. In addition, cleavers can stay green and tough in otherwise dry crops.

The Canola Council of Canada suggests that cleavers are a challenge to manage for a number of reasons, including herbicide resistance, climate changes and moisture conditions interfering with the timing of herbicide applications. Digging into the biology of cleavers will help to understand them better.

There are two Galium species that are challenging to differentiate and generally referred to as cleavers. Galium aparine L. which is the common name of catchweed bedstraw and Galium spurium L. or false cleavers, are distributed across Western Canada. Catchweed bedstraw is considered to be native, while false cleavers is an introduced weed that seemingly spread across the Prairies primarily through contaminated rapeseed crops. Andrea De Roo and Dr. Chris Willenborg with the College of Agriculture and Bioresources at the University of Saskatchewan have studied cleavers extensively and determined that false cleavers is the predominant Galium species in current cropping systems. False cleavers can germinate in slightly cooler temperatures and prefer brighter growing conditions rather than the shady conditions favoured by bedstraw. The team at the University of Saskatchewan also confirmed that false cleavers should be considered a facultative winter annual, as all of the populations they studied were able to emerge in the fall or spring.

Cleavers are typically prostrate or a climbing plant since the stem is rather weak. The small leaves appear in whorls, usually ranging from four to eight leaves per node on the square or four-sided stem that is covered in hairs like Velcro. The plants can get quite long or tall, up to two metres in length. While cleavers are not the most prolific weed, seed production estimates range from 300 to 3,500 seeds per plant. The seeds are not usually dormant but can survive for up to three years in dry soil and manage to survive passage through digestive tracts.

The increasing abundance of cleavers indicates that current control strategies need to be adjusted. The two species look very similar, with similar growth patterns and can be controlled with similar herbicides. Biological changes in cleavers that may be the reason for increasing abundance are: