Ever wondered what the key to securing the future of family farms for generations to come could be? If so, join our conversation with Lauren Sheil, a financial planner and trusted advisor. With his background growing up on a small farm and his focus on eliminating debt, building wealth, and leaving a legacy, this is a discusison you do not want to miss out. Stray tuned to be one step closer to building wealth, and financially planning well for the future.
Website: https://lcsfinancial.ca/
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Script:
The shares are worthless if I'm not there.
The world has become a lot more complex.
Every year, you leave $100,000 inside a company, the government's going to come along and say, oh, look, there's $100,000 there. I want 15% of it just for nothing. And so we take that money and we just move it over here where the government can't get at it.
Nobody wants to die, Lauren. We're all going gonna live forever.
There's there's that and that's just delusional, everybody dies.
Well but we're all delusional.
The story of the day and this is a true story based on a previous client and you know obviously paraphrasing a few, a few little things, but Lauren, I look forward to hearing all of your thoughts about this, this story, this business case. All right. As the owner of a generational family farm, I've always been proud of our old school values and family first culture. My grandparents started the farm and it's been passed down to my father and now to me and I hope to my son in the future. We faced many challenges over the years but our commitment to keeping the farm and the family has never wavered. However, as I look to the future, I'm concerned we're not preparing like we need to be. I'd like to retire in the next five years and the world has gotten so much more complicated. When we bought the farm from my dad almost 30 years ago, it was a much simpler time. I know I don't know what I don't know and I've been resistant to change and putting together the necessary checks and balances, such as insurance, legal documents and policies. We've always operated on trust and mutual understanding but I also know the world's changing and we need to adapt and the last thing i want is for us to have to sell the farm so enter lauren shale thank you for coming on the podcast lauren uh lauren's a financial planner and trusted advisor
I'm just listening to you talk i'm like am I supposed to say now?
You say something whenever you want to say something.
So enter Lauren Sheil, a financial planner and trusted advisor. Lauren has a relational approach that we think would really support clients with this particular challenge. With his background, with your background, Lauren, growing up on a small farm and your focus on eliminating debt, building wealth and leaving legacy. I think you're you might be the perfect person to help us navigate with these challenges. So before we get started, welcome to the show.
Thanks for having me. Fabulous.
Tell me what makes you a great person to help with this kind of challenge?
There's a lot going on. And, um, uh, as you mentioned, I, uh, I grew up on a small, it was more of a hobby farm. It wasn't really an actual operating business farm. I, my father was actually a corporate executive and, uh, and he, uh, he moved to this, we bought this farm he grew up on a generational family farm in the 1940s and 50s and uh and by the late 70s he was starting to feel the itch a little and uh so he bought a small uh small farm outside of town and basically played gentleman farmer on the weekends while he was being the corporate executive in the city during the week. I adore that. I totally adore that.
Yeah, it was fun. It was an interesting dichotomy of his of the way we we ended up living because uh because you know um well I won't get into all the detail about that but we we kind of grew up the uh the the location itself was just kind of outside the outskirts of town um not too far from a fairly large city um and uh and so the uh the relationship and the dynamics of the town itself and the people that we interacted with was was very diverse there was a number of um family farm in the area it was a big dairy farming area um as well as um the townies as you want to call them um and so so uh so that was kind of the environment that i grew up in and um and uh i got into uh this business after having spent 20 years almost um as a marketing executive in the canadian music industry okay working with creative individuals musicians um and so on and I learned a lot um about small business essentially and and might and even what i refer to as micro business which is um one and two people operations that are that are uh almost cottage industry-ish um in a way but uh but that can grow to be extremely large operations uh from a financial standpoint um but still operate with kind of on a shoestring of just a few people and and farmers tend to do that um that it's one family basically running this operation but it could be a multi-billion dollar operation and you don't and you don't necessarily see that or notice that until you do a little bit of digging so right so that's kind of how I come at this um that uh that that it's well it's a very simple structure um mom dad couple of kids all work on the farm maybe maybe one or two neighbors who are employed employed part-time or full-time or whatever um but uh but they're running a multi-million dollar operation a shoestring of uh of personnel uh and that's and that's what you see in a lot of the uh a lot of the farms especially the especially the dairy operations they can be hugely hugely profitable uh enterprises with five people interesting okay so you know it's so hard right? Because I feel like sometimes the farmers are this like last bastion of the handshake agreement.
Yes. You know, in a lot of ways, or the small town entrepreneurs, you know, and I'm from a small town. So I work with a lot of them. I work with a few people in similar scenarios as this as well in a different, totally different capacity than you do. similar scenarios as this as well in a different totally different capacity than you do um and it's like it i feel like that's almost like what we're missing in the rest of the world but at the same time we need to like help them um have some of the tools to make sure that because they're not wrong the world has become a lot more uh complex i was just going to say you you mentioned that in the story yeah in the discussion or the story there that you launched this with that the world has changed the world has changed significantly and um in preparation for this uh I did a little bit of research yesterday just uh kind of boned up on some statistics and uh one of the statistics that jumped out at me was that less than 8% of family farms have a written succession plan.
And that's, I mean, it doesn't have to be complicated. be as simple as son a purchases asset b from father i guess he would be a but yeah i know you're there and it doesn't it doesn't have to be it doesn't have to be um a 60 page legal document it just needs to be something that's written down that everybody involved understands yeah um and uh and so that uh when the time comes there's no confusion and there's no there's there's no indigestion at uh at family thanksgiving dinner totally yeah where does insurance come into play here this is really your bread and butter, right? Is the insurance industry?
Yeah. Let's back it up a little bit first. Sure. Let's back it up. When we start talking about succession planning in a family business, there's two, well, a number of factors that need to be brought to the table and and then first one is that a family farm is treated differently by CRA than any other business so the one one of the things one of the first things that you need to understand when you start talking about succession planning in a business like this is how the CRA is going to treat the sale. And without getting super technical, everybody understands or everybody has heard the term capital gains.
So, under Canadian law, under CRA rules, the capital gains tax is charged, the definition of capital gains is essentially the value that an asset has increased, the amount that an asset has increased in value from the time you bought it so the so there's there's two numbers that come into play there's there's the purchase price which is referred to technically as the adjusted cost base um and the sale price which um is is the and then the difference now oftentimes what people will say is well what if i bought the business from grandpa for a dollar the cra doesn't accept that as the sale price the cra says the sale price is actually fair market value right so if so if the if the product if the assets are gifted to you the cra doesn't care no the the the assets were actually this and whether you paid that money or not that's what we're going to calculate taxes on so so that's the first thing that people need to understand is that uh when transferring assets between family members between or or a close friend or whoever if you don't sell it to them for fair market value you're still going to pay the taxes yeah at fair market value um the other thing to the other thing to recognize is and the conversation comes up all the time is that um under the, there is what's called the capital gains tax inclusion rate.
And for a Canadian controlled corporation, the first million dollars in change of share value is exempt from capital gains. is exempt from capital gains so um this comes into play a lot with with small businesses where where i will be having be having this conversation and uh the business is worth you know it's a small business maybe it's worth half a million or one or two million dollars and they're like well we don't need to do any tax planning because we're not going to pay any tax on it anyway because of tax exclusion. Which technically is true, but only under certain specific circumstances.
The way the law is written, it says that the first million dollars in change, it's actually $1,016,000, whatever. And it changes every year, it goes up every year. The way the law is written, it basically says that this first million dollars of share value is exempt. So that means, number one, it has to be a corporation but you don't have shares in sole proprietorships right so if it's not and so if you're not incorporated there's no tax there's no capital gains inclusion rate there's no there or rather there's no capital gains exclusion everything is considered a capital gain um so if you're a mom and pop shop that didn't incorporate, if you're a partnership that didn't incorporate, this whole idea of the first million dollars is exempt from capital gains is false because it has to be incorporated. The other thing that people overlook or don't realize is that a lot of these small companies and again i work with very small companies a lot of these small companies their greatest asset is actually the people who work there for sure so if i'm selling my business and i'm essentially the business yeah then the shares are worthless right i'm not there so then what ends up happening is you're not selling your company for shares you're selling the assets of the company and then winding down the corporation right yeah and the asset sale if i'm selling a truck or inventory or a contract, service contract, whatever, that can't be brought into the capital gains inclusion rate either. It's not share. Of course. Yeah. So these are the little stipulations inside the CRA rules that people who are especially small business operators really need to understand. Yeah. And I mean, I'm not an accountant, so I can't give you actually accounting advice. This is just a situation that I've seen over the years.
Now, translate that back to farm businesses. Now, translate that back to farm businesses. The CRA has basically said that farm businesses, because of their nature, it being a family operation a lot of the time, don't have to be incorporated. But because most of the asset in a farm property is actually in the land. This is now the land transfer that's happened that can be done between family members without having a corporation a lot easier if you are in a corporation but you don't have to and then the other thing that the discussion that ends up happening is, okay, then we go back to that same scenario of, okay, I don't really need to do a lot of tax planning because I'm only going to sell a business to my son for a million or a million and a half dollars. Then you have the discussion of, if that's what you're doing junior might not have the credit oh yeah go to the bank and and uh fund the taxes that are coming to you because because it's as i said earlier a lot of these farm operations you look at them you drive by them on the highway and you're like yeah that's a million dollar operation that's a million dollar operation no no that's a 10 million dollar operation and you don't even realize it yeah it doesn't take long you got 100 acres of land you got um you're you're putting out um i grew up in uh as i said earlier i grew up in dairy corn country so you got 100 acres of land you're cranking out you know a couple of hundred thousand bushels of corn a year um you got 200 head of cattle uh and those and those dairy cows are producing a are attached to a production contract with the marketing board. And, you know, you've got a $10 million operation. For sure.
Yeah. And, and Junior isn't going to have the credit. No. To buy that. And that's what, that's where we kind of intersect, right? Because my job is to help senior let go and figure out how to get junior to start leading and, and to know what they need so that in five years, you can't do this in a year or even two years. A lot of the time, sometimes it takes junior five years to get ready to have the cap to not just the capital but the the credit to be able to take this on right and to have the skills to take this on so oftentimes what ends up happening in my experience at any rate and maybe you can you can speak to this too but um oftentimes what ends up happening is is uh we'll take the example of of my friend david who i who I went to high school with this guy, a dairy operation, southern Ontario, where I grew up, who went to university and did the agribusiness courses and everything else. And dad creates a partnership with Junior. And dad slowly steps away. And Junior slowly buys the shares.
It takes like 25 years to do that. It can take a while. Because there was no way he was going to be able to come up with a loan for the million or three dollars that the CRA was going to demand to make that transfer. So now they do it over time. Yeah. So that's kind of one of the first things that I would say in a situation like we discussed earlier is, yes, okay, you want five years, but really how much time do you need? want five years but really how much time do you need because if if senior is 60 and he wants to retire at 65 that's one thing but if he's gonna kick around and dabble yeah buy and you know drive a tractor once someone else there for the sake of driving a tractor, then maybe we've got 25 years. Sure. Yeah. Every single scenario is different. Yeah. Another situation I knew of where they did something similar to this and senior, again, a second generation senior. So this was like a three generation family farm, senior again a second generation senior so this was like a three generation family farm but uh but senior was 85 years old and still going out and cutting hay and doing whatever else just because he wanted to be there so this brings me to the the i mean maybe we're everything all roads lead to insurance but i mean you hope you always hope you're going to have another 25 years when you're six years old but what if you don't right so then yeah you're you're right all roads tend to lead to insurance in one way or another um there's there's a couple of things when we get into succession planning too that uh that we have to understand about the family dynamic and um and we get into what i call a state equalization because if there's two or three juniors and only one of them wants to take over the business we've got to figure out a way to treat the other two fairly right and so that's when we get into family trust structures and funding certain things with life insurance and also where we talk about how do we make thanksgiving dinner go smoothly yeah without having some of the uh the children feel like they've been shafted.
Sure. Because, again, we've got a $10 million operation here. And one son took over the business. Yes. And the other, and so now he's managing and controlling this massive asset. These other two kids are left to kind of go out and make life on their own without the benefit of this functioning business. So I recommend in situations like that what I call an insured asset transfer process, which is where we take a life insurance policy that is funded by the proceeds of the business. And that life insurance policy now is designed to do three things. It's designed to offset some of the taxes that would come to you if a senior died suddenly and complete that transfer quickly. We would have the life insurance policy there to do that, but it's also there to provide the other beneficiaries with enough money that they feel like they've been treated fairly. In a case like that, we've got to, again, I keep coming back to the value of the operation, but we've got a $10 million operation.
We've got one son that's running the operation. I know we've got a again i keep coming back to the the to the value of the operation but we've got a 10 million dollar operation we've got one son that's running the operation i know we've got two other kids that are sitting there going i need or i should receive three four million dollars from my drone and so we we can set that up as an estate utilization approach through a family trust or through just through a well-funded and well-designed life insurance policy right yeah and this is why partnering with people like you lauren is so important yeah i think um yeah you've got a lot of uh insight under your belt there and you've been through a lot of these scenarios.
So, you know, there's an emotional, a palpable, emotional resistance to this kind of structure. In a lot of cases, the folks that I've worked with, it's been, you know, it's a process of kind of getting to that, that, to that point where they're comfortable having a conversation with you or, you know, or someone like you, right. And that's part of my job is to get them there. someone like you, right? And that's part of my job is to get them there. But what would you say to someone who's in that scenario, who's a little bit resistant? Well, we want to figure out what they're resistant to. And there are some misconceptions in the world about what life insurance is for and um and there are some there are some issues people don't quite understand about the um the tax treatment of things and so the number one thing that people need to understand when they start talking we start talking about life insurance the number one thing I think people need to understand is that it is essentially a tax-free asset.
The proceeds of life insurance pay out tax-free. And again, depending on how you structure it, that is a very valuable piece of information for a lot of people. So not just in farm corporations, but again, if we go back to the other corporate structures that I mentioned earlier, if you're sitting on a company that has a couple of hundred thousand dollars or so retained earnings, just sitting inside the company, everybody knows that to get that out you got to pay dividend tax of course but if the um but if instead you use the money inside the company to pay life insurance premium you're moving the you're you're transferring the asset from a taxable environment to a non-tax environment or a tax deferred. So now as it sits, that money sits in, when money sits inside a corporation, it attracts tax, just the regular corporate tax rate stuff, just as it sits there. If you then, if you use that money to purchase a life insurance policy, that tax stops, that passive tax as it grows has stopped because the money has technically been spent. You can't write it off as an expense, but it's no longer just a passive growth that's happened.
So that's just taxes when stopped. And then when the individual dies, the owner of the company dies, the company receives the proceeds of the tax, the life insurance policy tax-free, and it can be paid out to the heirs of the corporate owner through what's called a capital dividend account, the notion of account that's created on debt by CRA, which is, again, a tax-free account. So now all of this money has been, has come out of the corporation tax free without having to be paid on it without having any dividends charged on it or anything like that. So that's so that's a structure that we use all the time for all corporations whether it's a farm corporation or not but it works and then it works with that farm corporation obviously just as well as any other. Well that's a good angle because I think I think every single one of my Well, that's a good angle because I think every single one of my small, but certainly the farm clients, the generational family businesses got something in common. None of them like tax.
I explain this to people all the time is when we put a life insurance policy inside a corporation, what we've essentially done is we've moved money that's from one pile that the government is taxing every year. And you leave $100,000 inside a company, the government's going to come along and say, oh, look, there's $100,000 dollars there i want 15 of it for sure um just for nothing and so we take that money and we just move it over here where the government can't get at it and it sits there and it grows it does its thing because life insurance policies grow with dividends and everything else and it grows tax deferred government can't get at that money while it's in life insurance falls right then when the then when buddy dies the uh the cash drops into the company and gets dividended out to the heirs of the company through this cda that that is tax-free so it's so we've uh moved money from a taxable environment to a non-taxable whereas if we just left the money in there and as it grew when the government grabbed their growth tax every year so they're taking the money off of this and then when you try and dividend it out they're going to take tax on it again tax so the only time the only time in canadian tax law and just about any western world tax law where the same dollar is taxed twice yeah well that's definitely an angle that'll attract some of these folks i think um and knowledge is power right i think you'd probably agree knowledge is power uh the other thing the other thing is like life insurance companies, life insurance gets a bad rap. Because there's always...
Nobody wants to die, Lauren. We're all going to live forever. There's that, and that's just delusional. Everybody dies. Well, but we're all delusional in the same way. That's just delusional. Everybody dies. Get them. No, the point is, though, that we've all heard the horror stories of somebody who paid into this life insurance policy for years and years and years and then never got paid but but uh but they're almost what i refer to as the uh as as the urban legend because because everybody talks about this stuff and they they think about it and they're like oh i heard about buddy and i'm like okay who was it where where did he live what was his name right how long ago was that they don't have the specifics because it actually never happens probably not no no it's I haven't heard of that before for the record so what's that i haven't heard of that for the record i'm just gonna live forever that's my right there you go there you go now the other the um I don't want to I don't want to gloss over this and I yeah bring it up I meant to bring it up sooner is that there's also a thing in uh a relatively new thing in life insurance okay um that's uh that's critical illness insurance okay basically living it's basically uh it's basically um as one of my friends put it um it's it's insurance for the unsuccessful heart attack so there's been a lot of those yeah what's an unsuccessful heart attack we're getting really good at you know bringing people back to life after these we're getting we're getting really good unsuccessful heart attacks and unsuccessful cancer yeah and unsuccessful you know so these are things that you get it don't die but your life is altered for sure so so we have so we now have what we call critical illness insurance which pays out um upon diagnosis of one of these major illnesses so long as you survive 30 days and um because if you don't if you die after if you die before 30 days it's just like a trick sure um but uh but if you have a heart attack and survive but you can't work the farm the same way you used to nice to get a little bit of money to to kind of offset your lifestyle um and and other things disability insurance is harder to get because um because it's based more on your income and if you're under reporting your income like a lot of small business owners and farmers do if you're now nobody nobody under reports their income come on no but if you're under reporting your income um yeah they are critical illness insurance policy doesn't care no um you purchase a you purchase an insurance policy that pays you a hundred thousand dollars on diagnosis of a heart attack or heart disease then that's what you get whereas if you say I make a hundred thousand dollars a year and i need a disability insurance policy that's going to continue my income at that level now you gotta prove that you make that kind of money before the insurance policies before the insurance company's going to approve you for that policy for sure so yeah we could go into underreporting income too and why that's usually a bad idea for the record like but on actually though if you're trying to grow your business it's it's you know there's there's a bit of a it Even corporations, small business corporations, if you want to simply pay yourself dividends from the growth of the company, which a lot of entrepreneurs do, they just pay themselves dividends, then you don't even really have to under report your income because because it's all your income's all in the company and you're just taking out what you need to live on and i've seen that that scenario play out a number of times a number of times as well yeah where where we've got a like a meeting just last week with a with a gentleman who uh who has a company makes probably $2 million a year. He pays himself 60 grand a year.
Yeah. Just because that's all he needs and everything else lives inside the company. And he was in another one of these situations where now he's got all these retained earnings that are attracting all of this tax. So I was like, well, I understand why you don't want to pay yourself a lot of money. So I was like, well, I understand why you don't want to pay yourself a lot of money. Protect this pile of retained earnings here. Yeah. Yeah. Well, you're a treasure trove of knowledge, Lauren. Yeah. Is there anything, any final words? You know, one of the things I like to ask, you know, at the end of the podcast is if you were in this person's shoes, or if this person was your client, what's the one question, the most important question that they ask themselves? Well, as I said, at the start of the story that you laid out is fairly common, but it was also a little bit vague in terms of some specifics.
So I would want to know what type of farm we're talking about here specifically, because there are different approaches and different considerations if we're dealing with a dairy farm that has a big milk quota versus just a straight up cash crop situation. I'd want to know how many kids there are for that state equalization conversation. And I'd want to know how the transfer, the first generational transfer happened because uh because when we're talking about adjusted cost base on the taxes we want to know how far back we have to go um but I think the number one thing that people need to understand when they're doing succession planning depending regardless of whether it's a farm or other type of business you've got to get your head around capital gains tax um and how that's going to affect things and i'm not an accountant so you need a good accountant yeah help you understand that and then once you get your head around how the capital gains tax are going to be treated then you need to engage uh someone like myself yeah who can uh work on ways to um offset or defer that tax for as long as possible and and um and the way we do that nine times out of 10 is with a permanent life insurance policy that grabs that asset, shelters it from tax and moves it forward. The the other piece of information that I didn't get a chance to discuss earlier is that when we're dealing with a permanent life insurance policy a lot of people will sit back and say well i don't get the money until I die and that is not true or not necessarily true okay um the uh permanent life insurance policy is has has this cash value component. The cash value is your asset.
You can withdraw portions of it. You can't withdraw it all because it collapses the whole policy, but you can withdraw portions of it as it grows and generate an income that way. You can also use it as collateral for a loan and borrow against it to get more money. Right. And now you've created another expense for yourself in interest. So any interest that's going to be charged when you borrow money against that policy becomes write-offable. Right.
So you can use that to fund your retirement if you if you get a large enough life insurance policy with a big enough cash balance you can borrow enough money against it to fund your retirement and then when you eventually pass away um because everybody dies need to break it to you but everybody dies um that was my that was my uh donald trump impression everybody dies you need to do your ted talk on everybody dies but uh the the uh the point being that that uh when you eventually die the life insurance policy pays off the loan and then right and then then away you go right so there's no there's no residual there um and there are companies out there there are banks out there that uh that structure these deals they understand how permanent life insurance works and they structure these deals in such a way that you don't have to repay them while you're living okay yep makes sense not really but you know why you have lauren guys don't worry all good you're in good hand this is why lauren knows stuff so we don't have to yeah well i mean the point is the point being if you borrow if you borrow against your life insurance policy. Don't worry about it. I won't say it about the bank, but if you borrow it right from the life insurance company themselves, they won't insist on a repayment plan because they know they're going to get their money when they die. Yeah, that's fair.
That makes sense. Yeah, that does. All right. Well, thank you very much you very much sir has been a pleasure and an honour Iappreciate that.
I appreciate the opportunity absolutely thanks for thanks for uh listening and uh i hope i didn't uh confuse everybody anybody too much but uh i'm sure in the show notes you'll have my contact information. So we are putting your contact information in the show notes and your website. So don't worry, folks, if it made no sense, Lauren knows what he's talking about. And, you know, we can guide you through it. You're a good, you're a good guide. A good guy and a good guide. There you go.
That's it.
All right.
Don't forget to stay weird, stay wonderful, and don't stay out of trouble.
