Affordability of Farm Land


A couple of weeks ago we talked about the affordability of residential housing in various countries around the world. The question arises, is the current price of farm land affordable?

There are three aspects in establishing the fair market value of farm land.

The first aspect is emotional.

You’ve probably heard the local coffee shop buzz that landlord Willy is selling his land. You have also heard the farmer Joe is offering X dollars for Willy’s piece of property. If you want the property then you will have to offer a premium over X in order to out bid farmer Joe.

It might be logical to pay a premium if you have a well established farming operation and plan to farm the land for the next several decades. The price premium you pay can be justified if you already have a healthy debt equity ratio in your existing farm operation and you don’t need to upgrade equipment to cultivate the additional acres.

If you can’t effectively farm the land yourself and afford to pay a premium for it, you will need to look to land rent and capital appreciation over time to generate a return. The return on your investment will be based on your entry price and rental income it will generate, less your land taxes and other carrying costs. In all likelihood the “investment” may produce a loss if you don’t have a well established farming operation.

Many land purchasers assume land is always a great investment because it is non-depreciable, you can touch it, you can see it, and of course the price of land never goes down, right? Sometimes feel good emotional purchases can blur reality, potentially wasting year’s worth of probable gains if a wiser investment option was chosen.

The second aspect is productive capacity.

Productive capacity is a purchaser’s yard stick used in calculating a property’s ability of paying for itself over the next 25-30 years.

The calculator (found at the end of the blog) takes anticipated operating costs along with anticipated yields and selling price to determine a breakeven point per bushel, acre, and entirety of the farm. After establishing how much cash flow you have to support a mortgage payment you can use this calculation to determine the cost this net margin would support.

For example, if the property generated $124 per acre worth of net profit over operating costs, it would support a $275,000, 25 year mortgage at 5.25% interest. In order for the property to pay for itself in the next 25 years the maximum price you could pay is $1,719 per acre.

This is a problem because a lot of land is currently trading at much higher valuations. For existing farmers to continue to expand they may need to use existing land holdings to subsidize new purchases.

The third aspect is a long term investment.

Some pension funds and large institutional investors have decided to expand their investment mix to include farm land as a long term investment allocation. An increase of their asset allocation to agricultural real estate could very well provide a large sum around $100 million to invest in land. If they anticipate the average purchase price around $3,000 per acre and purchase in approximately 30,000 acres bundles, they could create a well grounded land rental system. If the gross average rent was $70 per acre less $20 of costs, only $50 per acre per year would be available to the pension fund. The annual investment return is only 1.5%, but they would also anticipate some rate of long term capital appreciation.

Land ownership acts as a form long term inflation protection in the 50+ year time horizon. Many pension funds have large portions of their holdings in government bonds which have similar low rates of return but have absolutely no potential inflation protection.

As most of you know, real estate prices go through long-term up and down cycles. Currently, we have experienced about 25 years of rising farm land prices. By coincidence, increasing land prices seemed to have tracked interest rate’s downward trend. Some commentators have stated that declining interest rates have caused land prices to rise. Will this mean that the increasing interest rate will cause land prices to decline?

Province of Manitoba has a great interactive crop production calculator at:

The Golden Age of Inflation


Don and Erik outside of Scotia Tower in Toronto, before inspection of the Scotia Global Banking and Wholesale precious metals vault.

Inflation is on the rise. Why should you care? It’s safe to assume most people want their savings to maintain its purchasing power over time. If you invest a $100 into a 5 year GIC at 2.75% interest, you gain $2.75 of interest each year, but lose purchasing power to inflation every year you have your money invested. If inflation is 2% per year, you are effectively $0.75 ahead of the game.

But don’t forget tax! Interest income is taxable income in the year received.

If you make $50,000/yr salary and have a non-registered GIC paying you 2.75% per year, your effective tax rate on the interest income added to the top of your salary income will be taxed at roughly 33%. After tax, you are left with 1.84% return. If we assume the above 2% inflation, your savings are compounding at a -0.16% rate of return!

A huge factor affecting future purchasing power is government debt and ongoing deficits. Governments love to spend money. It is also difficult for government to convince citizens to pay more tax for these expenditures, therefore they go into debt. Governments have been further encouraged by very low borrowing rates which makes it look much more “affordable” to borrow for their budgetary needs.

This debt will need to be paid back eventually, along with the interest on the accumulating debt. This reality only gives governments a couple of options:

  1. Increase tax rates and run budget surpluses to pay interest and repay principle.
  2. Massively reduce services in order to run budget surpluses (not a likely option do to public push-back).
  3. Refuse to pay back their debt or interest owing (very unlikely: could cause seriously political and financial upheaval).
  4. Engage in policies that will increase inflation.

Increasing inflation is the most likely outcome because it doesn’t tarnish government’s reputation as drastically as the other options. Government’s like higher inflation rates because it means their fixed term bonds (money borrowed from citizens, ultimately) become smaller and smaller and less intensive to pay back over time as our currency is inflated.

Inflation often becomes a government best practice because it goes mostly unnoticed in the eyes of the public. The problem, however, is the lagging impact it has on the average citizen, saver, and tax payer. It is often not realized until it is too late.

Gold is an interesting investment asset because it acts as a safety net or insurance against high government spending, stock market instability, and poor central-bank policy (the printing of money to increase money supply and inflate prices of goods and services). Theoretically, an ounce of gold today should purchase the same amount of goods and services as it did 100 years ago, regardless for how we account for that value in paper dollar terms.

Gold tends to be the most appealing when returns on cash and bonds are at low or even negative rates, higher than normal government spending is forecast, and other investment assets are overpriced.

If you take into consideration the points made previously in this post it is easy to conclude that the supply and demand for gold should be on the rise. This is fascinating to many because the exact opposite is found in the market currently. Gold is bouncing around a 10 year low.

A rise in inflation is likely to increase the price of gold over time (through supply and demand principles), however, it will be interesting to see if the prevalence of new digital currencies such as Bitcoin affects the supply and demand of Gold.

More on that in another post!




Retirement becoming a far reach


The U.S. age of retirement is rising as workers stay in careers longer and the age at which government benefits kick in is rolled back. However, working longer doesn’t correlate to an extended life span. In fact, data released last week suggests that American’s quality of health and average life expectancy is declining. According to the journal ‘Health Affairs’, Americans in their late 50s already have more serious health problems than people in same age group 10-15 years prior. This may very well be credited to the higher rates of stress, obesity, and limited access to healthcare throughout the nation.

It is predicted, that by the year 2027, the average age of retirement will jump from 65 to 67. Although this article is prominently US based, we suspect these same trends can be found here in Canada.

In 1990, the RRSP entitlement Factor of Nine formula was created to give non-defined-benefit pensioners a fair shot at accumulating a sizeable tax deferred retirement income through RRSPs. The Factor of Nine formula defined 18% as the maximum amount of annual earned income that could be contributed to RRSPs to provide a comparable retirement income stream to the defined benefit pensions that were offered.

Both interest rates and equity returns were quite healthy in that era, so the 18% factor was tight, but reasonable. I remember when our office was offering 5 year GIC’s at a rate of 9.25% in 1993. Today you would be hard pressed to find a GIC’s paying more than 3% interest.

The authors of “Rethinking Limits on Tax-Deferred Retirement Savings in Canada” argue that this 18% entitlement factor is very outdated due to low investment returns and increasing life spans and living costs. As a result, they speculate people must save nearly twice as much to afford retirement than the factor assumes. The study recommends increasing the annual savings threshold from 18% to 30+% to accommodate for decreased rates of return, and increasing life spans and living expense.

We recently reviewed a couple different pension plans where the employees were receiving a rate of return capped at 2% for the next ten years. These low rates drastically minimize the future income benefit in retirement. For example, $1,000 compounded annually at 2% for the next 30 years would be worth $1,848. However, if you took the same $1,000 at a rate of 6% compounded annually, it would be worth $6,088 at the end of the 30 year term. It is important to understand your pension plan and how it may or may not meet your expectations in retirement.

Bottom line: Spend less than you earn and save the difference, or hope our future government will be able provide you with a comfortable retirement. Please call us if you’d like to ensure you have adequate savings to provide for your future retirement.



C D Howe institute of Toronto issued a new report “Rethinking Limits on Tax-Deferred Retirement Savings in Canada”


A lack of housing affordability


An interesting report was floating around last week about the affordability, or more like the lack of affordability, of homes in eight countries including Canada, US, Britain, Australia, New Zealand, Ireland, Japan, and Singapore.

Unsurprisingly, Vancouver BC was number one in lack of housing affordability compared to 400 cities. Vancouver has median house price of US$1.1 million and a median household income of US$64,000 for an index of 17.1. For comparison, Toronto had an index of 7.5.

Winnipeg, the most unaffordable Manitoba city came through with an index of 3.7. This was found by dividing the median house price of US$256,000 with a median family income of US$70,000.

The researchers suggested affordable housing was defined by an index ratio of 3.0 and below. So, if you had an annual family income of $60,000 then you can afford a $180,000 home. Higher scores in the index ratio indicated higher barriers to affordable housing.

The government and banks use a different formula, but they are in a similar range with recently implemented stricter mortgage lending requirements. The government and banks are concerned about home owner’s ability to meet mortgage repayment requirements, especially if interest rates increase. Under the Total Debt Service Ratio, a maximum of 32% of your family income can go towards the repayment of debt. Car payments, student loans, and other debt quickly diminish the amount of mortgage a family can afford.

Recently, the government issued a directive that banks must use their highest 5 year mortgage interest rate in calculating affordability of payments, even if the mortgage client was receiving a much lower floating rate.

Yesterday, I used an online mortgage calculator to figure out what size of mortgage a $60,000 family income could support. Assuming a 10% down payment, the old rules would allow for a $250,000 mortgage. Under new rules, a $60,000 annual income can only support a $200,000 mortgage now. A more expensive home could still be purchased but would require a much larger down payment.

We have been encouraging our younger clients to consider working a “mock mortgage payment” into their monthly cash flow. The extra $1500 or $2000 per month is deposited into an investment account and left to compound. Not only do they experience the impact of a sizeable monthly cash flow commitment, but they are actively accumulating for an increased down payment. As a side benefit, the greater down payment amount will lower their mortgage default premium. This mortgage default premium (CMHC costs) could be an additional $5,000 to $7,000 fee added to the mortgage principal depending on the size of the down payment.

Why not let the power of compounding interest work for you instead of against you? A $400,000 mortgage would require approximately $2,000 per month payment for the next 25 years. If you saved that same $2,000 per month into an investment account for the next 12 years, assuming a 6% rate of return, you would have $400,000 for your new home.

Details on the actual study can be found here:



Liberals soften on proposed tax changes

pexels-photo-355988What a week. It seemed the Trudeau cabinet rolled out daily press conferences trying to offer “tweaks” to the income tax changes that they had proposed July 18th. These most recent changes are more conceptual in nature but are reassuring for the farming community.

The changes that affect the farming community are in four major areas:

  • Income splitting will remain for shareholders (dividends) in family farm corporations. However, the government still wants a “reasonability” test on such payments. Details on how this will be implemented are yet to be announced.
  • Passive investment income taxation has been clarified. It will only apply to income within the corporation above minimum threshold of $50,000 per year. It suggests there would be no concerns with an investment portfolio of $1M providing a 5% taxable income payout. We suspect that an additional calculation like the Alternative Minimum Tax formula would be required at the higher investment income levels ($50,000+). For example, corporations in Manitoba are currently operating under the rules:
    • Converting income to capital gains will continue to be available for retiring farm families who want to pass on the family farm to the next generation.
    • If the farm corporation’s yearly taxable farm income is over $450,000, the first $450,000 is taxed at 10.5%. The amount above that limit would have a substantial higher tax rate.
    • The passive investment income declared in corporations over the $50,000 threshold will now have an additional tax levied.
  • The tax rate on business income, passive investment income, and capital gains will have different tax rates 0% to possibly 90%, depending on the nature of the source of income within corporation and how it’s received by the end shareholder.
  • Unincorporated farms in Manitoba currently have a super tax credit which allows for Capital Gain’s on sale of personally owned farm land to be taxed 0% up to a certain threshold. Once passing the threshold, the ‘Alternative Minimum Tax’ calculation would conclude the additional tax applied on this supposedly “tax free” transaction.

As an unexpected bonus, it was announced that the federal small business tax rate will be reduced to 9% by 2019. One journalist speculated that this tax reduction would save small companies roughly $7,500 in taxes per year, for a total savings of $3 billion dollars. The July 18th tax change proposals were expected to generate additional tax revenues of $3-$5 billion dollars. Interesting…

Please call us if you have questions about your specific succession plan structure and potential complications you may face.

Tax Change Concessions Coming?


Last week we commented on the unintended consequences of the changes in the taxation of incorporated small businesses, as it would have a major impact on the farming community. The Federal government is issuing a series of announcement this week hoping to counteract some of the criticisms. Apparently, the Finance Dept received 21,000 submissions by the Oct 2nd deadline.

On Monday, the Liberal government announced that they will reduce the small business corporate tax rate from 10.5% to 9% by 2019. However, there are proposed increased effective tax rates on dividends from small companies and higher capital gains for distributions to owners.  The 9% tax rate was part of their 2015 election platform promises, but added taxes on dividends and capital gains may offset the benefit for the average farmer/business owner.

In addition, Bill Morneau, the finance minister, indicated that farm inter-generational transfer issue would be tweaked. No further details were provided, but we will post them here when they are.

What’s happening with the markets?

I had a close friend contact me about the world/US events, wondering why the US stock market keeps going up (hit a record 23,000 this week) when all the headlines seem to counter that logic.

He was among others who have inquired into why their investment account values continue to make gains while the media is virtually 100% insistence that we are on the verge of a major economic recession/stock market correction and war with North Korea, Russia, Iran, etc.

A recent study by Harvard University done over a two-month period indicated that 88% of the articles about President Trump published by the US media were cast in some form of negative tone. It’s funny how eye-catching media articles conveniently crowd out some of the positive economic news that is occurring. Fear and doom sell advertisements, I suppose.

For the last eight years the US has had economic growth in the 1 to 2% range. Limited growth and associated unemployment normally imposes a drag on investment growth.

Currently, US economic growth is in the 3.2% range which is the highest in the last ten years. Unemployment rates are at the lowest levels going back 43 years, and the number of actual people employed is the largest in the past decade.

Bottom line: when companies are growing, making money and hiring employees, investors are likely to buy their stocks to share in the prospective future profitability.

Proposed Tax Changes Have Advanced Financial Planners Hard at Work

pexels-photo-541525.jpegBoth Don & Erik have just returned from the annual Institute of Advanced Financial Planning conference. It was a gathering of the leading Financial Planners in Canada, where ideas were exchanged and specialized speakers gave presentations around a common case study from their legal, accounting, estate, and family mediation perspectives. We were glad to attend and take part in conversing and brain storming with Canada’s most elite financial planning professionals.

The hallways and meeting tables at the conference were filled with the buzz of a recent white paper submitted by the federal government around proposed changes to the taxation of small business corporations. These changes are of concern to the agricultural industry, as only about 25% of Canadian commercial farmers are incorporated.

An unintended consequence of the proposed tax changes will be the elimination of the ability to utilize capital gains tax credits in the transfer of the family farm to the next generation. Many family farms have had an increase of value in their land holdings in recent years, by hundreds of thousands if not millions. The restriction in the use of capital gains tax credits on passing assets to succeeding generations could have serious income tax costs for the retiring parents. However, capital gain tax credits could still be available on the sale of the family farm to a third party.

Would it be good public policy to have the succeeding generation assume the farm with an additional $500,000++ tax liability, while the sale to a neighbouring farmer on an equivalent transaction will still qualify for the first $1-2 million of capital gain tax free? This is out of our area of expertise, but from our point of view this could send the wrong political message. We would like to hear your opinions.

Since possible ramifications are huge, the business, agricultural, professional communities and our various associations have lobbied hard throughout the consultation period which ended Oct 2nd. Bill Morneau, the Canadian Finance minister, has recently suggested that the government may take another look these proposed changes. We hope they do. The Forbes Wealth team is closely monitoring the situation. Please call us if you have any questions about your current succession plan structure.

For more info on the Institute of Advanced Financial Planners:

BoC Interest Increase & Charitable Giving


On Wednesday the Bank of Canada increased their official interest rate from 0.75% to 1%. The BoC official rate is the rate available to the big Canadian chartered banks who wish to borrow from the Bank of Canada. This is normally for short term purposes, literally a day at a time. The chartered banks will set a “prime rate” which is normally 2-3% above the BoC rate for the base rate they begin lending their retail and corporate customers.  The BoC rate is also used as a link to other rates such as the Canadian Treasury bill. Canadian investment interest rates will increase very slightly but dramatically higher rates aren’t likely for the foreseeable future.

At the same time the CAD US dollar exchange rate increased by 1.3% in response to the BoC announcement. The question arises: why is the Canadian dollar more valuable? The most obvious answer is supply and demand factors. An unreported side effect of this rate move was a jump in the market value of Canadian Government bonds. Currently, 5 year Canadian Bonds are slightly higher yield than the equivalent US Government bonds.  Additionally, 19 out of 26 European nations have negative rates. Over 30% of all government bonds worldwide (worth $7.3 trillion dollars) have a negative interest rate if you cared to purchase them. This makes Canadian bonds more attractive to the global interest-seeking investor.  Even with the BoC rate at a measly 1%, investment interest rates are at all time lows using financial engineering never previously recorded in history.

Charitable Giving Through an Estate

We always encourage people to be tax efficient when considering investment products and strategies, with the intention of controlling more of their money longer.

One idea is to consider donating the proceeds of a registered account (RRSP/RIF/LIRA/LIF) to a charity. This can be done either by designating a charity as a beneficiary of the registered account or by specifically designating said charity for a legacy in the will.

Registered accounts are fully taxable when redeemed while living or after death by the estate. All charitable donations receive a tax credit of the highest personal tax rate, which in Manitoba would be either a 46% or 51% tax credit on most estates. Generally, people are in a lower tax bracket throughout life but sometimes forget that their final estate could face income tax rates they wouldn’t have ever thought possible.

Charitable giving through an estate, whether as a beneficiary of a registered account or specified in the will is a good way to legally reduce some income tax while also supporting a charity doing valuable work.

Farming Corp Changes Coming?


The Canadian Finance Department just released a discussion paper about proposed changes to various aspects of our current capital gains tax regulations with public input until Oct 2nd.

About 25% of all commercial Canadian farmers are incorporated. The corporation is a separate legal entity in which a business can operate or assets can be held. The corporation has a much lower income tax rate for qualified small businesses. With a tax rate of only 11% up front, the corporation has taxing savings to re-invest and grow quicker, deferring the rest of the income tax burden until the end. Due to the capital intensive nature of operating a farm, many owners opt to incorporate their farming enterprises.

The Canadian government has looked favorably on incorporated farmers, giving them additional flexibility in when and how they pay their income taxes, particularly in passing on the farm to the next generation.

The discussion paper is likely to focus on how capital gains rules are applied to estate and succession plans using intricate structures to fully utilize the capital gains tax exemption on company shares.

An interesting news article from Brian Plett goes into further detail:

After the fall harvest, Canadian farmers could face huge tax hit from new rules

Economic update

An interesting news article was published last week noting that European Junk Bond investments now have an average interest rate of 2.42%. Coincidentally, this is very close to the current rate offered for a 10 year US Government bond. By definition junk bonds are issued by a corporation who cannot get bank credit hence the “junk” label. Normally junk bonds are priced with 10-20% interest rate incentive above an equivalent US Government bond due the high default rate of junk bonds.

There is an overwhelming supply of investment money chasing interest bearing investments, pushing the rates down. Most European Government bonds now have either very low rates or negative rates leaving European investors looking for some return to purchase junk bonds.

In Canada we are unlikely to see any effort to increase investment interest rates here. If Canadian rates get too high relative to the US and Europe, we are likely to see a flood of money come in from those locales with lower rates. This will bid up our Canadian dollar, making our exports less competitive in the global market.

Photo by Tim Mossholder on Unsplash

The Value of Inflation and Deflation

olu-eletu-38649Recently there has been some discussion as to the impact of inflation and deflation. They sound like complex terms, but they simply refer to the way we price and re-price our wages and everything we consume over time.

Deflation can actually benefit your household budget. With Deflation you spend less to acquire the same goods and services. For example lets say that a jug of milk cost you $5.00 last week but there is deflation in the economy. This same jug of milk might cost only $4.50 this week because of the deflation. You got the same product but for less money, hanging on to more of your wealth. Deflation increases your Purchasing Power Parity, meaning you spend less to get more. For more information on purchasing power parity see

Inflation, in contrast, means you have to pay more for the same product or service.  This happens because the central bank prints money to stimulate growth, higher prices, and an increase in wages. Governments also prefer to keep the economy in inflation because the fixed dollar amount of their debt obligations are paid back in the future with shrinking dollars. By printing more money, the money that we have is now worth less, in turn lowering the actual size of the government debt obligation relative to the amount of taxes they can raise on a percentage basis.

Deflation got a bad name during the 1930’s when wages and commodity prices were dramatically slashed. With limited safety nets, wide spread misery occurred for the average person. My Dad tells the story about the winter of 1935 when he fed a steer over winter for sale in the spring. The steer was shipped from Manitoba to Toronto for sale in the Toronto Stock Yards. By the time the calf got to Toronto the market price had dropped and was not enough to cover the shipping costs, so the shipping company sent my father a bill.

Today’s deflation is less obvious. Maybe exported inflation is a better term. When a company’s locally manufactured good or service is not price competitive, they simply lay off the workers and have the same product manufactured overseas at a cheaper cost. Just walk around a Wal-Mart or Canadian Tire and see how many products are manufactured overseas.

Deflation occurs during periods of slower growth when people spend less and investors hold more cash, lacking confidence in the economy. Without the confidence that markets are likely to continue to gain, stock investors tend to have an emotional response and move to cash and guaranteed income type investment vehicles. This provides an oversupply of interest seeking money, causing the interest rate to be bid lower and lower.

In summary, which is better for savers? 2% interest rate with 0% inflation or an 8% interest rate with a 6% inflation rate.

Weekly World Business Events

Moving into recent news from the business world, we see that recently the S&P hit an all time high of 2,480 last week. The S&P is an index of the largest 500 companies on the New York stock exchange based on market value. For those that don’t know what an index is, or would like further knowledge on indexes, check out the following article:

Looking at another piece of news from this past week, the US government statistics division announced that the US GDP grew 2.6% in the 2nd quarter of 2017. Comparing that to the 1st quarter rate of 1.3%.

Photo by Olu Eletu on Unsplash