Generating retirement income from your farmland
by Colin Sabourin on 10.16.2018
Entering retirement with farmland that you can use to generate rental income is a great way to create a steady income. However, there are a few points to consider to make sure you’re generating enough income and being as tax efficient as possible.
Unfortunately, land isn’t like a savings account. If you’re a little short one year, you can’t simply withdraw $10,000 to top up your income. Having a retirement income plan will help to ensure that you will have enough income after taxes to sustain your retirement lifestyle and avoid being forced to sell your land. When you’re forced into selling, you risk having to settle for whatever price is offered at the time instead of having the luxury of waiting for the price you want.
Sometimes debt payments can leave you with very little net income after you’ve paid your taxes. If that’s the case, you can lower your annual debt payments by refinancing and stretching your amortization out for 25 years. The downside is that you then have a loan payment for another 25 years. So, if you’re not comfortable with outstanding debt, this strategy may not be for you.
If you have RRSPs and/or RRIFs, it’s important to make annual tax projections to ensure your withdrawals are as tax efficient as possible. If you’re earning $70,000 in rental income and your withdrawing $15,000 from your RRSPs/RRIFs, you will be subject to Old Age Security (OAS) clawbacks. For every dollar above $75,910 (2018 amount) that you earn, you’ll lose 15 cents of your OAS. In the above example, you’d have to pay back $1,364 to the government due to the clawback. So, make sure you’ve planned your RRSP and RRIF withdrawals appropriately. You earned that OAS, let’s make sure you keep it.
To judge whether you’re charging enough for rent, try comparing your rental income to how much you could earn from an investment such as a GIC. Let’s say your land is worth $960,000 (160 acres valued at $6,000 per acre). If you purchased a 5-year GIC for the same amount that pays 3.25% in interest, you would be earning approximately $31,200 in income. If you’re only charging $125 rent per acre, you’re only generating $20,000 in revenue. In this scenario, you might want to consider increasing your rent to at least match the income you could receive from a GIC. GICs have no work or stress attached to them (unlike your rental property) and may be a viable option depending on your personal circumstances.
In my next article, Qualifying for capital gains exemptions when you rent your farmland, special guest Julien Grenier, accountant and farm tax specialist at Talbot & Associates, will provide comments and tips to make sure you and your beneficiaries qualify for the capital gains exemption.
Disclaimer: The information contained herein was obtained from sources believed to be reliable. However, we cannot represent that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of Colin Sabourin, Certified Financial Planner, and Investment Advisor and not necessarily those of Harbourfront Wealth Management Inc., member of the Canadian Investor Protection Fund.