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Hot Potato

Hot Potato 

How Tom Hughes used clever tax planning to save his company and to reduce his family’s overall tax bill

EarthFresh Farms changed hands at least six times over 40 years before Tom Hughes bought it outright in 2009. It was a homecoming of sorts, since Hughes' dad, Tom Hughes Sr., cofounded the company, then called McCain and Hughes, in 1963, brokering potato sales at the Ontario Food Terminal in Toronto. When Tom Sr.’s partner got sick in the mid-1980s, they decided to sell. “I was bummed out, but I understood, and I was happy for my dad,” says Hughes, then a 24-year-old salesman at the company.

 

Hughes Jr. went on to start his own brokerage business, but in 1991 he sold it to his dad's old company (by now a major spud distributor) and went back to work there. By 2004, EarthFresh, as its current owner had rechristened the company, was deep in the red. “They’d over-expanded and took on too much debt,” says Hughes. “And, as happens in this business, they had a couple of lean years and couldn’t hang on.” Hughes teamed up with a private equity firm to buy back the business. As part of the turnaround, he began buying proprietary potato varieties from countries like Chile and Korea to market in Canada. “It allowed us to differentiate ourselves,” says Hughes. “We captured the best varieties” — in a range of colours and shapes, and for different uses, including boiling, frying, mashing and chipping — “and brought them over here.” They also began teaming up with growers, investing in their potato crops, buying them back and distributing them to grocery stores and restaurants.

 

All this growth came at a cost, though. EarthFresh was in debt to its private equity partner, which decided, in 2009, that it wanted out of the spud business. If Hughes couldn’t come up with the money to pay off its debt, the partner was threatening to put EarthFresh into bankruptcy. “It was a make-or-break situation,” says KPMG Enterprise Tax Partner Paul Woolford, who started working with EarthFresh five years ago. At the same time, other distributors had expressed interest in some of EarthFresh’s potato varieties. Hughes and Woolford decided to sell off a percentage of the business and use the proceeds to pay off its creditor at a reduced level. The restructuring could have resulted in a big tax hit — but it didn’t. “We were able to do it in a tax-effective manner, with no negative tax implications,” says Woolford.

 

With Woolford’s help, Hughes has also set up a family trust to minimize his family’s overall tax bill — a very common tax-planning approach for entrepreneurs. “It’s a way of shifting income from a high-income earner to a low-income earner such as Tom’s wife or his children, who are both in their twenties,” says Woolford. (You can no longer income-split with minors, unless they are disabled or infirm.) A portion of Hughes’s income now flows into the trust (which can also contain stocks, bonds, real estate, art or other valuable assets) and can be withdrawn by his family members — which means it is taxed at the beneficiaries’ lower marginal rate. “We’ve changed the dynamics of who’s benefitting from the ownership,” says Woolford.

 

Today, EarthFresh Farms, and its partners, have nearly 14,000 acres of potatoes in production and a stable of 120 proprietary spud varieties, and they are about to open the doors on their own potato-breeding centre in Idaho. And every day, it washes and packages roughly 400,000 pounds of potatoes at its plant in Toronto’s west end — just down the street from where Hughes grew up.

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