How and why farm partnerships may work for your farming business
A farm partnership is a potentially beneficial tax structure that can be used effectively for tax planning purposes. While corporations can also be partners, this article concentrates on partnerships between individuals. There needs to be a business carried on by two or more people, related or non-related, with the shared goal of making a profit before a partnership can exist.
How to set up a partnership
Begin with a partnership agreement, which defines all partners, specifies governance and operations, outlines how profits are to be disbursed and provides details regarding a partner’s death or departure from the partnership. Oftentimes taxpayers, especially spouses, file income tax returns as a partnership yet they do not have an official partnership agreement. The agreement is an important document as it takes care of matters that may arise during the partnership. It also helps provide validation should the Canada Revenue Agency (CRA) question information on the return.
Before beginning operations and transferring assets, register the partnership for GST/HST.
Pay close attention before adding a new partner, if you previously have been farming alone for many years. You will need to transfer your individual farming assets to the partnership by using an election under the Income Tax Act to benefit from a tax deferral. Without this step, the CRA may view that you have sold your farming assets at fair market value, which will lead to a significant tax bill.
Farm partnership incorporation
Typically, where the capital gains deduction is concerned, we may think of its utility when farmland is sold or when shares in a farm corporation are sold. A beneficial tax planning opportunity also exists where farm partnerships are concerned. Partners can sell their partnership interest to a corporation and employ their capital gains deduction, assuming the partnership interest is eligible. This strategy assists farmers in transferring assets such as farm equipment or inventory at fair market value while recouping a tax-free promissory note from the corporation.
As an example, consider farmers Mr. and Mrs. Cattleman have a farm partnership. The following outlines their assets and liabilities at fair market value:
- Grain and feed $400,000
- Cattle $1,000,000
- Equipment $900,000
- Total Assets $2,300,000
- Less debt on equipment ($300,000)
- Value of partnership $2,000,000
Both Mr. and Mrs. Cattleman have a partnership interest worth $1,000,000, as well as their entire capital gains deduction in the amount of $1,000,000. When Mr. and Mrs. Cattleman sell their partnership interests to the corporation, they can offset the capital gain from this sale with their deductions and recover promissory notes from the corporation in the amount of $1,000,000 each. With the corporation as the sole partner, the partnership effectively ends and so long as the corporation perpetuates the farming business, all assets and liabilities will roll out on a tax-free basis. This allows them to sell their cattle, feed and grain at a reduced corporate tax rate and remove the after-tax dollars without paying any more tax.
Would you like to discuss your personal circumstances surrounding selling or purchasing farmland?
Please provide your contact information and a member of our team will be in touch!
Source: RSM Canada LLP
Used with permission as a member of RSM Canada Alliance
Standard legal disclosure:
RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.
Tax Content Disclaimer:
The following disclaimer must be used in addition to the RSM Canada Alliance legal disclosure when repurposing tax content from RSM.
The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.