By Craig Macfie, CPA, CA, PAg with Stark & Marsh CPA LLP
Originally published in the Sep. 26, 2017 edition of Grainews
Many family farms have participated in variations of revenue and/or cost sharing arrangements. A typical scenario involves family or neighbours sharing equipment and labour to minimize costs, reduce the cost of production and improve the bottom line. However, inefficiencies and disputes over the value of contributions can result from these informal arrangements. Formalizing and documenting a joint venture agreement may solve current or potential disputes, and promote efficiency and profitability.
Sharing equipment or labour may create the problem of whose land gets seeded or harvested first. Seeding and harvest windows can be narrow in Western Canada, which can lead to significant variation in yield and quality. A more equitable result can be achieved through the use of a land pooling arrangement, particularly if crop is forced to overwinter.
Another potential issue may be grain ownership. Delays and inefficiencies at harvest could result if the participants are interested in storing grain separately. Often grain storage costs will be higher and there is the potential for underutilized bin storage. Pooling grain sales will typically simplify grain marketing and may result in volume premiums. Also, pooling arrangements typically improve purchasing power for inputs and provide the participants with an opportunity to enter into land rental arrangements that would be mutually beneficial.
Whenever two or more participants agree to pool resources and undertake to farm together, serious consideration should be given to formalizing and documenting the joint venture arrangement.
A formal joint venture arrangement should use a separate bank account to track the shared receipts and expenditures. The joint venture participants then claim the agreed upon percentage share of the resulting net income on their income tax returns. Traditional tax planning tools are still available with a formalized joint venture arrangement including deferring grain sales and acquiring inputs.
The small business tax deduction limit should also be available for incorporated joint venture participants. For large joint venture operations, with more than one corporate participant, the full small business limit may still be available to each corporation. Partnerships and associated farm corporations would typically be required to share the $500,000 annual small business limit.
A formalized joint venture arrangement can act as a bridge to farm succession. Typically, parents do not hand over the shop keys and move to Arizona. Documenting a joint venture arrangement can be an effective method of transitioning key operating, financial and management responsibilities.
If the next generation is not taking over the farm, the parents could consider a joint venture arrangement with an arm’s length party whereby the parents retain management responsibilities and share in the risk of profit or loss. This would typically preserve the tax-free rollover of farmland or shares of the corporation to the next generation.
Unlike a partnership, a joint venture is not a separate legal identity and would not own assets. A joint venture arrangement should be supported by a legal agreement to document the terms and conditions including the decision making processes, the split of revenue and expense, the land, machinery, buildings, labour and other resources contributed and the length or term of the arrangement.
The joint venture will be obligated to account for the GST associated with its business activities. One participant is designated to file all GST returns associated with the joint venture activities. Consider consulting your accountant about the election to be filed for GST purposes.
The joint venture will need to select a year end and maintain a separate set of accounting records. If the joint venture participants have different year-end dates, multiple cut-off periods will be needed for tax and accounting purposes. Risk management programs such as AgriStability and Crop Insurance, however, should be simplified using the “one farm” approach.
A joint venture may be the most appropriate business structure to meet your needs. Consult with your professional advisor to learn more.
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