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A typical family farm operation generally takes the shape of three main forms: a proprietorship, a partnership or a corporation. A family farm partnership is essentially a farming operation that is owned and operated by more than one person (i.e. the partners). Typically the partners would be spouses, but children or corporations may also be partners. The partners are responsible for the farm operations and will be subject to income tax on any income the farm generates. Under the partnership structure the farming assets are owned by the partnership and the individual partners own an interest in the partnership rather than a direct interest in each underlying farming assets, such as inventory and equipment.
There are significant tax planning benefits available when operating a farm in a partnership structure as opposed to sole proprietorship. Individuals may qualify to use their $750,000 capital gains deduction on the sale or transfer of an interest in a qualifying farm partnership. The main advantage of a farm partnership is that the value of the equity in the partnership that has developed over time, would likely qualify the individual partners to utilize their capital gains deduction to reduce their personal income tax. The use of a farm partnership can also reduce taxes arising on death or significantly increase the benefits realized by an individual in a future incorporation of the farm partnership.
A farm partnership improves the ability to split taxable income with family members who are partners in the partnership based on their contribution of time and/or capital to the partnership, potentially reducing overall income tax. Furthermore, a farm partnership is also a flexible tool that can be utilized to introduce new family members to the partnership at any time in the future to help facilitate the succession of farming operations to the next generation. In certain circumstances, an individual may be able to gift some or all of their interest in the farm partnership to children on a tax-deferred basis, enabling more equity to transfer to the next generation of farmers in a tax efficient manner to achieve succession objectives.
Although there are some significant advantages to conducting farming operations in a partnership, the marginal tax rates of individuals are higher than that of a corporation with a similar level of income. Therefore, decisions are often made that are tax motivated (i.e. pre-buying, deferring grain cheques, etc.), as in the case of a proprietorship, which may not be the best decisions from a business perspective.
It may be helpful to have a conversation with an experienced tax specialist when determining what structure may be best suited to achieve your business and personal objectives. At Meyers Norris Penny LLP we can meet with you to discuss options and strategies to take advantage of the available income tax planning opportunities available in the farming industry. A thorough understanding of your farm operation and options will enable you to make informed and economically sound decisions as a business owner.
For further information, please contact Jeff Henkelman, CA, Ron Friesen, CA or Jaymon Hill, CA at (306) 665-6766.
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