USING PARTNERSHIPS IN THE FARMING FAMILY BUSINESS

Partnership-

 
A business carried on by two or more people with the intention of making a profit.

Partnerships can also include corporations. I will discuss partnerships between individuals in this article. Partnerships can be formal using agreements or informal such as spouses filing income tax returns as a partnership without having a partnership agreement. A partnership is a question of fact on how you conduct your business.

 
Section 97(2) of the Income Tax Act is used to transfer farm assets from individuals into the partnership on a tax deferred basis, otherwise, you could have an unexpected tax liability if one does not use section 97(2). Partnerships must have a December 31 year end for income tax purposes.

Partners need to predetermine how partnership net income is to be split between partners. The net income is calculated at the partnership level and the split can be based on various criteria such as capital invested and management performance. This allocation needs to be reasonable, otherwise CRA may challenge the allocation to the partners. Salaries paid to the partners are considered to be a distribution of partnership equity, therefore, not deductible as a partnership expense.

A great planning strategy is to incorporate the partnership. Here you would sell your partnership interest to a corporation and use your capital gains deduction provided that your partnership qualifies. Another strategy is to create a family farm partnership and farm the land for at least two years where your source of income is substantially from farming. This may enable the land to qualify provided all the rules are met for the capital gains deduction if the land originally did not qualify.

 
Talk to your tax advisor for more details and to assess your farm situation to see how this may work for you.

 
Partnerships is a business of relationships with an expectation of profit. 

Your thoughts are always appreciated
Take care

Fred