In what would later become a quest for a family farm partnership in their new homeland near Lethbridge Alberta, my great grandfather's family was among a group of nine families who drove 385 head of cattle, 185 horses, and 17 wagons from Utah to southern Alberta in 1889. They arrived in Canada on July 13, crossing the line at what is still known as the Emigration Gap, near North Milk River.
His autobiography records the following:
"What a cattlemen's paradise the country was! Looking north from the Milk River Ridge, the long waiving grass looked like a green sea. Not a fence, not a house, not a living thing in sight. All grass, grass, grass and yet on closer inspection was the vision and fragrance of wildflowers. Never have I seen so many wildflowers, whose delicate hue and fragrance could only have been found in an enchanted garden. "
"There was no Buffalo left, the last having been seen some five years before, but the prairies were literally covered with their bones. Many times afterwards I have found their skeletons intact, with perhaps an arrowhead at the base of the skull or some other part of their bodies."
"We began to build a house, log of course, and accordingly we began to haul logs for this purpose. Broken wagons, lost horses, stalled teams, and empty stomachs were only scenes by the way. Two rooms 16 x 32 partitioned was the size of this first house. For lumber we must go to MacLeod, some fifty miles away, or Lethbridge, sixty-five miles away. There were no bridges on either road, the rivers en route being extremely dangerous to cross during the summer months, and many an accident occurred..."
After a difficult early life back in England, working in cotton mills, and dodging his cranky father, his description of life on the family farm is brief but makes for good reading. He and his brother later formed a few different business partnerships which eventually provided their families with a living.
After the recent four-part series examining the decision of incorporating the family farm, we take a brief look now at partnerships as an alternative ownership structure.
Farm Partnerships
An alternative farm ownership structure is farm partnership. This can be created between family members
(i.e. individual, his/her spouse, and their children) or between unrelated parties.
Advantages include:
Similar to a farm corporation, it provides an opportunity to split income and therefore reduce overall total taxes paid;
It allows an individual to add their children as partners. This gives the children the opportunity to gain experience with the farm and for the parents to ease into retirement if that is their goal;
Partnerships typically involve less initial and on-going costs than corporations; and
Losses distributed by the partnership can be utilized on the partners' personal tax returns subject to certain limitations.
In addition to these advantages, the lifetime capital gain exemption is also available for farm partnerships.
Disadvantages include:
A partner is potentially liable for the actions of other partners. Unlike a corporation, an individual's assets outside of the partnership are potentially exposed to the claims of creditors;
Partnership income must be distributed to the partners and is taxed at their individual tax rates. Thus a partnership is not eligible for the lower small business tax rate available to small business corporations; and
While partnerships are typically less expensive to administer than corporations, they do require detailed record keeping and therefore, it is more expensive to maintain a partnership than a sole proprietorship.
If you decide that a farm partnership makes sense for you, it is highly recommended that you and your partners develop a partnership agreement. A strong partnership agreement details the rights and obligations of the partners relating to the partnership and typically includes the ownership of the assets, the division of profits, the methodology by which disagreements are resolved and the ability to buy the interest of other partners.
You might also consider John D Rockefeller's old adage: "A friendship founded on business is a good deal better than a business founded on friendship." Whether the partnership is with a close friend, a family member, or a strictly-business associate, it is best to have a very businesslike approach. Unspoken assumptions might be the grease of a good friendship, but they are the goo in a bad business.
Forming a partnership for your farm business is a decision that can have long-term ramifications. Consult with your professional financial, tax and legal advisors to help you consider all the ramifications.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
