If you’re considering retirement or expanding your farming operation, a joint venture arrangement may give you some much-needed flexibility and offer tax advantages.
A joint venture has some similarities to a partnership, but with key differences. A partnership involves partners carrying on one business together, typically for an indefinite period. A joint venture, on the other hand, involves parties with separate businesses agreeing to collaborate for a specified period of time. Joint venturers thus have the ability to define the scope of their commitment to the joint venture and to limit their liability exposure.
The difference in structure is also reflected in the way they are taxed. Under the Income Tax Act (Canada) (ITA), the small business deduction (SBD) allows Canadian-controlled private corporations to pay a lower corporate tax rate (between 9–13% depending on the province) on their first $500,000 in active business profits. For partnerships, the ITA specifies that the members of a partnership must share the SBD in respect of the taxable income of the partnership. This means that any partnership income in excess of $500,000 will be taxed at general corporate rates.
Parties to a joint venture are operating different businesses; therefore, they report their income and expenses separately for tax purposes. As a result, each party may qualify for the SBD individually. Depending on the circumstances, a joint venturer may have more of its business income taxed at SBD rates than if it were to earn that same income via a partnership.
How a joint venture works
A joint venture is a flexible relationship between you (or your corporation) and at least one other business entity (an individual, partnership or a corporation) in which you agree to share costs without actually carrying on a single business together.
Unlike partnerships, joint ventures typically have a limited scope and duration. You would be coordinating your efforts and pooling your resources over a specified period of time, giving you the flexibility to review and tweak your business relationship – or abandon it altogether.
Due to their flexibility, joint ventures may offer farmers eyeing retirement time to ease out of the business. It may be possible to gradually sell off certain assets and take a step back from day-to-day labour on the farm while still carrying on an active business until you’re ready to fully retire.
It’s important to bear in mind that your corporation may be taxed at lower corporate rates if it is carrying on active business and earning business profits. In contrast, if you’ve decided you’re ready to retire and your corporation rents out its land, it will be taxed at significantly higher rates as a passive landlord. For example, passive income earned by a Canadian-controlled private corporation in Saskatchewan in 2022 will be taxed at a rate of 50.67% versus a rate of 10% on business income (note that a portion of the tax on passive income is refundable when the corporation pays dividends).
To maintain active business status, you will need to assume a certain amount of risk and play an active role in the management of the joint venture. Each party should agree on what they’re contributing to the venture, the expenses they’re agreeing to share and the portion of inventory produced that each will be entitled to. These and other important details should be included in a written agreement.
Example scenario 1: The family transition
Let’s say you’re planning to pass your farm on to your two children. This could be an ideal scenario for a joint venture, allowing you to transition out of the business while your children gradually take the reins.
In this scenario, you might maintain ownership of your farmland and agree to transfer your farming equipment to corporations controlled by your two kids. You also agree to be involved in the management of the farm while your children use the equipment they now own to carry out operations.
In this scenario, you’re contributing your land, time and expertise to the joint venture, while your kids contribute farming equipment and labour. You each assume risks and are each entitled to receive a portion of the grain or livestock inventory produced. It would also be open to each of you to decide to take your respective assets and do something different with them in the future (e.g. you may choose to rent your land to someone else or your kids may choose to carry on their businesses independently from each other).
Example scenario 2: An arm’s length transition
Let’s say your family isn’t interested in carrying on your business, but a young farmer down the road would love to – she just doesn’t currently have the financial means to buy you out.
This could also be an ideal scenario for a joint venture. You could bring the assets – the land, buildings and equipment – while remaining involved in the management of the farm and assuming some of the risks. Meanwhile, your young neighbour is responsible for the labour and benefits from accessing the equipment she needs to expand her own operation.
You can take a step back from sitting in the tractor seat every day while continuing to earn profits in your business. If the venture proves successful, your young neighbour may one day be in a situation to buy your business.
When you’re entering a joint venture, it’s important to consider the following:
- What expenses are you each responsible for and what expenses are you sharing?
- How are you breaking down each party’s share of inventory produced?
- Are all the participants involved in management? Are they all assuming some risk?
- Will there be any co-owned property?
- What is the process for terminating the joint venture?
All of these details should be included in a written agreement so that the parties are clear on the terms of their relationship. There is no bright line between what a joint venture is and a partnership. Therefore, the details of the written agreement are key both from a practical perspective and also with respect to how each venturer’s business profits will be taxed.
The lawyers in the MLT Aikins Taxation group regularly advise clients in the agriculture industry on succession- planning strategies. If you’re interested in learning more about how a joint venture agreement could help you transition to retirement or expand your operation, we’d be happy to assist you.
This article appears in our 2022 Agriculture & Food Year in Review. Download the free ebook.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.